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Africa Brief                                                                             18 December 2016

Overheating Trump     

by Cees Bruggemans                    words 1500

Six weeks past the US election, and one day before the electoral college formerly inks the Trump Presidency (by voting for him by a comfortable majority, despite Clinton having achieved nearly 3 million more votes than Trump in the election), one is allowed to wonder what has been achieved in this short interim, and what may lie ahead.

Most new Presidents start with enormous noise about what they intend to do and achieve, only for the American political checks and balances to erode this into virtual nothingness ere long. Will Trump await a similar fate? Or is this time different?

 

Certainly these past six weeks have been a whirl of action – by markets. Though in the hours following Trump’s triumph, the Dow futures were down by 800 points (nearly 5%) as a lot of investors were caught red handed in the wrong play with the wrong mindset, it only took these few hours and this shakeout to clear the market’s collective mind.

Thereafter, a remarkable revival took hold, the first Trump trading day started positive and ever since US equity markets have scaled new highs, while the 10yr bond yield went from 1.74% to 2.6% (the equivalence of more than three Fed rate hikes). People were hooked on something (and it wasn't pot).

What did the trick? Firstly, people wanted to believe the new noises. It meant mostly positive change for moneyed America. Secondly, the noises themselves. Corporate tax rate down to 15%. Seeking to repatriate over $2 trill held by businesses overseas. Individual income tax cuts. Most powerfully, the promise to be lighter on regulation, to the point of deregulation (probably the heaviest lift of all). More infrastructure spending.

Against all that, there were the promises of more trade intervention, potentially affecting many companies. But while physical facilities are difficult to shift without attracting attention and outcry, much of American corporate strength is in the intellectual field. Who will notice one hires less talent in New York but more in India or 100 other locations around the world? That impact can be very diffused rather than concentrated.

Also, there is the unsettling Trump way of singling out businesses for Twitter treatment. Carrier, Boeing & Lockheed have been early examples. Others may follow. Populist messages offer cheap propaganda and a sense of achievement. Reality will probably be more difficult to manage.

Despite these concerns, the deregulation drumbeat and the tax promises brought forth investor salivating. This was believable, with a Republican dominated Congress, and it being Trump, the unconventional challenger.

Infrastructure spending can take years materialising. Ronald Reagan got his tax cuts only in his second term. But far too many people appear willing to push that button now, with Trump correctly having assessed the mood. It might fly early and strongly, despite muttering of fiscal-neutral budgets by some.

So perhaps President Trump wont go down as a lead balloon, even if some of his most cherished promises may fade. His “wall” may degrade to a fence, half of which already exists, and perhaps could be upgraded. But East German or Israeli walls? It remains to be seen.

As to deporting millions of Mexicans, that probably isn't his intention. But there will likely be more immigration reform. How much will depend on the Congress.

Despite the aggressive macro policy stance, not a peep out of anybody that this could be too rich a brew, too much of a good thing. One can strongly stimulate weak economies. Reagan came after the weak 1970s. There was scope for better performance, if businesses could be enticed. They were, though it took the better part of a decade in which the evil empire fell, and technological manias steadily took shape.

Bill Clinton in late 1992 got incredibly lucky. He inherited a reviving economy already on the mend. It wasn't necessary to do too much, which a gridlocked Congress in any case didn't want. Bill’s attentions wandered elsewhere.

But that is not the situation today. Seven years of steady recuperation after the Great Recession, the US economy at Christmas 2016 is effectively at full labour employment.

Come again, you may say? What about the millions of unemployed, millions of underemployed and long-term unemployed remaining? Surely the US could do with a period of modest “overheating” (as the Fed playfully termed it) to mob up more of these unlucky ones, many of them Trump believers?

There are various ways of looking at this. These many millions still not fully deployed are a reality. But so is the reality of businesses claiming they can't find qualified applicants for available jobs. US businesses find it harder today to fill a job than in overheating 2006. Furthermore, American workers holding two or more jobs is at a cyclical high.

The real problem with those remaining unemployed or underemployed is that many of these Americans may not be adequately skilled. Not having enough education and experience.

That's a structural weakness. You don't solve it by piling on the gas, as that can only lead to overheating (as Kennedy found in the early 1960s, Nixon in the early 1970s and Carter in the late 1970s).

By providing more demand stimulus, it may invite more technological deepening (investment), boosting productivity of existing assets (labour). But that may be short-term. There is a point where general demand stimulus overheats the engine. Also financially as the pot starts bubbling. Historic data show it and the present is no different.

The main problem here is seven years of steady recuperation slowly righting the ship, and a President-elect not acknowledging that what is lacking most on the fringe of his electorate is human capital.

There needs to be reform of US education, a lift in training. But one doesn't change the human endowment quickly. Instead, these millions have become more and more marginalised in the modern economy, through the combination of globalisation and technology, and their own inability to stay the course skill-wise. The same can be observed in Europe and elsewhere.

Instead of helping his followers by focusing on uplifting human capital, the most difficult challenge, Trump typically chooses for broad-brush populist stimulus and deregulation, enthusiastically welcomed by his followers and many other beneficiaries (newly converted).

Yet we know from history, most vividly in the late 1960s, that when Vietnam war and Great Society deficit spending are attempted together, electing for guns AND butter, something will overheat.

Today, American military involvement will be cut back, and social welfare may also get leaner. So hey, what's your problem?

Those coming tax cuts are huge. But most I fear the dormant animal spirits, as much in the US as worldwide.

I found it telling watching a former Fed governor expressing the view that the Fed is not behind the curve, that inflation may head for 2.5% but that wouldn't be a train smash. There was scope for running with the economy, so do so.

We are living in an Age of low inflation in the rich countries. Investment bubbles were rudely popped in 2008. Both won't come back quickly.

But it depends on your assumptions. Supposedly, we have years of uncertainty behind us during which investors and businesses were afraid of their own shadows. But if those spirits were to lift, animated by the Trump evangelical messaging, and the growing belief his actions may materialise, it will not only be the Trump actions that will figure. It will be the response from audiences that may become even more resoundingly powerful.

Yes, we can!!! Obama eight years late. And with feeling….

You may miss the boat in 2017 and 2018 if you don't fully throated participate, in financial markets and gradually as businesses, too. But somewhere out there lurks a line in the sand. If the Americans transgress with the usual vigour of these instances, they will transform their own condition and also the larger world.

It will not be immediately apparent. The choir must build up steam first. But when it finally starts to hit the high notes, where glass shatters and roofs lift, we must be ready to recognise that there are limits beyond which one pays fines.

Sometimes it takes a full decade. But the American economy is at full power NOW after seven years of recuperation, yet Trump wants full throttle and his audience might be shaking off its lethargic dormancy, perhaps slowly at first, but then with growing conviction. Everyone, including the Fed, has now shifted from being “Data Dependent” to “Depending on Trump Doing What He Said”. This is big stuff once it gets really going.

It will not do for the Fed to repeat the early 1970s. Yet Trump wants his own candidate there. Watch that spot. Remember Arthur Burns under Nixon, the clueless Bill Miller under Jimmy Carter, and even the nearly 20 years of Alan Greenspan under Reagan, Bush senior, Clinton and Bush junior (low inflation and self-regulating banks and financial markets…).

Oh much can still happen, if thankfully still hidden from view. But think beyond the immediate present, and what could still lie in wait.

 

Cees Bruggemans                                                                          

Bruggemans & Associates Consulting Economists

 

Website www.bruggemans.co.za

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