On Trump: I think Trump remains the biggest wild card for the global economy. We see daily shifts in his rhetoric and policies, and he is unpredictable. But he is consistent in one aspect: going after [Fed chair] Jerome Powell, because the economy is not doing very well. He sees the trade war impacting economic growth, and calls for more rate cuts to weaken the dollar and increase exports.
What is the math of rates falling during economic expansion? Since 1971, every time this combination occurred, the stock market went up 100% of the time. The advantage of a figure like Trump, from an investor’s perspective, is that he is very pro-capital markets. He judges himself by the performance of the stock market – unlike his predecessors. It’s a different world now: Trump is really wielding the tariff stick, going after China, Germany, EU, anyone who he thinks is rigging the game. It’s unprecedented. And that brings volatility to the stock markets; quant funds are using these movements to “pump and dump” on his commentary.
He is pro-wealth creation, but the hard part for the rest of the world, of course, is that they are mostly not invested in US stocks, so the benefits to them are very limited.
Looking ahead, one of the big unknowns is whether Trump will be able to get his touted infrastructure development programme off the ground. But one factor that doesn’t get a lot of coverage is the EPA. Obama had his hands tied by the EPA, which prevented or delayed a lot of projects that his administration planned.
Trump, on the other hand, turned the tables on the EPA, and basically forced the organization to provide explanations for not rubber-stamping projects to the Justice Department. As a result, the approvals started coming through. This shows how government policy is crucial to providing a headwind to strength of demand for commodities required for all these projects.
On US-China trade: Another big risk is the ongoing trade stand-off with China. Trump wants a level playing field, so will look to make a deal. One of the initial talking points could be car-making. If they want unimpeded access to the US, producing cars and selling them to the US, then they can’t charge tariffs and duties on imported cars from the US. Same with semi-conductors. And the same goes with Germany, Europe, and more recently India, along with other trade partners.
How long that will take is the million-dollar question. It looks like China is playing for time, essentially seeing Trump as a paper tiger that Xi can simply outlast. I think they are more concerned about not losing face than the economic challenges the stand-off presents. We’ve had neo-cons in the Bush era, who wanted to start wars all over the world, but Trump’s isn’t like that, he doesn’t want a war. He is more of an “economic neocon.”
On broader macro environment: From a broader macro and monetary perspective, I am quite optimistic. Rates are on the way down, which is a boon for US markets, and that will drive other markets, creating collateral opportunities. But the trade war will remain the biggest headwind.