Since President Biden so disastrously failed in the June TV debate and Trump 2.0 had seemed a certainty, everyone in finance started to discuss the “Trump trade”. The former president’s eccentric views are sufficiently well known to bet on them, even when they change sometimes on the drop of a hat (Crypto, anyone?).
The “tariff man” could reasonably be expected to double down on import duties, with known consequences: hardship for importers and tailwind for a handful of protected manufacturers. Oil and gas production would be encouraged and policies to tackle climate change smothered.
Regulators and regulations will be in the crosshairs. As a result, banks will enjoy less onerous capital requirements; producers of steel and aluminium would prosper by shielding them from foreign competition; companies in the solar- and wind-generating business would suffer. Not hard to lay one’s odds.
On a macro level, predictions were less certain. Would the oil price go up or down? Would the dollar strengthen or weaken? Would interest rates go up or forced down? Now, with the cards reshuffled and presidential candidate Kamala Harris in the ascent, these speculative ruminations have lost currency.
Will pundits now spin the next investment story, the “Harris trade”? Would a President Harris be the economic continuation of the last four years, or would a different approach to foreign policy impact markets in yet unknown ways?
Everyone now knows that projections have become more difficult and less plausible. While everyone focuses on a two-horse-race, little thought is given to candidate Kennedy and his possible inroads, or the future composition of the US Congress. Yet, as investors, we have to prepare.
A Trump presidency is still a plausible outcome. We should therefore focus on what his presumptive members of government and his long-term advisers have to say. And we should listen to Trump. By now, we have to accept that he does what he says he will do, one way or the other.
A good starting point is Project 2025, the political programme put together be former Trump advisers and staffers under the aegis of the Heritage Foundation, a radical-conservative think tank and the voice of MAGA.
Cornerstone of Project 2025 is a 900-page paper, Mandate for Leadership. It plans to “unite the conservative movement and the American people against elite rule and woke culture warriors”.
The starting point is the overhaul of the civil service by eradicating bipartisan civil servants and to replace them lock, stock and barrel with ideologically-vetted loyalists. The Department of Justice will have to be moulded into a purely political force headed by the president, as will the FBI. Independent agencies of the US government – a hotbed of experts – will be curbed, defunded or dissolved.
Good candidates are the Federal Election Commission, the Environmental Protection Agency, the Federal Trade Commission, USAID, or the FED. Trump does not eye the Central Bank’s independence with equability. Federal regulatory agencies too will feel the pinch, like the Food and Drug Administration or the IRS.
All this may have predictable consequences for US corporations, but not yet for their stock market performance. Markets don’t really hope for an analysis to work out, but bet on the expectations of a majority of their participants. US oil companies are too dependent on oil markets to profit from Trump’s drilling passion. His promised tax cuts for US corporations sound like a boon for all, but who knows how much taxes they would have paid in future anyhow?
Who can predict with certainty how laxer environmental regulations will profit polluters, until they’ll have to face a public backlash? What will the international headwinds be facing US brands abroad? What effects will a large-scale exclusion of immigrants have on growth and inflation?
A strong dollar is the result of the currency’s haven status in times of geopolitical uncertainty- Andreas Weitzer
The second pillar of market speculation was a recent interview given to Bloomberg Businessweek, in which Trump presented his policy wish list. He wants 1) higher import tariffs, 2) lower interest rates, 3) a weaker dollar, 4) fiscal expansion, and 5) lower inflation. Who would disagree? These policy targets are all achievable, if one really goes for it. The trouble is, they are mutually exclusive, as I will describe. For John Authers of Bloomberg “none of the first four [aims] are compatible with the fifth”.
As I have written in an opinion piece a couple of weeks ago, higher tariffs are not a cost imposed on foreigners, as Trump and his trade advisers think. It is a tax on US consumers and import-dependent manufacturers (components, materials) Trump declares to support. They are inflationary. As prices go up, they are curbing growth and will strengthen the dollar, at least until something breaks. They have a recessionist impact and as such will lower tax income. As long as the FED can still act as an independent inflation firefighter, it will have to raise interest rates.
If interest rates are set by a pliant US Treasury, and not by the Central Bank, they can be lowered at will, at least for short-term debt and deposit rates. Long-term debt, alas, depends on the willingness of domestic and international investors to buy US treasuries.
As the yearly US budget deficit and overall US debt will grow (fiscal expansion, tax cuts), investors will demand higher returns, particularly when inflation (or a forced weakening of the US dollar) is threatening the real value of their outlay.
A strong dollar is the result of the currency’s haven status in times of geopolitical uncertainty (whatever trouble, the dollar will be safe) and the exceptional performance of the US economy since the GFC. Adjusted for inflation, the dollar is close to its peak in the 1980s.
This is weighing on US export competitiveness, but is helping to force inflation back to desired levels. A weaker dollar would put this in jeopardy. Other than in the 1980s, when exporting nations like Japan and Germany had to be strong-armed into a concerted action to lower the US currency (“Plaza Accord”), Japan would be more than happy to see its undervalued currency recover. But I struggle to understand how this should help the US economy. It may cheapen a few US exports nominally. But it will not herald a new-found competitiveness, particularly as trade restrictions, trade conflicts and sanctions take their toll.
The tools to lower the dollar value are in a range of harmless to drastic. Remarkable also what little value if any it has. One could “talk down the dollar”, pushing open doors. Or introduce capital controls like China, tax foreign investment, or spend money selling dollars on a vast scale. All this would diminish the dollar’s status as the world’s reserve currency, hasten de-dollarisation and boost inflation.
The MAGA ideology of lowering corporation tax and income tax for higher earners are fiscally expansive. It is worsening the budget deficit, increases America’s debt burden, while putting upward pressure on interest rates and inflation. As retail investors, we can only hope that interest rates will come down in a timely fashion, giving respite to a US economy already showing signs of deterioration. This will help weaken the dollar without Trump throwing sand in the gears.
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.