I will build a great wall – and nobody builds walls better than me, believe me – and I’ll build them very inexpensively. I will build a great, great wall on our southern border, and I will make Mexico pay for that wall. Mark my words.
– Donald Trump (during U.S. presidential campaign, 2016)
The rise of an underdog
It’s 8 November 2016. The world lies in shock for the second time in a year. Despite a series of controversies that would have easily destroyed any other candidate, bold promises for extreme policies, and a bunch of racist and sexist comments and behaviour, Trump has made it to the White House. As the superstitious have often warned, “beware leap years!”
How such an inexperienced player in the political field could have won the election is certainly a puzzle. But how such a figure could change the way we view the economy, and in such a short period, is even more puzzling.
At a time when central bankers are bolder than ever regarding their policy tools; at a time when the world has been submerged in a period of secular stagnation for more than a decade; and at a time academics try to refine and redefine their views on how the economy really works, in order to find answers to the low inflation/low growth puzzle: there is one man that seems to have all the answers to all the questions.
Judging by the euphoria after the election result, the market is taking Trump seriously with regard to his promise to “make America great again” – indeed, it seems to think he can also make the world great at the same time.
The world has been shocked twice this year. But the real lesson to learn is that shocks may indeed be less shocking than first believed. Let’s take Brexit, for example. The UK is not in recession and is doing much better than the EU as a whole. There was an initial extreme reaction to the referendum vote, but markets reversed the initial trend. In the US, the initial negative reaction was even more short lived and markets have, in fact, turned extremely positive.
Why are voters depositing their hopes in extreme options like those that Brexit and Trump represent? Why are people replacing the comfortable status quo with the uncertain unknown? Why do they trust in an inexperienced politician with bold promises? And, more importantly for investors, how does that impact markets in the near future? Those are the questions I’m preparing to answer in this article….