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Trump, Trump, Trump. His rhetoric has offended 95% of the world’s population, says Michael Wilson. What does it mean for the markets?

  • By Sue Whitbread

Fog in Washington, World Cut-off

Now here’s the thing I don’t understand. To hear some people talk, you might suppose that the presidency of the United States was up for grabs on 6th November. And that all the disastrous policy decisions taken by Donald J Trump during the first 20 months or so of his incumbency could be swept aside and overturned in a sudden, mighty tide of new-found sanity.

And that the world can breathe a sigh of relief, and that trade relationships with the 95% of the world that Mr Trump calls hostile territory can be restored in the time it takes to sign the recantation documents. And that everything will be back to normal in a jiffy.

I’d like to say that I hope for all that as well, but it isn’t very probable. Even if the Democrats were able to swing enough votes in November to force a tax fraud investigation on the Very Stable Genius (as a recent New York Times article recounts), and even if the despairing “adults” in his Administration were driven to invoke the 25th Amendment (the “insanity clause”), we’d still have Mike Pence as president and arch-hawk John Bolton as security adviser.

And probably Ivanka Trump taking up Nikki Haley’s empty chair as the UN ambassador (assuming they don’t give it to Kanye West instead), and Brett Kavanaugh weighing down the ultra-conservative bias on the Supreme Bench for the rest of his life.

And although Moscow might be annoyed by the loss of Mr Trump, not a lot of other things would change.

A healthy economy. (Probably….)

Nor would they really need to, say most Republicans. The American economy is in fantastic shape. Unemployment is at near-record low levels; corporate profits are said to be set for a 45% rise; and share prices rose by 12.5% during the year to end-September. Which is why the dollar was able to hoover up so much of the world’s liquidity. Largely to the detriment of Asia, and especially China, where the Shanghai Composite had lost 30% YTD by mid-October, and another 7% in dollar terms because of currency movements.

But the first half of October was cruel to the US as well. As I sat down to write this article, the S&P 500 had given up 6% in the space of a week, including 3.3% on 10th October alone. And the reason? We’ll, as far as anyone can tell, it was the Federal Reserve’s earlier decision to put up the bank rate (again) by a quarter of one per cent.

The increase was nothing more than most responsible central banks would have done upon learning that the US economy was expanding by an overheated 4.2% in annualised terms, but it was enough to annoy the president into calling his new Fed chairman’s team “crazy”.

Crazy? Well, there are those (including me, incidentally) who feel that underlying US equity positions have been due for some sort of a correction for some time now. The Shiller cyclically adjusted p/e ratio on the S&P 500 has been nudging 34 for the last month – twice its long-term average, and more than in 1929 – and UK fund managers have been opining for some time now that the logic of overweighting US stocks has been wearing a little thin. But the rampaging dollar, and the prospect of higher third quarter earnings, was still keeping up the bullish pressure as I write this.

The dissenters

There are, of course, the moaning minnies who insist that it will all end in tears. Most of the impetus behind the country’s strong recorded growth stems from the $2 trillion of unfunded tax cuts that the Prez dished out last Christmas – money that has not been earned, or saved from elsewhere, or removed from other axed government projects. And in this connection it’s worth remembering that America’s GDP calculations, unlike those of other countries, do tend to favour consumption over production, which makes it relatively easy for governments to generate spikes in the figures.

Meanwhile, there are critics who say that the US unemployment figures are a flawed resource, because they don’t include the millions of jobless who get to the end of their six months’ dole money and then drop right out of the job-seeking market – older workers, mothers, black-marketeers, long-term drug addicts and no-hopers of every description. But again, let’s be generous and take the employment good news at face value.

So is this momentary downward lurch a time to be looking for the market-timing opportunities that are about to emerge on the international stage?

Well, there are many who insist that market timing is only for the very gifted and the extremely stupid. There are plenty who quote John Maynard Keynes’s wise words about the market remaining illogical for longer than you can remain solvent. And there are many more who’ll remind you that if you’d missed out on the 20 best days in the last 50 years you’d only be half as well off. All of them have a point. But all the same, can we determine anything about which way the damaged world trade position is moving?

There are plenty who quote John Maynard Keynes’s wise words about the market remaining illogical for longer than you can remain solvent. And there are many more who’ll remind you that if you’d missed out on the 20 best days in the last 50 years you’d only be half as well off

America Alone

Internationally, of course, it would be an understatement to say that Trump’s international position is uncomfortable. There are 7.5 billion people on earth, and the Prez has managed to offend 95% of them, often mortally. Rapists, extortionists, currency manipulators, parasitic freeriders, backstabbers, tax robbers, and enemies of the American people. We’ve heard them all.

America’s best trade allies have been threatened with hefty costs, with fines for stealing US jobs, and of course with Trump’s trade tariffs. Lots and lots of tariffs. Many of Trump’s tariffs have bounced straight back on America with all the certainty of the robber’s brick that rebounds from the shop window to fell the assailant on the pavement and leave him bleeding.

Did I say Trump had offended 95% of the world? Please do check my maths. I’ll give you 50% of the US population (160 million) who Trump approves of, plus 90% of Russians (130 million), plus the 75% of Israel that isn’t Muslim (6.5 million), plus the whole of Saudi Arabia (32 million). And, since I’m feeling extra-specially generous, three quarters of South Korea (38 million) and 10% of the British people (6 million). Until recently I’d have included 0% of Turkey (40 million), but that alliance seems to be right off the table these days. Please don’t ask me to include North Korea (25 million), because I really can’t bring myself to do it.

