The Dust Begins to Settle as the World Map is Redrawn

The early dust is settling on yesterday’s shock win for Trump, as evident by the predicted calming of markets. This short blog adds to ours of yesterday morning, as cool-headed analysis begins to emerge on the likely short to medium term impacts.

The big question on everyone’s mind is what will President Trump make his top priorities, what is his likelihood of achieving them, and what are the consequences?

Strategically, Trump sees the rejuvenation of the US economy through the prism of redrafting trade deals in favour of the USA, controlling immigration, rough handling military opponents by leveraging US muscle in favour of soft skilled diplomacy and delivering a dynamic boost to the domestic US economy most especially in its rust belt.

1. The US President will be constrained by dealing through both houses in achieving much of his agenda quickly, but is less constrained on foreign policy and immigration. Seeing himself as a deal maker, he is pretty much hell bent on renegotiating trade deals, that means robust redrawing of the largely secretive process underway in TTIP with Europe http://ec.europa.eu/trade/policy/in-focus/ttip/.
2. It also means scrapping NAFTA establishing a free trade zone in North America in 1994, abandoning TPP the Trans Pacific Partnership https://ustr.gov/tpp/#what-is-tpp and binning climate change targets.
3. He is determined to deliver the most comprehensive tax package since the mid 1980’s and is betting the shop on the dynamic effects this will have to avoid adding trillions to US debt by accelerating the pace of GDP growth. Specifically, he wants to slash top rate income tax from 39.6% to 33%, whilst delivering a stunning reversal in US Corporation tax, cutting it from 35% to 15%, just a tad above the rate upon which Ireland attracted US FDI in large volume for decades.
4. He also plans to overhaul runaway costs related to the Affordable Care Act, Obama’s centrepiece https://www.irs.gov/affordable-care-act.
5. His grand plan is to use the dynamic effects of tax reductions to drive increased tax receipts in the direction of refurbishing US infrastructure, airports, roads, bridges, schools i.e. classic ribbon-cutting and jobs-rich projects.
6. He can be expected to vigorously confront China whom he names as a currency manipulator responsible for hollowing out traditional US industry using unfair practices, thus we can expect a shift in geopolitical tension to Asia.
7. Mexico is also in his sights and the building of the wall cannot be ruled out as a quid pro quo in negotiations with former Republican opponents in Government. We can expect early trade wars with both China and Mexico accordingly.
8. Although Trump is unlikely to row back on NATO, he can be expected to make as a condition of continued US support, much greater participation by nations benefitting from it, which translated means a redrawing of Pax Americana as we’ve known it since WW2. US military cover is going to come with a price tag.
9. Despite his freedom to impose his ‘USA First’ view of the world, President Trump will face dealing with harder nuts like North Korea, now armed with a ballistic missile capability, and the deeply entangled mess that is the Middle East, neither of which are likely to be solved by rough house tactics.
10. If he gets the dynamic effects of tax cuts right, starts rejuvenating the rust belt and manages to drive US GDP much higher than its current glide path, the price paid by threatening a ballooning deficit and increased international tensions from US hegemony may be deemed worth the risks by his domestic audience –for a time.

In practice, President Trump like all revolutionary politicians before him, is likely to over-promise and under-deliver, finding pretty quickly that managing a quarter of the global economy, one wired at a deep level with the remaining three quarters cannot be redrawn as easily or as quickly as it says in a business plan.

Until President Trump takes over from President Obama, the interim hiatus allows for further analysis and as this happens during the lame duck period, we will add further comment. From an investor perspective the need to address caution towards the risks posed by reversing quantitative easing is now elevated by the risks posed by the dislocations which President Trump’s strategy will undoubtedly create.

There is the additional risk posed to the domestic Irish economy squeezed between the UK and the USA with both positioned to deflate Irish economic growth capacity over the next few years. This is localised and an additional risk that cannot be diminished or ignored as clearly it will not be alright on the night.

If you haven’t penciled in a strategic review of your balance sheet to best defend against these themes, the best time to do so is probably in advance of Trump’s inauguration on Jan 20th next.