All quiet post-US election, but unintended consequences may cause problems
Paul Gambles, managing director of MBMG Investment Advisory, is a regular commentator on global events, and their impact on financial markets. Here, he looks at Donald Trump’s shock election victory on Tuesday, and considers whether the predictions of doom-mongers are overblown; or whether, in fact, it might just lead the US into a depression.
Donald Trump’s victory in the US presidential elections may have come as a surprise to many, but there’s no reason to panic – just yet.
Only time will tell what President Trump actually plans to do, once in office, and what he will ultimately achieve; and as so often is the case, it is the unintended and unforeseen consequences that may be the biggest worries of all.
Here are some of our initial thoughts.
The US president does have a relatively large amount of discretion in trade, and for this reason, this could be a source of some surprises.
New trade agreements, such as the Trans-Pacific Partnership (TPP) and The Transatlantic Trade and Investment Partnership (T-TIP), are likely to be halted. However, these agreements were essentially political constructs that were primarily designed to benefit the US and those nations that allied themselves to the US, at the expense of others.
The TPP has already started to divide Asia into those who benefit most from it, such as Vietnam, and those who don’t (China & Thailand).
Trump is basically moving those battle lines, but I don’t see these fractures as being worse – in fact, a better outcome for China may even delay global and regional instability. Similarly, Trump will no doubt cut the T-TIP.
A Trump trade war with China is likely to be no more damaging – and arguably less damaging, and less effective, but much clumsier, more visible and playing to the gallery – than the TPP would have been for China.
Ultimately this may be a zero-sum game, but a zero-sum game where China can’t afford to lose without there being potentially serious consequences for the Chinese and global economy.
For this reason, Trump barging noisily through the front door like a drunkard trying to sneak in stealthily after a late night may prove less of an immediate trigger to China depression than TPP more subtly attacking China via the backdoor.
Trump has stated that he would renegotiate NAFTA (North Atlantic Free Trade Agreement) and potentially withdraw the US from the agreement if a consensus with other members could not been arrived at. He would not need congressional approval to do this, although this is not to say that he would do it.
Trump will likely come under pressure to give details of his plans, particularly as the Peso drops significantly in value.
Trump has given some, though little, detail to date. His plans for individuals look like Speaker Paul Ryan’s 33% tax cut, simplifying the filing process and restructuring the international tax code.
Again, the specifics, and what it could mean for FATCA, are unclear.
Trump’s corporate tax plan is very much like that of the Congressional Republicans’ 20% rate. Reform of both individual and corporate taxation is a priority of Congressional Republicans; however, even with control of the House, it will likely face several obstacles.
As many media commentators have noted over the last few days, Trump’s victory could mean large parts of the post-Global Financial Crisis Dodd-Frank financial reform act may be retracted. It could also mean the end of the Department of Labour’s Fiduciary Rule, which is due to come into force in April, and which will oblige those working in retirement planning in the US to consider the best interests of their clients when advising them on products. This will probably depend on who Trump brings in as his advisers.
In his campaign, Trump alluded to a US$1trn spending package. Some of this may get past Republican members of Congress, but it’s unlikely the whole lot would.
This is an unexpected result, and the markets clearly don’t like it. But no incoming President wants to be responsible for a risk asset crash as he takes office. So we are looking for president-elect Trump to announce some Wall Street-friendly advisers/nominees to appease the markets.
Any cancellation or delay of the TTIP could be the spark that lights the bonfire.
As Europe is so fragile, it’s unclear whether this will prolong the agony or bring matters to a head. The biggest immediate risk of a Trump presidency may be that it sets off a populist reaction in Europe: The Italian referendum remains a potential flashpoint, and consequently the single currency has now moved from “under threat” to “almost certainly terminal, and probably within the next 12 months”.
If the Euro had taken terminal illness insurance, it could probably submit a claim today.
This is the most immediate major danger of the election’s result. The bullets were already loaded, but they’re getting harder to dodge because of the sheer scale of issues also piling up in Europe and China.
I’m not worried about an America recession – I’m worried that a recession, with this level of private debt, could become a depression.
That said, my personal jury is out as to whether Trump will bring forward America’s next great depression or not. I guess we’ll never know the counterfactual, but we were getting closer to being trapped between rocks and hard places anyway, especially in China and in Europe – the depressions of which may well precede, and be the catalysts for, America’s next great depression.
Paul Gambles is managing partner and co-founder of MBMG Investment Advisory, Bangkok, Thailand, which is licensed by the Securities & Exchange Commission of Thailand as an Investment Adviser. Separately he is also personally licensed by the SEC as a Securities Fundamental Investment Analyst and an Investment Planner.