Comment 11 January 2017
Trump’s winding road
by Cees Bruggemans words 850
It started simple. We will give you tax cuts, better infrastructure, less regulation. For those craving it, there will be more trade protection & fewer Mexicans. Geopolitically, we will demand fairer treatment, as much from our European and Asian allies as from China.
But it never stays simple. Daily tweets ensure that the (growing) assault from special interests, questioning media and of course surviving Democrats offers ever more intensity. And the President-elect ever so willing to respond.
I experience different sensations about Trump policy talk, depending on when taking a medium term view, the long view, or the short term noise.
The medium term “strategic” view is devoid of chatter, and also doesn't take into consideration longer term sustainability. It assumes the airplane holds together, and will take-off, but with no sense of what happens thereafter.
The short-term daily focus is a totally different experience, creating an uneasy sense that this thing is hurtling towards a brick wall.
Three levels, three sensations, three outcomes. Which is the real one?
The most comfortable one is the broad-brush strategic view, with not too much focus on detail. We are going to cut taxes, increase infrastructure spending, change the welfare function, deregulate in line with common sense.
The equity markets have responded positively to the implied faster growth and higher earnings, the bond market notices the switch in emphasis from monetary to fiscal, and has raised bond rates (and expectations for the entire yield curve), and the Dollar is stronger. The good ship America is holding to a new course.
Strangely, nothing is as yet firm about these policy shifts. Not about how low corporate taxes will be cut (really 15%?), how global earnings will be treated (will it really trigger a repatriation of capital tsunami?), how much new infrastructure will be committed, what will be deregulated (and how much?).
Markets haven't got the luxury of waiting. Instead, this gigantic bet that it will all be very big and wonderful, and thus discountable positive rather than fearful .
But a longer view sees something quite different. A fiscal deficit ballooning, a monetary policy and bond market rate hiking, a Dollar spike as capital favours the US, global capital flow disruption weighing heavily on fringe emerging markets.
All this before shifting to the favoured trade policy of America first, which also has geopolitical implications.
Trump appears successful in inducing some American companies to reconsider their foreign investments, particularly in Mexico. Especially the motor manufacturers, but also other industrial companies originally located in the American rust belt are in focus. It allows Trump to claim trophies and hold them high, for his voters to see. Doing just what he has promised.
Meanwhile American foreign trade is more than a few foreign car factories. If import taxes are set to be imposed, there will be global ramifications, especially in China and Mexico, but also beyond.
American consumers would have to pay more for their imported consumption, China may find its trade balance and Yuan pressure worsening, global trade competitors might find it necessary to meet tit for tat, while currencies will do most of the reweighing.
The net outcome may be American-negative.
On a more deeper level, is the real challenge facing America macro in nature (give us more demand) or is it supply (give us more competitive ability, not through protection and a disruptive stronger Dollar, but through better and affordable education)?
So far, the airways have been full of the pleasant medium-term broad strokes, and the happy consequences flowing from them. But this happy picture is being eaten away from two sides, both the long view and the daily assault.
The questions raised longer term make the equity boom to date out as a mere sugar rush, while the bond market may ultimately not crack just as yet.
The more fascinating spectacle is the short view. The new administration is a week from inauguration and the noise levels are already getting painful. This is quite normal for any incoming administration, but what is on show now seems to be on a level of its own.
The new political appointees have to be approved by Congress, but this may not be the pushover it seemed not long ago. Thereafter, the policy proposals will start coming, and these may have as hard a time. What really will survive this year is as yet far from obvious.
What is unsettling is the personal nature of so many objections, from both sides. Everyone seems to be bathing in trivialities. Meanwhile the bigger ship sails on to meet its destiny shortly, as much domestically as geopolitically.
On one level this is creating an enormous excitement that something big is happening, with positive outcomes for years to come. On another level it is creating caution, even fear, that something truly disastrous is within striking distance.
But then the unknown always creates such sensations. In a manner of speaking, it feels like going to war. For some creating a deep sense of wonderment about what is going to change for the better. For others a deep dread as to where it may lead.
It won't be long now before reality will start to intrude with the first real battle scenes and their outcomes.
Bruggemans & Associates, Consulting Economists