Americans have voted to put Donald Trump in the White House and left Republicans retaining their majority in the House and also a narrower Republican majority in the Senate.
The Trump victory is another manifestation of a powerful force that is sweeping the world – a growing deep-seated distrust and disillusionment with career politicians and elites. The past couple of decades of globalisation has benefited mostly the rich and resulted in rising inequality, stagnant or declining real wages for workers, and the loss of many jobs to emerging markets and robotics. Unemployment rates in the US are down to 5% from their 10% peak in 2009, but there are still many tens of millions of people who have given up looking for work and so are not counted in the unemployment numbers. Add to this the rising racial tensions that have plagued America for centuries.
Change is inevitable in the world. The good thing about the US election is that it has resulted in political change via a relatively peaceful democratic process without revolution or civil war.
The main message is: don’t make sudden panic moves. Following the herd and panic buying in booms or panic selling in busts is the biggest destroyer of wealth for most investors.
US economy
- Many of Trump’s policies are stimulatory – including personal tax cuts, corporate tax cuts, increases in infrastructure and defence spending, winding back banking deregulation and winding back business regulations. These are largely the policies of the traditional Republicans who control the Congress and so many will have a good chance of being legislated.
- Interest rates and bond yields – Federal Reserve chair Janet Yellen is probably safe to serve out her term despite Trump’s promise to fire her (he has no power to do that). The Fed’s careful plan to raise interest rates slowly will probably keep interest rates low for the foreseeable future. If anything, Trump is likely to add a more ‘hawkish’ bias to the Fed board, which would do more to lower rather than increase growth, inflation and bond yields.
- Trump’s promise to deport 11 million Mexicans and build a wall to keep them and get Mexico to pay for it – all seem unlikely to be carried out in full. However any money spend on increasing border protection would be stimulatory.
Trade
- Trump’s promises to tear up or at least renegotiate trade agreements, and to slap high tariffs on China and Mexico are unlikely to get full support in Congress. Global trade flows have been declining since the GFC. Although the WTO mechanisms have prevented an all-out global trade protection war, each country has been raising protection in key industries behind the scenes. This is likely to continue while unemployment remains a problem especially in Europe.
Military
- Trump appears isolationist and he says he wants to retreat from foreign military involvements. Much of the grass roots supporters were against the US torturous entanglements in Afghanistan and Iraq. Although he may wish to withdraw, this has proven extremely difficult to achieve. Despite the rhetoric he is likely to be forced to continue US involvement in Asia against the rising global threat to US supremacy, China. China is also America’s biggest creditor and supplier of the capital to fund America’s stimulus and defence spending.
- One of the few things a President can do without Congressional approval or support is to start wars. Trump’s isolationist stance means he is unlikely to start a war, but he also appears to be a volatile character who may react illogically if pushed. Although he doesn’t need Congressional approval, he will know that there is no point starting a war if he knows Congress will not finance it, as Congress controls the budget.
Some likely implications for Australia
- Shares are likely to follow the lead from US markets as they have done for the past century. Since most of Trump’s policies are pro-business and stimulatory, the US markets are likely to be largely supportive (despite the usual regular sell-offs from time to time)
- Industrial commodities prices – would be boosted by Trump’s promised infrastructure and defence spending plans. However the main driver of demand is China, where government is also likely to continue to prop up economic growth and jobs with stimulus spending.
- Gold may do well in the short term, but any sustained rally would require a return of runaway inflation or a complete breakdown of the US or global banking systems and a return to a barter economy, both of which are unlikely in the foreseeable future. The brief US downgrade crisis in 2011 saw gold to jump to $1900 per ounce but that was quickly forgotten and the bubble burst. It may be that the stimulatory policies increases US inflation, but runaway inflation is unlikely given the excess capacity and deflation in Europe, China and Japan.
Originally published by Cuffelinks