Trump the pragmatist?
As I said on election night, history is littered with populist politicians who became pragmatic leaders. One of the questions immediately post the election was whether it would be Donald Trump the populist who took up residence in 1600 Pennsylvania Avenue or Donald Trump the pragmatist.
So far the pragmatic signs are good. The signals began on election night when Mr Trump delivered a speech that was almost presidential. That immediately started to settle nerves and allow the market to avoid the immediate Brexit-like kneejerk negative reaction. Instead we skipped the angst and moved to a focus on what some of his more-likely-to-eventuate policies might actually mean.
For now, markets have been able to park the biggest pre-election concerns about the President-elect – his perceived unpredictability. Let’s face it, Mrs Clinton was not preferred by markets for her supposed recipe for growth-enhancing economic reform. She was preferred over Mr Trump for her predictability and steady hand.
Indeed, recall one of the other pre-election fears was that the Democrats might get the clean sweep (President, House, Senate), and with that a more comprehensive Clinton programme, including greater regulation, particularly of the finance sector, and income redistribution which would have been negative for US growth. Makes you wonder how markets might be tracking now had she won.
Since the election, further calm has ensued as the President-elect has softened some of his more extreme positions, particularly on immigration, Obamacare and trade. However, it is trade that still provides the greatest concern to the outlook for global growth, especially for small open export-oriented countries such as New Zealand. It’s still the case of ‘RIP’ TPP.
Markets have therefore been able to focus on the more positive aspects of Mr Trump’s policy platform, including higher infrastructure spending, tax cuts and reduced regulation. These positions are all positive for growth at least over the next couple of years.
Regular readers will know we have long supported the argument that monetary policy was losing its effectiveness, and that it was time for fiscal policy to step up to boost domestic demand, close output gaps and create sustainably higher inflation.
The caveat to that has been that the spending needs to be investment-oriented so that productivity is enhanced. That stimulus needs to not only boost growth as the spending hits the ground but also improve the capacity for the economy to grow in the future. An investment focus to new spending also helps mitigate the risks around long-term fiscal sustainability. There may even be lessons here for countries like Japan and within the Eurozone about the benefits of some fiscal loosening.
Along with the positive implications for growth, markets have acted to presume higher inflation too. Bond yields have risen significantly since the election. Greater fiscal stimulus, along with some of the more negative aspects of the President-elect’s policy platform (anti-immigration and anti-trade policies), support the case for higher inflation.
A minimum of three hikes from the Federal Open Market Committee (FOMC) between now and the end of next year (probability of a December hike is currenty 90%, up from a low of 40% on election night) seems an increasingly safe bet. And of course that means a stronger US dollar. Greg Fleming, our Head of Investment Strategy, will have more to say on the USD outlook and implications for our diversified portfolios next week.
While there are some positive early signs about what a Trump Presidency might look like, I’m never really happy unless I’m worrying about something. The big worries for me right now are that we have an inexperienced politician in the White House and that no matter how much support is put around him, and there are highly competent people in his team, there will be challenges to manage.
I worry that while markets have taken a positive (sanguine?) view on the near-term outlook, the eventual policy outcomes are highly uncertain. Offsetting some of this risk is that House and Senate Republican will be geneally supportive of some of his more positive policies such as corporate tax cuts, but can be relied on to stymie some of his spending and anti-trade positons. There’s still the vexed issue of the debt ceiling to navigate.
But it’s the outlook for global trade that causes us most concern. A process of tit-for-tat retaliatory anti-trade restrictions that descends into a full-blown trade war is a significant downside risk for the global economy, especially export-dependent countries. It’s developments in this space we will be watching most closely in the weeks and months ahead.
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