This is our last show before Donald Trump officially becomes the President of the United States of America. That’s a scary thought for many people. I have no opinion on whether he will be a great President or a great disaster – I’m a Canadian, so that’s not my worry.
I am interested in how President Trump’s policies will impact Canada. Even the experts don’t know what will happen; how could they? None of them predicted that Trump would win the election, so the future is uncertain. We made some predictions on last week's podcast. My guess is that interest rates will increase, trade with the U.S. may become more difficult, and that may impact Canada. The prudent course of action is to reduce your debt now, so that you are protected from higher interest rates.
Of greater interest to me, as an observer from Canada, is how Donald Trump used various tricks to convince Americans to vote for him. These tricks are the same tricks that advertisers use to get us to buy their products, so learning these tricks can help protect us against advertising.
How Our Emotions Affect Our Decisions
We humans are driven by emotions in a lot of what we do. We have seen cases where people turn to debt as a way of coping with loss. It could be grief for the loss of a loved one, or maybe loss of income that launches you towards a new opportunity.
Trump’s biggest trick is that he appeals to people on an emotional level. He ignores facts and some would say that he just makes stuff up.
The election results proved that facts don’t matter. We react on an emotional level.
Appealing to people on an emotional level triggers an internal response. Whether it’s wanting to “build a wall” to protect us from some unseen threat, or an advertisement telling us we will feel great about ourselves if we buy their product.
If we recognize that we rely on our emotions to make most of our decisions, we can take a step back before committing to a major purchase. So we'll consider the facts of the situation, which may help us make better informed decisions.
Resources Mentioned in the Show
- Ben Rabidoux, Show 117, Why We Expect Tighter, More Expense Mortgage Markets: http://www.hoyes.com/blog/why-we-expect-tighter-more-expensive-mortgage-markets/
- Wall Street Journal: http://blogs.wsj.com/economics/2016/11/18/states-with-rising-unemployment-went-overwhelmingly-for-donald-trump/
- U.S. Labor force participation rate: https://data.bls.gov/timeseries/LNS11300000
FULL TRANSCRIPT show #124
On January 20, 2017, unless there is some major upheaval, Donald Trump will be inaugurated as the 45th president of the United States of America.
Today on Debt Free in 30 we’ll ask a simple question, that doesn’t have a simple answer: What will a Donald Trump presidency mean for Canada?
I’m going to answer that question many different ways on today’s show. I’ll tell you what everyone is expecting, and what that will likely mean for debt levels in Canada, but I’ll also give you an answer that has nothing to do directly with money, and it’s and answer you may or may not agree with.
So let’s get started with the easy part of the answer:
The conventional wisdom says that Donald Trump wants to promote infrastructure spending, or as he puts it, he wants to “build a wall”, which certainly qualifies as infrastructure spending.
He was asked about it during the first Republican debate, and here’s what he said, addressing his comments to his challenger, Jeb Bush:
Donald Trump: We need to build a wall. It has to be built quickly. I don’t mind having a big beautiful door in that wall so that people can come into this country, legally, but we need, Jeb, to build a wall.
Doug Hoyes: So his campaign promise was to build a wall, and build it quickly. Will he do it? I have no idea, but of course he’s not just promising to build a wall. He’s promising to repair and build new infrastructure, like roads, bridges and airports. He wants to put Americans to work.
That’s great, but he also wants to cut taxes, so how is it possible to increase spending while reducing revenue? Mathematically the only way to do that is by borrowing money. The US government is good at borrowing money, which is why the US national debt is just under 20 trillion dollars, so I assume if a Trump government wanted to borrow another trillion dollars, they could do it.
Of course, as everyone who listens to this show knows, if you borrow a lot of money, there are consequences. If you are a person, and you borrow too much money and can’t pay it back, you get collection calls, and your wages could be garnisheed, and you could lose your assets.
But what happens if you are a government and you borrow too much money?
A government doesn’t get phone calls from a collection agency, and a government doesn’t have wages to garnishee, but there are two things that can happen to governments that borrow too much money:
Interest rates can go up, and the currency can go down.
Governments borrow money by issuing bonds, and those bonds are bought, as investments, by people, or companies, or pension funds, or even by other governments.
If I’m an investor in government bonds, and I’m worried that a government is borrowing too much money, I may only invest in a bond if they offer me a higher interest rate. Interest rates are a measure of risk, so if I think there is additional risk of non-payment, I want a higher interest rate.
That’s why the interest rate on a secured mortgage is a lot lower than the interest rate on an unsecured payday loan, and that’s why the interest rate charged by the biggest most powerful government in the world, the United States, is lower than the interest rate charged by a smaller country on the verge of bankruptcy. It all has to do with risk.
So if the US government wants to borrow more, that may mean that they will have to pay a higher interest rate on their bonds, and if bond interest rates increase, all interest rates in the economy increase, including mortgage interest rates.
So, it’s possible that interest rates will go up under a Trump presidency. I discussed this exact topic with Ben Rabidoux back on show # 117.
