Look out Barack, here he comes, says Michael Wilson. What does the Trump phenomenon mean for investors?
To foreigners, he’s the face of America’s shameful isolationism, and of its growing withdrawal from the complicated world of international politics. To many Americans, especially the working class, he’s the figurehead for a wave of public rage that has erupted against the way that nearly all of America’s growing wealth in the last 20 years has gone into the pockets of the top 1%, and hardly any of it to the working man.
And to the Republican mainstream, he’s a problem which, it freely confesses, is largely of its own making.
Love him or loathe him, Donald John Trump is the disruptive expression of a popular sentiment that has remained suppressed for probably too long. Without his chaotic emergence, we Europeans might never even have noticed that Americans work harder, take fewer holidays, earn less and get less benefits than we have ever supposed. Which comes as something of a shock, given that America’s solid economy and ebullient stock market has been one of the few fixed points that the investing world has had during the last six or seven years.
Obama on the political ropes
But there it is. There are not many who would disagree that President Barack Obama’s loudly trumpeted ambition to even out the social and economic inequalities of the US state has run largely into the sand, as his watch in the White House has seen the rich getting richer and the middle class losing out. Partly, but not entirely, due to the fact that he never had a working majority in Congress.
Which meant what, exactly? That the Republican opposition were able to stymie all of Obama’s attempts to cut the Federal deficit (remember all that Fiscal-Cliff brinkmanship?); to hold back key parts of the welfare reforms; and to stop any real changes to the status quo which his disastrous Republican predecessor George W. Bush had left for him.
Oh, certainly, Obama achieved many popular things, such as bringing home the troops from Iraq and Afghanistan, and staying largely out of new conflicts in Libya and Egypt. But it wasn’t enough to prevent China from muscling in on America’s low-wage manufacturing jobs – how could it have been? And nor did it give an answer to the world oil price slump which has driven the US shale oil industry – possibly America’s biggest and most successful single innovation of the last decade – to its knees, mired in debt.
Add to all that an acknowledged problem with immigration from south of the Mexican border, and what have you got? The makings of a public revolution against what the American working class perceives as a corrupt and ineffective political system, that’s what. So who do you think the dissidents will choose to lead the charge?
“Shrink the state”
Not a mainstream politician, that’s for sure. Instead, this blowsy-haired billionaire believes he can get there by invoking the simple spirit of self-belief that the Founding Fathers laid down all those centuries ago. To hell with an economic policy, Trump seems to say – all you have to do is shrink the state by around $1.3 trillion a year for the next few years, and cut taxes, and free-market capitalism will do the rest. (Well, that and a 15% corporation tax band which seems to have been largely uncosted so far.)
Awkward statistical question – What’s $1.3 trillion a year? About 7.5% of the whole US economy, since you ask. And how much of the economy does government spending account for? Roughly 24% in a typical year. Which suggests (to the back of my cigarette packet, anyway) that the Trump plan is to chop federal spending by almost a third. That’ll be hospitals, highways and welfare, at a guess. All of them solid working-class areas. So has anybody told the voters yet? I doubt it.
“Ignore the whining from abroad”
Trump’s other economic policies are loose, to put it mildly. You could call them laissez-faire capitalism, or if you were being less kind you could say they don’t have any proper coherence. What you’ll have noticed, however, is that they rely on interventionist trade strategies.
Trump openly calls China a currency manipulator which has stolen America’s money so as to build its own gigantic force, and he wants a 45% import surcharge to be levied on all China’s sales to the US. But in fairness, leaving aside the vexed question of what that would do to manufacturers like Apple, let’s pause to reflect that it isn’t only Trump who thinks that way.
Wind the clock back five years, and Democrat Senator Chuck Schumer was demanding the same thing. Ronald Reagan, whose ‘unschooled’ approach to politics is often cited by Trump apologists, was also not slow to slam prohibitive duties on Japan’s motor trade during the early 1980s.
Trump says that America must make Europe, Japan and Korea pay their way when it comes to international defence. NATO is out of synch with today’s economic realities, and the liberal whingers need to support themselves – especially in Ukraine, which has no real strategic interest to the US.
We already know about the 2,000-mile 35 foot high wall along the Mexican border wall that Trump says will cost $8 billion, all of it being paid by Mexico. In practice, the Washington Post reports, even just the existing fence has cost $7 billion, so Trump’s calculations seem to be well adrift. But Trump’s point is that America’s economy will gain from having less cheap labour coming in to fill the country’s low-paid jobs, and less Mexican demand for US exports aid for with the money they send home. At least, I think that’s what he’s saying. What do you think?
