Trump could put the US economy back on track
The surge in industrial and raw materials stock prices and the collapse of bond markets since Donald Trump’s election victory portend a very different kind of world economy. Rather than persisting in a world of quantitative easing, with extremely low interest rates and 1%-2% growth, the United States has the potential to get back onto a normal recovery track.
How much can it grow? The US economy is 10% smaller than it would have been under a “normal” economic recovery since 2008, and if it can regain half the lost ground, that’s an additional 5% of GDP. The global rally in capital equipment stocks reflects America’s need for capital goods imports to gear up.
Beijing does not expect a trade war with the United States; Trump is viewed by China as a pragmatic businessman, perhaps a tough negotiator, but a man whose object is to get a deal rather than to make ideological points.
The US dollar rallied and emerging market currencies fell sharply. That’s because emerging markets doubled their foreign currency debt since 2008, taking advantage of a low growth environment to fund at very low interest rates. Now that higher economic returns will be available in the United States, there’s no reason to own the kind of instruments that were so popular under the low-rate, low-growth environment of the past eight years. EM currencies and debt will remain under pressure. There is a risk of select EM currency/debt crises.
Italian and to a lesser extent French government bonds fell sharply. Partly that reflects the generalized shift out of financial instruments that offered a modest income in the previous environment (including emerging market bonds, real estate investment trusts, and so forth). But it also reflects the prospect of political breakdown in continental Europe.
Trump’s campaign CEO Stephen Bannon was quoted in news reports Sunday morning praising the National Front opposition candidate Marine le Pen. With support for the governing French socialists in single digits, next May’s French elections are unpredictable, and a National Front victory can’t be excluded. Germany’s elections in September/October 2017 are also subject to significant uncertainty. Italy will have a constitutional referendum on December 4, which the government likely will lose, leaving a lame-duck administration in place until new elections in 2017.
Europe is looking dodgier as an economic and political proposition. Some German business leaders are telling the press that Trump’s victory impels Germany to the East — to Eurasia, namely Russia and China. England has come to the same conclusion. It is noteworthy that the British pound has been the only major currency to rise after the US election. In part, that reflects the affinity of Britain’s post-Brexit government to the incoming Trump Administration; in part the judgement that the GBP is now a less risky currency than the EUR.
A major US defense buildup would benefit British defense industries as well. And in retrospective wisdom of the UK in distancing itself from the mess that the European Union has now become a perceived plus.
The UK is negotiating new economic and monetary agreements with China and India. The timing of India’s dramatic currency reform (the retirement of large denomination banknotes that support its underground economy) is suggestive; it appears that India wants to clean up its financial system so that it can seek a greater role in a transformed world economy.