Chief economist Stephen Halmarick outlines what newly-elected president Trump will mean for the global economy.
The election of Donald Trump as the 45th president of the United States has come as a great surprise in the US and, evidently, to the majority of financial market participants.
This was evidenced in the initial market reaction that saw a significant ‘risk off’ move or a shift to lower risk investments before a recovery in US trading.
Importantly, Mr Trump won a comfortable majority of the electoral college votes and, in addition, the Republican Party has retained a majority in both the Senate and House of Representatives.
Words being used to describe the result are ‘tectonic’ and ‘revolutionary’, as the result is considered a significant vote against the political status quo. The implications are likely to be far reaching, in both a political and economic sense.
Mr Trump’s policy priorities are expected to include substantial income tax and company tax reductions, health care reform focused on repealing Obamacare, increased spending on defence and veterans’ programs, immigration reforms to reduce the flow of both legal and undocumented immigrants, and an increased infrastructure spending program.
Additionally, a Trump administration is anticipated to adopt a much more aggressive trade policy, including naming China as a currency manipulator and imposing tariffs on selected Chinese imports, changing the terms and conditions of the North American Free Trade Agreement (NAFTA) and abandoning the Trans-Pacific Policy.
It is important to note, however, that there is considerable uncertainty on whether Trump, as president, can act unilaterally on trade policy, or whether he would need the support of Congress − which may not be forthcoming − to change policy, especially in treaties such as NAFTA.
Implications of President Trump’s policies
Over time it is possible that Mr Trump’s policies would, as announced, be highly stimulatory, expansionary and, ultimately, inflationary.
In terms of implications for financial markets, we see three phases for the period ahead, but with less confidence on the exact timing of these trends.
1. The initial market reaction, globally, was ‘risk off’. Global equities were down, the USD was down against other major currencies, and US Treasury bond yields were down. This is a similar reaction to that seen after the Brexit vote. The risk off mode was based on the view that Mr Trump is a vote for significant change in the US political system. This change will likely bring uncertainty and, as is widely known, markets do not like uncertainty. However, it is fair to say that phase one has been shorter than expected.
2. The second phase of the market reaction, which appears to have begun sooner than we anticipated, is likely to be ‘risk on’ or a shift to higher risk investments, with a positive sentiment towards equities and weakness in bonds. This is based on the view that Mr Trump’s policies are stimulatory, expansionary and inflationary. If he is able to get his election policies through Congress − which could be more likely given the Republican Party’s majority − we are likely to see a near-term acceleration in the pace of growth of the US economy and a higher surge in the USD. The equity markets could potentially respond positively to this stimulus, especially those with significant cash holdings offshore and those companies involved in sectors of the US domestic economy that stand to benefit from Mr Trump’s nationalistic policy focus.
3. Phase three of response to Mr Trump’s policies are not likely to be as supportive. The key issue is that the inflationary implications of his policies are likely to see the Federal Reserve raise interest rates much more aggressively than currently priced into markets as inflation takes hold. We could expect to see Treasury bond yields move sharply higher, short-circuiting the stronger economic data. Mr Trump’s anti-trade policies and commitment to increase tariffs are also likely to be inflationary and negatives for growth. The implication is that, perhaps within a year or so of Mr Trump’s policies being introduced, the US economy could weaken significantly − possibly heading towards recession − with the US dollar, bond yields and the equity markets having the potential to decline as well.
Love him or hate him, there is one thing we can all agree on – the man takes some hilarious photos!!
As you probably all know (or anyone that follows me on Facebook or Instagram) I have been in America for the last two and half weeks. I took the kids to show them America and experience travel and what they can learn from it.
While I was there I attended Loral Langemeier’s Ultimate Millionaire Summit (UMS) so I got to mix it with some of the brightest minds and get my learnings on. It was a 3 day event held in San Diego – a great city and if you have the opportunity to go – you must. There was also a kids UMS being held at the same time, so it was a great opportunity to pass on the education of the future entrepreneurs of the world. My children Luka 15 and Carlo 10, went over with a plan and to sell some goodies to their USA counterparts. They did and they were the most successful kids in the program, making a gross total of $640USD and net $380USD, after they paid back the wholesaler (Dad, Me). They had to set market prices and see which items sold, they had Tim Tams and Boomerangs and a few other odds and ends. They also had to do currency conversions as the items brought in Australia using AUD and sold in USD and what they need to pay back the wholesaler in USD. They also learned how to enter conversations, shake people’s hands, ask for the business, have fun and make some new friends.
I also met some great new friends and some potential business partners in the states, there were property deals, stock market trading, franchises to invest in oil & gas, speed reading & memory courses, new technologies apps, breakout sessions, travel companies and loads, loads more.
You know the biggest part was actually turning up and going to the events. If you are in business and not make a habit of traveling overseas for a seminars, events or training I highly recommend the experience. You never know where introductions will lead and the great people you will meet. Just Do It! It is about taking action very much like investing in property – there are always deals but you need to step up to the plate and take some action and do it.
So What has America taught me? That Americans are still the best salespeople, that to build wealth you need diversification, education and continued learnings are part of both business and life in general, to take action and the world is your market – not just Australia
And what resonated with me the most …… Real entrepreneurs don’t have a job or work – they have a lifestyle!
Happy Travels and would love to know where you have last travelled and what events you have been going too. Please leave a comment so I can see what you have been up to!
A memory from Chris’s trip to The United States recently….
The morning air is crisp as we scramble to get on the 10 am boat to Alcatraz. We only just make it on board – running to be the last on. At the harbor there are the sounds of the cars passing, the F type trams gliding along the tracks, seagulls squawking and smells of coffee and fresh donuts – the American breakfast. (The coffee is still shit).
The people are warm and friendly and whenever us Aussie’s open our mouths they just love our accent so it allows us to get away with things we otherwise might not.
As we motor out to Alcatraz we chatter among ourselves catching our breath after running for the boat. We can see the Rock (Alcatraz) in the distance, it looks ominous and sits right in San Francisco bay. We also get to view San Francisco bay in all its glory, looking back onto the magical city, with the golden gate bridge in the distance that shimmers an orange/red glow. The water is calm today, but you can still see the strong currents running in the bay and there is barely a cloud in the sky – the San Francisco people say this is rare.
As we pull up to the Rock the first thing we all notice is the amount of birds – the seagulls are massive, they must have a good diet out here. We have our briefing which is done by a passionate ranger talking about the life on the Rock. We are given our headsets for the self-guided tour and guide ourselves around, looking at the old building until we reach the prison. It’s cold inside yet it’s a warm day out – so I would hate to feel it on a winter’s night with the wind blowing through. We view the small cells and the isolation cell which is pitch black – they locked us in for a minute….. I don’t know if I would have like it for much more. The cells did have a great view across to San Francisco and they said on a calm night when the wind blew – you could hear the music and people laughing – this was torture to the prisoners, being so close but they could not see it or be part of any of it.
The day trip to Alcatraz was fantastic, topped off with a stroll through Pier 39 and clam chowder served in a sour dough roll…. perfect!
I just love travel – it is one of my passions, it is one of the reasons why I build a property portfolio, it is one of the reasons I have a passive income.
If you want to travel and learn how to make passive income – give me a call.
Travel its good for the soul!