“Bring the jobs back from Asia”
That one at least seems simple, doesn’t it? Put an end to Beijing’s trade undercutting, and the steel and textiles and electrical goods jobs will come back of their own accord. But, as Bruce Springsteen reminded us right back in 1984, long before China was ever in the ascendant, industrial outsourcing is nothing we can blame on anyone except the modern trade economy:
“Now Main Street’s whitewashed windows and vacant stores
Seems like there ain’t nobody wants to come down here no more
They’re closing down the textile mill across the railroad tracks
Foreman says these jobs are going, boys, and they ain’t coming back.”
I rest my case. Pass the whiskey and the dirty bandana, please.
“Tax Wall Street”
Perhaps the biggest shivers came in January, when Trump on the Stump accused US financial institutions of being too closely aligned with China – which was why, he said, the stock market rout in Shanghai had infected the US exchanges too. The sharp suits were in cahoots.
“I know Wall Street,” he thundered. “I know the people on Wall Street. We’re going to have the greatest negotiators of the world, but at the same time I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us. We’re going to tax Wall Street.”
What does that mean? Nobody really has a clue, but it sounds dreadful. Maybe nothing – but if the working class voter is feeling cheated by city sharp dealers, it has a certain electoral ring to it, does it not?
“Dump the Fed’s independence”
Let’s not beat about the bush here. The final year of a US presidential term is always lame-duck territory as far the financial markets are concerned. And doubly so when it’s a second and final term of office. (US presidents can have only two consecutive terms, so we can say for sure that Obama won’t be running for the Democrats I November.)
But this time Mr Trump’s luck is in, because Obama’s timing is in the cyclical doldrums and it’s just too tempting to look for easy policy targets. Yes, the US markets spent most of last year riding a wall of worry, and 2016 has been the year when gravity has got the better of it.
It’s not just that stock valuations (as measured by the CAPE cyclically adjusted p/e measure) have been riding close to their all-time highs. There’s also the embarrassing way that Fed Chairman Janet Yellen made herself look silly by bungling last December’s December decision to raise the US lending rate at exactly the moment when the US economy was topping out before falling again.
Trump’s view of Ms Yellen is as sexist as it’s dismissive. Last October he accused her of keeping rates low as a deliberate sop to the ruling Democrats. Obama, he said, “doesn’t want to have a recession-slash-depression during his administration,” and she had been malleable enough to oblige him. So now Trump is demanding a public audit of every Fed decision by the Government Accountability Office. Which would mean, effectively, that its independence would be gone.
So let’s be clear. Does the Donald favour sharply higher interest rates? In a word, yes. And would that help America’s industries? Err, next question? Would it drive up the value of the dollar? Yes, certainly. So wouldn’t that make it easier for foreign exporters to invade the US market? Hey, what kind of a liberal question is that?
Here in Britain, we abandoned the strong-pound mantra somewhere in the 1980s after Margaret Thatcher’s dream of a sterling domination hit the rocks. And we made the Bank of England politically independent in 1997. From Frankfurt to Toronto, the idea of a politically-tied central bank is an unshakeable anathema. Not least because a tied bank is an interventionist bank, and we don’t believe in those. But Trump, it seems, does.
“I don’t care about the Wall Street guys. I’m not taking any of their money.”
Could he do all that?
But all this is slightly beside the point, because it isn’t economics that’s driving this election campaign, but deeply-felt sentiment. Could Trump get elected in November?
At present, most of the smart money says no. Hillary Rodham Clinton, the shoo-in for the Democrat nomination, has a powerful knack for putting people’s backs up – but she does at least have executive experience, and an ability to get her points across without resorting to Trump’s thinly-veiled threats of mob violence.
More to the point, probably, the chances of even a victorious Trump getting his way in Congress are slim. The Donald would find himself trying to run a Republican Party that is, for the most part, appalled by his simplistic nations and repelled by his brutalist rhetoric.
Simon Laing, Head of US Equities at Invesco Perpetual, puts it rather nicely. The divided Republicans, he says in a recent blog, might maintain control of the House, but the Senate “would be more of a dice roll.” Indeed, he says, “we may just have a frustrated President who may even end his term early if he wasn’t able to change Washington.”
Comparisons with Ronald Reagan, with his non-political background, are tempting, he says. But Reagan had been a governor for eight years before he ran for President. Whereas Trump has no political experience whatsoever.
“I think Schwarzenegger in California is a closer comparison,” he says – noting that, although popular, the Governator “had achieved virtually zero of what he wanted to due to his inability to alter political process.”
And for the future? “I don’t think that Trump will get in,” says Laing. “But, given he looks likely to be on the front pages until November, he could be another dent in US consumer confidence. At the very least I would say this puts downward pressure on the US dollar and keeps expectations around risk elevated.”