by senior futurist Richard Worzel, C.F.A.
The victory of Donald Trump as president of the United States is without precedent, and creates enormous uncertainty. Will his qualifications as a businessman transfer to management of the world’s largest economy? Will his policies work as advertised? Will his advisors be up to the task?
We don’t know, and uncertainty is something that businesspeople despise, and investors flee from. So, how should you cope with the uncharted economic waters in which we find ourselves?
As it happens, this is precisely the kind of situation where scenario planning offers the greatest benefits. The future will inevitably catch us all by surprise. Those who will do best out of it are those who recover fastest when the unexpected happens, and who respond most constructively with the shortest delay.
With that in mind, let’s consider three of the major scenarios that we should consider, as well as the contingency plans we might make for each.
Scenario 1: Trump’s Triumph
Trump’s supporters believe that his understanding of business will lead to lower regulation, productive and much-needed investments in public infrastructure, and a devotion to leveling the playing field in terms of trade. Businesses will respond by loosening their purse strings and investing in new plant, equipment, and staff. As a result, Trump’s supporters believe that the economy will boom, corporate profits will grow, and Americans will be better off.
In that scenario, companies should be planning how best to profit from the boom times ahead. They should be making investments in productivity enhancements and key personnel, and they should be preparing their finances to expand. Investors should identify sectors, industries, and companies that will benefit, and shift their portfolio balances to reflect these projections.
Scenario 2: Trump’s Tragedy
Trump’s detractors believe he will produce a disaster. His lack of understanding of macroeconomics and the nuances of fiscal and monetary policy will lead to a short-term boom with rapidly rising inflation & interest rates, bloated government deficits, and rising government indebtedness. His beggar-thy-neighbor trade policies will precipitate a trade war, leading to a global recession. His amateurish foreign policy will lead to a series of global crises, scaring investors and citizens alike. And poorly regulated industries, especially in finance, will lead to another 2008-style financial panic.
In that scenario, companies should prepare for the worst, husband their cash, take a flinty-eyed look at their cost structures, and eliminate products lines, operations, and staff that are not productive. Investors should retreat to defensive positions, emphasizing cash with some investments in gold and precious metals as an insurance policy against serious disaster.
Scenario 3: Trump’s Irrelevance
The Trump Administration’s actions turn out to have more PR value than economic impact, with the result that the economy continues to muddle along as it has been doing for some time. Growth continues, but at a modest pace. Corporate profits grow, but slowly. The recovery continues in what seems like a modest Goldilocks pattern of slow, but steady, growth.
If that happens, then companies should continue as they are now, being cautious but open to making new investments in plant, equipment, and personnel as demand requires. Investors should be sensitive to the already full valuations of stocks, and the potential downside risks of bonds, and be selective in their choices.
The Critical Issues
There are other, more extreme scenarios on both the upside and the downside that I haven’t delineated, and that are of lower probabilities. The point is not to try to cover all possibilities, but to assess probable futures. Right now, nobody knows what to expect so it is more than worthwhile to game out the major possibilities. Indeed, the first, and most critical, decision is to consider more than a single possible future. None of the scenarios you sketch out will be 100% accurate, but the exercise of considering possibilities will stretch your mind, broaden your field of vision, and cause you to consider both what might happen, how it might happen, and what you could or should do about the range of events that could occur.
And whatever scenarios you consider, don’t expect to be completely correct. The future may be different in minor details, or you might not have correctly assessed the right probabilities and the future may be wildly different. But just thinking about ranges of probabilities is a worthwhile exercise.
The second critical decision is what indicators, or Distant Early Warning signs you should be watching. How could you tell if one scenario was emerging rather than the others? What should you watch so you can be warned as early as possible? Just keeping an eye on developments with the intention of trying to identify which scenario will be closest to being right is valuable because it helps you identify things that don’t fit with one scenario or another – and may not fit with any of them. Watching the future with intent can be extremely valuable in assessing the future.
Or, to put it another way, if you don’t watch what’s going on, you will inevitably be caught by surprise, more so than if you are assessing and gauging what’s going on, and trying to decide where it’s taking us.
So take advantage of the tools provided by scenario planning. We are entering a period without precedent, and those who are prepared for the things that catch everyone else by surprise will benefit most from the changes to come.
There’s a rule in the field of future studies: Someone always benefits from change. Let it be you.
© Copyright, IF Research, January 2017.