A day can be a long time in investment markets – and the average investor is rubbish at forecasting. So it’s no surprise that both equity and bond markets looked tired and emotional in the aftermath of the US election result.
Clearly the President Elect is an egotist and demagogue – amongst other things! Yet he does bring some hope, and not only to the 50% or so voting Americans who supported him.
From a theoretical perspective, many of his policies look flawed. But since when have textbook economics been perfect?
- Protectionism per se is indeed bad, yet free markets rarely find the equilibrium levels that they should. Consequently, whilst the People’s Bank of China might not be the currency manipulator he suggests, Chinese goods can be too cheap and a sensible tariff might be appropriate. Cheap imports benefit the wealthy minority at the expense of the working majority. It was not so long ago that steelworkers in the UK were crying foul on this.
- Fiscal stimulus from tax cuts and spending might well lead to inflation? But is this is given – does it not depend on how the money is spent? Would sensible public investment raise productivity?
- Furthermore, would some inflation be a bad thing? The Bank of England seems happy to tolerate it now – not surprising really, given that we’ve been hunting it for so long.
- And, of course, Debt to GDP is high and a fiscal boost could make it higher. But a sustainable growth dividend might help rather than hinder this. Indeed, the hallowed 90% threshold calculated by Rogoff and Reinhart and seized on by fans of austerity has fallen into disrepute.
None of these issues is straightforward. And the scope for policy error is high! (Furthermore, they ignore the socially repugnant attitude to immigration, healthcare and climate change.)
But they are not necessarily a recipe for disaster. At least Trump has the counsel of Congress and, if he sees fit, he can change his mind. A wall with Mexico might not actually mean “a wall with Mexico”. Whereas, we are told, Brexit means Brexit!
Hopefully, a strong, confident US can lead a strong confident West. A lot of people across the Western World want change and it looks like they are going to get it.
We did not expect nor hope that Trump would win. But he has done and, economically, the consequences might not be that bad. Not least, this might be because Trump has guts. An imperfect strategy, implemented with gusto, can eat a perfect plan implemented half-heartedly for breakfast.
So, seize the Donald! Think hard about how you manage asset and inflation risk. (A leveraged LDI strategy will have merit.) But don’t give up hope!