By Dr. A. Gary Shilling
Donald Trump’s stunning victory on November 8 was the culmination of voter angst over declining purchasing power.
The voter climate is ripe for demagogues who blame weak purchasing power on income polarisation. While Clinton advocated taxing the rich and redistributing money to lower-income folks through government spending, Trump focused on limiting immigration and imports. Trump struck the chord of voter discontent.
Security markets are trying to figure out Trump’s plans. Stocks rallied sharply the day after the election, not because of lesser uncertainty but in anticipation of massive fiscal stimuli. His promise to slash personal and corporate tax rates were also likely contributing factors.
The Mexican peso (an excellent indicator of Trump’s election chances) nosedived in line with his plans for the southern border wall. But the dollar also rose against many major currencies except the beaten-down sterling. This may indicate a strengthening U.S. economy and higher interest rates, but also reflects the dollar’s safe-haven status. In times of global uncertainty, investors flee to pillars of strength and the dollar certainly is one. Even the normally safe-haven yen fell vs. the buck the day after the election.
I’ve said that safe-haven Treasury bonds would also benefit from a Trump victory. But prices fell instead as yields jumped, at least initially. Apparently, investors fear the issuance of new Treasury securities to finance massive fiscal stimuli, and that triggered the dumping of highly-leveraged Treasury bonds.
Pushing legislation through
So what, in fact, is Trump as likely to accomplish? To begin with, even though Republicans will still control Congress, he ran as an outsider without the support of many Republicans. Getting Congress to approve his plans, especially the more radical ones, is a tall order. Also, Congress is inherently conservative – not prone to radical action even in the face of clear dangers.
Trump has an obvious protectionist bias, but what else is new? In times of domestic weakness, governments and central banks try to promote growth at their trading partners’ expense. Central banks are trying to trash their currencies to promote exports by making them cheaper for foreigners while imports become pricier and consequently less desirable at home.
Then there are protectionist measures under the guise of health and safety to limit imports. Washington is already working nonstop to curb steel and other Chinese products dumped here. And, of course, both Trump and Clinton have criticised Obama’s Trans-Pacific Partnership (TPP) in Asia.
I’ve been predicting vigorous fiscal stimuli regardless of who next occupied the White House and the halls of Congress.
Voters are demanding economic growth and higher incomes, and politicians of all leanings have seen the footprints on the ceiling.
Both Trump and Clinton proposed plans for major action during the campaign.
The way forward
I continue to believe that much-needed infrastructure and military spending will benefit Republicans in control of Washington.
The zeal for fiscal action is considerable with ongoing slow global growth and Trump’s victory adding to worldwide uncertainty and caution. Otherwise, a worldwide recession could unfold with even a minor shock such as a further nosedive in oil prices. A Trump-initiated trade war also could precipitate a global economic downturn. Estimates predict that a 15% tariff on Chinese imports (Trump has proposed 45%) will reduce already-falling Chinese growth by 1%.
The initial post-election jump in interest rates was probably overdone. It can be retraced as investors again face a deflationary world. As for equities, the initial euphoria is no doubt overdone. As Congress grinds through Trump’s proposals, many will likely be considerably watered down. Rising protectionism is already in place and massive fiscal stimuli were already in the cards. Tax cuts seem likely regardless of hopes that they’ll stimulate enough economic growth to finance themselves. The Fed will probably finance massive fiscal stimuli, but potentially huge deficits will make Congress cautious.
All in all, I doubt that Trump’s election was a watershed event. He rode the tide of voter discontent, but it was already pushing economic and foreign trade policy in the direction he is advocating.
Dr. A. Gary Shilling is the President of A. Gary Shilling & Co., Inc. in New Jersey. Twice ranked as Wall Street’s top economist by polls in Institutional Investor magazine, Dr. Shilling was also named the No. 1 Commodity Trader Advisor by Futures magazine.
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