“President Trump”. Crazy, huh? Well, not that crazy. Part of me is shocked and part of me is not. I first predicted a Trump win in my 2016 annual predictions and then later thought he’d lose due to his divisive commentary and failure to pivot to the center. As it turns out, I was wrong and he didn’t need to pivot at all. But I’m no political polling expert (and based on the disaster in election polling forecasters, it’s safe to say there are no election polling experts). I try my best to keep politics out of economics so let’s talk about what President Trump means for the economy and the markets without getting bogged down in so much of the ideology that can lead us astray.
- As I’ve explained before, Trump always had the more stimulative economic plan of the two. He’s a Keynesian on steroids while Clinton was enamored with the myth that a budget surplus, like the Bill Clinton surplus, was good. Trump’s plan to run a massive budget deficit will be stimulative in this environment. Why, you ask? Well, the math is relatively simple. The USA is a current account deficit country (so, think income flow out of the country due to trade). The country’s private sector has been weakened by the credit bubble that resulted from the housing bust and remains at historically weak levels so growth has been weak in large part because of this. But when the government offsets these two weak flow sources by turning on its own spigot it can be stimulative. In fact, the deficit has been a key factor in the economic and profit growth of the last 8 years as it helped offset a de-leveraging household sector.
- This is yugely important for stocks as the deficit will contribute to corporate profits, big league. Remember, we know from the profits equation that the deficit adds to profits in an environment like this. This is especially true in a productive economy running a current account deficit in which private credit growth is weak. So, Trump will give us the fiscal stimulus that I’ve been begging for for so long. And according to the Tax Policy Institute, it will be a huge increase in the deficit.
- While Trump is planning a huge deficit, he’s planning this in a typical sort of trickle-down fashion. He’ll be corporate friendly and emphasize tax cuts for the rich. So, I suspect inequality will increase under Trump as his economic plan will largely benefit those who own financial assets, corporations and the wealthy.
- Trump’s trade policies are anti-free trade. A lot of people were convinced that Trump would bring back jobs via trade. We should be clear – those jobs we lost in manufacturing are largely gone. They’re not coming back due to secular trends. So this is a big unknown. I suspect Trump’s policies will reduce the current account deficit as they’re rather protectionist and if we tax imports we will probably see higher prices for American goods as corporations raise prices on goods they increasingly make in domestic markets. As you can see, there’s no free lunch there. Yeah, we lost jobs due to foreign trade, but we also got lower prices. So, if we do get some jobs back we’ll likely see higher prices. All in all, this is probably a wash for the economy and won’t achieve the benefits that Trump voters hoped for.
- The Fed rate hike is off the table. Trump’s win will create enough uncertainty in the near-term that a rate hike will be delayed in all likelihood. In fact, there’s a good chance the Fed won’t move until Trump is sworn in and has greater clarity on the direction of policy. This has bogged down markets for much of 2016 so this will be viewed positively.
What’s it all mean for the financial markets? Well, the fiscal stimulus is the key here and it likely means we see higher profits, higher interest rates, higher growth and higher inequality. It will be good for the overall economy, but it will be REALLY good for the wealthy. So, in a weird sort of way the Trump economy might not look that different from the Obama economy where profits and stock markets boomed and the wealth largely flowed to the rich.
The kicker here, is that it will take time for the markets to digest these policies assuming they even come to fruition. So the markets will overreact to the uncertainty in the short-term. Markets don’t like uncertainty and Trump provides plenty of uncertainty. But given enough time I suspect that these big macro trends will reinforce themselves and that uncertainty will wane. So, assuming a President Trump can keep his finger off the button I think it’s safe to assume that this business friendly President will be more market friendly than not.