Trump leading a divided Republican Party has taken the US Presidency and with it a Republican Party that now controls both houses, Congress and Senate. It is time for calm and careful reflection on the implications for potential US isolationism and what this means for both geopolitics and for the global economy.
This is an early note, which I hope to follow up with further blogs after picking my way through what will be a blizzard of material, much of it skewed by pre-Trump conventional positions and their slow desertion by advocates for the establishment, which means most of the media. The truth is that “experts” got stuffed.
- It is evident after Brexit and now Trumpit that the “left-behinders”, those fearful of the pace of social, technological and cultural change, are rejecting the political establishments that did not provide them with cover. The impact of Quantitative Easing has disproportionately rewarded asset owners at the expense of workers without houses, shares or savings, these are the “left-behinders” and they are there in a large numbers, if not yet politically coherent
- Once the dust settles we will need to rely on the internal checks and balances of the US political system to mute the more extreme announcements by Donald Trump. The Republican Party will need to head a healing of the deep divisions in the USA if it is to hold on to power in 2020. President Trump will need to work with his Republican Party and that is where the focus now will shift, i.e. how that will work in practice.
- The engine room of the global economy remains the USA and its growth path is currently unchanged, it is the enactment of some of Trumps polices for other economic regions that has yet to be teased out as he inevitably develops his “US First” approach.
- The political focus will quickly shift to Europe because the same underlying mood prevails. Brexit and Trumpit serve as a huge boost to EU sceptic parties with Italy, Austria, Holland and France at risk of political regime change, which, in turn, increases the risks to the EU.
- Gold has risen, bonds are rallying and equity markets have fallen in early reaction to the mis-call once again by pollsters. This volatility is likely to be temporary and will pass as markets absorb the news. Ironically, and in an insight into the immediate future, MogIA, an artificial intelligence system, called the Trump margin weeks ago by tracking vast quantities of social media data learning what people were really thinking and not telling pollsters.
- The support for Conservative policies in the USA is a rejection of high taxes servicing high deficit spending and projects like Obamacare with runaway costs paid for by those in the middle servicing debt with little or no savings and excluded by the “wealth effect” of vast quantitative easing because they don’t own properties, shares or bonds. The Irish equivalent, unquestionably, is the majority of the private sector workforce watching from the side-lines and excluded while scarce resources are carved up by insiders.
- Ireland is now caught between the anvil of Brexit, which will heavily hit localised economies reliant on Agri-food revenues and its workforce and the hammer of 15% US Corporation Tax, which will inevitably lead to FDI migration back to the USA – this being played out during the high risk process of reversing quantitative easing over the next three years. Thus it can be said without exaggeration that Ireland is most at risk from the political tide turn in 2016. This double whammy puts investment in the local Irish economy at elevated risk over the next few years until matters clarify changing the risk/ reward equation.
What the economic and social responses will be to the disruptive emergence of this new voice, itself incoherent at this point, will reveal itself over the next few years. In a few weeks’ matters will reach a new normal whatever that will be but it would be wrong not to read this morning’s outcome as entering a dangerous phase for both the global economy and its own cohesion, until we know more.
In the meantime, as ever, and against the risky backdrop of exiting Quantitative Easing over the next three years, I’d recommend maintaining a diversified mix of uncorrelated assets, not having all eggs in one basket and taking a position liberally sprinkled with defensive assets like linkers, cash and gold.