That comes to 375 million people who Trump likes – give or take a million or two. Which is 5% of the world’s population. I rest my case.

Many of Trump’s tariffs have bounced straight back on America with all the certainty of the robber ’s brick that rebounds from the shop window to fell the assailant on the pavement and leave him bleeding

Those pesky trade sanctions

But back to my point (at last). Is it correct that there’s very little the world can do about the progress of Mr Trump’s tit-for-tat trade wars, or are we stuck with the prospect of mutually escalating reprisals for the foreseeable future?

Much of that, we must presume, will rest on where the November mid-term elections leave the President. The optimists’ case is that some sort of a critical mass will emerge from the ranks of his White House staff, and that sweet reason can be forced upon a more vulnerable leader, so that wiser and more experienced heads can be allowed their say before the President’s Twitter account can wreak any more planning havoc on the established order of diplomatic relations.

Lest I seem to be getting ahead of myself, let me make two points here. The first is that President Trump has actually been quite good at appointing capable and experienced people – I’m thinking of foreign policy people like Rex Tillerson, military strategists such as James Mattis, or organisers such as John Kelly, the White House chief of staff. The problem has been that they have all been discarded or at least sidelined for contradicting a president who doesn’t actually have a very good personal grasp of either economics or diplomacy.

Do I need to amplify that point? Possibly. You’ll remember Mr Trump’s assertion that countries that score trade surpluses against America are, by definition, robbing it and cheating it – whereas in fact they are making their fortunes by supplying goods to a US public which is better at consuming than it is at producing. (The logic only works halfway, because Trump’s “negative” trade balances ignore the fact that its service export surpluses to China or Canada substantially outweigh its deficits on physical goods. Overall, America makes a balance of payments surplus from both these countries. Fact.)

You’ll also have gathered that the President equates a healthy stock market performance with his own economic success – earlier this year he was quick to claim credit for having generated billions of dollars through the strong growth of Wall Street. Alas, this conceit evaporated immediately as soon as Wall Street sagged: instead of taking blame where he once would have claimed credit, Mr Trump openly accused Wall Street of betraying the country by letting share prices drop. You can’t really argue with that level of ignorance, because there’s no point.

Similarly with the oil price, where President Trump takes the view that rising prices are somehow OPEC’s fault, rather than the market’s. Now that Trump’s ban on Iranian oil exports has created a global supply gap, Russia and Saudi Arabia should be stepping up production so as to keep America’s motorists happy, he says. And never mind the fact that America’s shale oil extractors suffer horribly when prices are low, because they’re so heavily indebted that they need expensive oil to break even. What’s good for Trump threatens to break their backs.

Which brings us back, eventually, to the image of the rebounding brick. China has retorted to America’s tariffs on $500 billion of its exports with a much smaller (but highly targeted) levy that hurts American farmers – mostly wheat, pork, maize and soya exports to the People’s Republic. Trump has tried to make amends by letting them send more maize to ethanol production, but the farmers of the Midwest are no longer as enchanted with the Republicans as they were a year ago.

Europe, for its part, responded to Trump’s tariffs on steel and aluminium by tariffing niche US products such as Harley-Davidsons and Jim Beam whiskey – with the almost comical result that Harley Davidson said it would offshore more of its production to countries outside the US, whereupon Trump accused the all-American icon of treason and betrayal.

And all the while, US steel prices have risen to seven year highs because Trump didn’t check whether domestic US producers could meet domestic demand before he slapped the tariffs onto imported steels. A schoolboy error which could have been averted if the right wise heads had been consulted. As it is, however, US engineering and durables manufacturers have been having to cope with radically higher production costs this year. US auto production is at barely half the levels of 2016 and a third of those for 1996, and Ford and General Motors are currently reported to be thinking of pulling right out of the US market.

Nice one, Donald

US steel prices have risen to seven year highs because Trump didn’t check whether domestic US producers could meet domestic demand before he slapped the tariffs onto imported steels

So where does it go now?

That’s a bigger question whose ramifications (and possibilities) go beyond anything that we can predict this close to the US mid-term elections. It’s probably more helpful to end by focusing on the defining characteristic of the Trumpian approach to trade – or to diplomacy, defence, political alliances, everything.

When you boil it right down to the basics, the reason Donald Trump doesn’t like dealing with groups of nations – the United Nations, the World Trade Organisation, the Paris climate accord, the Pacific Trade Partnership, the European Union is that he doesn’t enjoy being in a room where he might be outvoted by a multiple alignment of the other participants.

Trump’s apparently benign admonition to his trading partners – that he’s an American patriot and he expects other leaders to be patriots and to stand up patriotically for their own countries – is best interpreted as an expectation that each one of them should go head-to-head with the United States on an equal basis. Which they will, of course, lose because America is bigger than each of them singly, even though it’s worth barely a sixth of their bargaining power collectively.

This is not to say that Trump is always wrong. He has made many cogent points about NATO and the fact that only four European countries are paying their share of the cost burden. (Britain being one of them.) He has also brought freshness and vigour to the diplomatic debate, even though it’s doubtful whether Canada’s prime Minister Justin Trudeau will ever forgive him for calling him “very dishonest & weak”. And yes, he’s started a party in the streets of many depressed American towns by bringing in the hope of an upturn.

But ultimately, Trump is leading his country away from the essentially collaborative post-WWII role (essentially “first among equals”) that Roosevelt and his successors envisaged for America. That’s a factor which shakes up all our ideas about the United States’ position in the world, and how the future can be expected to pan out. We are still running the calculations

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