Ben has been bearish on interest rates for many years, meaning he’s thought that interest rates would continue to fall, and of course he’s been absolutely correct. But now his opinion is changing: Here’s what Ben said back in November:
Ben Rabidoux: I have a different view on that now. I actually think that rates are bottoming right now. And there's a couple of things at play. So, one is we're seeing a back of a back up in rates out of the U.S and part of that is related to Trump and the thought that he's going to unleash a lot of stimulus spending and infrastructure investment and that it'll end up being slightly inflationary for the U.S and so there's a bit of a re-pricing in the bond state side. And so consequently our bonds, are priced off the U.S., and we're seeing a back up in rates across the spectrum and that's affecting mortgage prices.
Doug Hoyes: So, as Ben says, if Trump spends a lot of money, that could drive up interest rates in the US, which could drive up interest rates in Canada, because all world economies are connected. It’s the old saying, “if the U.S. sneezes, Canada catches a cold”. Other than spending a lot of money, what else is Trump proposing?
What else does “build a wall” mean?
Building a wall has two meanings:
First, it’s infrastructure spending, but second, it’s protectionism. It’s a symbol for keeping things out of America. Obviously Trump is speaking about immigration, and keeping people out, but he has also said a lot about keeping foreign made products out of America.
He wants to create jobs, and one way to do that is to increase tariffs on goods from abroad sold in America.
Trump doesn’t want companies to use cheap labour in countries like China; he wants those jobs brought back to America, and one way to make up for the cost difference between Chinese and American labour is to put a tariff, or a tax, on goods entering the US. If those taxes are high enough, more goods may be produced in the US.
There are trade deals in place, so it’s not as simple as Trump makes it appear; he can’t just change the law overnight. He wants to make changes to various trade agreements, including NAFTA, which could have a very direct impact on Canada.
Here again are Ben Rabidoux’s thoughts on that:
Ben Rabidoux: For Canada I think the most concerning thing for us is some of this kind of protectionist rhetoric, these leaked memos that suggest very early in his term he's going to start looking at renegotiating or, you know, at the worst cancelling NAFTA. And, you know, there's all sorts of unknowns around that. So, yeah I don’t know, it's far too early to know how much of that was rhetoric versus something that he plans to act on. We’ll have to see.
Doug Hoyes: So there you go: even the experts like Ben Rabidoux don’t know exactly what to expect. There are a lot of unknowns.
So here’s my prediction: Trump is a politician, and like all politicians he will say one thing during an election campaign, and then even if he truly meant what he was saying during the campaign, once he gets inaugurated and has to work with Congress, and state governors, and the vast American bureaucracy, what he can actually accomplish may be significantly different than what he promised.
That’s how politics works.
He may spend a lot of money, and that may drive up interest rates, and he may depreciate the US currency, or perhaps it won’t.
He may be able to make substantial changes to trade agreements very quickly, or he may work on it for his entire presidency and only make minor changes.
We don’t know.
I think it’s likely that interest rates will go up, but not just because of Trump. Interest rates are at historically low levels, both consumer and government debt are at historically high levels, so regardless of who is the president, interest rates will likely increase.
I don’t think interest rates or trade agreements will be the biggest impact of a Trump presidency.
I predict that four or eight years from now, when historians look back on President Trump, his biggest impact will be on how we think.
Trump is different than every previous American president, because before being elected president he had never held elected office, and he was not a military leader. That has never happened before. Every president over the last 100 years has had a lot of help from the news media, with newspapers endorsing his candidacy.
Not this time. Virtually no-one in the media supported him.
Every president in the last 50 years has spent a lot of money on election advertising. Trump spent some money, but based on the numbers I’ve been able to find it looks like Clinton outspent Trump by at least two to one, and yet Trump won. The old system of “whoever spends the most money wins” appears to no longer work.
So how did a non-politician, who was initially not even supported by his own party, who was opposed by the media and who was out-spent by his opponent actually win?
The conventional wisdom is that he’s a loud mouth bully, who tweets insults, and half of America are also bullies and racist, and that’s why they voted for him. That’s possible. I don’t know. I’m not an American. I didn’t vote for him.
There’s no doubt his controversial tweets got him a lot of free publicity. The media may not have supported him, but they sure were happy he was running, because it made the election campaign very interesting, and caused TV ratings to soar. The media is responsible for Trump winning, because they gave him the platform and free publicity.
So are American’s racist? Is that why they voted for Trump?
I think a more plausible theory is that the average American has suffered from a declining standard of living for many years, and Trump’s promise to “Make America Great Again” really resonated with them.
According to the Wall Street Journal, there were 17 states where the unemployment rate rose over the past 12 months, and Donald Trump won 13 of them; Hillary Clinton only won four. Pennsylvania is a good example. The unemployment rate went up from 4.8% to 5.8% in the year before the election, and even though Pennsylvania hadn’t voted Republican since 1988, they voted for Trump this time.
