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Why Trump’s ‘infrastructure boom’ is fake news
12/13/2018 10:13:52 PM
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Investment management insights from a leading Canadian expert.

By Tyler Mordy  | Monday, October 16, 2017


Some investors may believe that natural disasters lead to increased economic growth. In the short run, this may appear to be the case. For example, American manufacturing expanded last month at the fastest pace in 13 years, in part due to the effects of Hurricanes Harvey and Irma. But fortunately, we have the late French economist, Frédéric Bastiat, to set enquiring minds straight: Destruction does not benefit the economy.

In Bastiat’s “parable of the broken window,” from his 1850 classic on political economy, That Which Is Seen, and That Which Is Not Seen, a man’s careless son breaks a window pane. A crowd gathers and begins to contemplate the damage. They optimistically conclude that the boy has actually performed a community service.

Their logic? His father will have to pay someone to replace the window. That individual will spend the income on something else, multiply to another, and so on. Voilà! The local economy is stimulated.

Bastiat, however, gently nudges us to consider “that which is seen and that which is not seen.” What is less evident is that the father’s income is reduced and used to fund a maintenance cost (simply replacing something that has already been purchased). What’s more, the father could have spent the money on other goods or services. Ultimately the crowd was wrong — overall economic growth has actually been reduced.

Looking at the wider infrastructure thrust from U.S. President Donald Trump’s administration, the fog is still thick. But some of it is lifting.

It is now clear that there will be significantly less than the $1 trillion of new investment promised by the Trump campaign. Elaine Chow, Trump’s Transport Secretary, has repeated several times that the federal government accounts for only 16% of U.S. infrastructure spending — that means less than US$200 billion of federal money.

The rest is up to state governments. Where they will raise the money seems not to have been a consideration, except floating the idea of more public-private partnerships. In any case, there is no urgency to any of this. Even if the $1 trillion infrastructure promise could be financed, it was meant to be spread over 10 years.

Investment implications

Overall, Trump’s infrastructure spending will have far less impact on the economy than originally envisioned by markets. The most encouraging development is the prospect for reduced regulation. Treasury Secretary Steve Mnuchin and Commerce Secretary Wilbur Ross are clearly determined to deregulate wherever they can.

Even if the Congressional Democrats block specific changes (like proposals to alter the massive Dodd-Frank Wall Street Reform and Consumer Protection Act enacted following the financial crisis of 2008), the Administration has room to weaken regulations simply by reinterpreting existing laws. As such, Trump’s sectoral impact will be substantial.

From that perspective, U.S. policy is likely to support financials and be negative for infrastructure companies and energy (as prices should stay soft while supply continues to ratchet up).

Tyler Mordy, CFA, is President and CIO for Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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