Now you might think, wait a minute, the economy is doing great. If the unemployment rate, even in a state like Pennsylvania, is only 5.8%, that means that most people have a job, so that can’t be that big an issue, can it?
It depends if you focus on the unemployment rate, or the labour force participation rate, which refers to the number of people who are working or actively looking for work.
In January 2000, the U.S. labour force participation rate hit an all time high of over 67%. In November 2016, election month, it was down to 62.70%, so that’s a lot fewer Americans who are working than in the past. So why is the unemployment rate so low?
It’s low because many Americans have simply given up looking for a job. They don’t count as unemployed, because they aren’t looking for a job.
If you don’t have a job, you worry about your future. You are under a lot of stress, so when someone comes along and says he will “Make America Great Again”, you listen.
Make America Great Again was a brilliant slogan, because it was so vague that it meant whatever you thought it meant.
If you are 40 years old, the word “again” makes you think back to the year 2000, when you were 25 years old and jobs were easier to find. That’s the time you want “again”. If you are 50 or 60 years old, you think back to the booming 80s, and that’s the economy you want, again.
Donald Trump didn’t win because he had better policies than Hillary Clinton.
Donald Trump won because he didn’t have any policies.
He had a slogan, a theme, “Make America Great Again”.
He didn’t try to reason with voters. He didn’t try to make a rational argument. He appealed instead to their emotions. He painted the picture of “great again”, and it worked.
“Build a wall” is not a policy. If it was, he would talk about the cost, and the environmental impact, and he would give facts and figures. He didn’t. It was purely a tactic to appeal to people who are worried about immigration, and it worked.
That’s why he uses Twitter. His tweets are emotional, not factual, and that’s why they work.
So what’s the lesson here?
Simple: facts don’t matter.
I know you don’t believe me, but it’s true, and it’s true in most areas of your life.
Did you buy your car because it has the best gas mileage, or the highest safety rating? Perhaps, but it’s more likely you chose your car based on emotional factors, like looks, and then rationalized it later by finding facts that support your decision. It’s very important for us to understand that we make most of our decisions based on emotion, not fact.
The car salesman doesn’t start by telling you all of the numbers, the gas mileage, and the fuel economy, and whatever. He starts by saying “you’d look great in this car; think of what your friends would say!” That’s an emotional appeal, and it works.
The lesson from Trump is not that Americans are racist, or stupid. Maybe they are, but that’s not the real lesson. The Trump lesson is that emotion always trumps reason.
The news media knows this. That’s why the stories they put on the front page of the newspaper are emotional stories, not stories full of boring facts, which is unfortunate, because if they just reported the facts we could make our own decisions.
Advertisers know this. That’s why they appeal to you on an emotional level. They don’t advertise the facts of the product they are selling; they tell you that you should buy it because of how it will make you feel. They are appealing to your emotion, not reason.
Once you realize that politicians, and advertisers, and the media are emphasizing emotion to get you to do what they want, you can be alert for it, and consciously choose to ignore their emotional appeals.
By all means buy the car you like, but take a few minutes and also crunch the numbers.
You are free to vote for whatever politician you want, but don’t just listen to their emotional appeal; ask for some facts as well.
Trump may be responsible for higher government spending, and higher interest rates, and reduced trade, and all of those policies may hurt Canada. I don’t know. We’ll see.
The next few months will probably be a very volatile time, with interest rates trending upwards, so now would be a good time to reduce debt, and perhaps downsize to a more affordable house. Those are prudent actions to take at any time.
Those are steps you can take to protect yourself from the “Trump Effect”, but I think the most important step you can take is to realize that the news media, and advertisers, and politicians, will use whatever tricks they can to get you to do what they want you to do.
The news media was predicting a Clinton landslide victory right up until the time the polls closed on election night. They were completely wrong. All of the news coverage we read for the 18 months leading up to the election was wrong. That fact alone should make us think more critically about everything we read.
Like I said earlier, I’m a Canadian, I didn’t vote for Trump, I didn’t have a vested interest in this election. It’s over. Trump won, but instead of getting all worried about all the horrible things that will happen with Trump as president, there are two positives actions we can all take.
First, recognize that we are in for a volatile period, so protect yourself by cutting your debt, and lowering your expenses, so that you can weather any storm.
Second, Trump is a 70 year old man with no political experience, with no real policies, and with the media and his own party actively working against him, and yet he won, and he did it purely based on his appeal to voter’s emotions.
That’s the power of emotions, and that’s the exact same trick advertisers use on us, so if we are aware of that trick, we can take steps to protect ourselves by considering not only our emotions, but also the facts before we make any financial decision.
If we do that, that will be a big positive lesson from Donald Trump.
That’s our show for today.
Tune in next week for a slightly more conventional show. Full show notes, including links to everything we talked about and a full transcript can be found at hoyes.com, that’s h-o-y-e-s-dot-com
Thanks for listening.
Until next week, I’m Doug Hoyes, that was Debt Free in 30.