On the day that the 45th President of the United States of America assumes office, during Davos week, I recall the observation of a great contemporary economist. Harvard’s Ken Rogoff (I have often mentioned his work in these pages, especially This Time it’s Different – Eight Centuries of Financial Folly) was at Davos last year. He told Bloomberg that he remembered the moment that he realised that Mr Trump was probably going to win. It was when the luminaries of the World Economic Forum proclaimed that it couldn’t possibly happen.
(Similarly, I remember my 2016 über-moment when I realised that Brexit was overwhelmingly probable. It was a few days before the referendum when the BBC announced that their “computer” (more likely Evan Davies in an induced trance) had determined that Leave could not possibly win).
One of the most refreshing themes of the post-Brexit, Trumpian world is that the unexpected becomes normal. So it’s a moment to reflect then on what might lie ahead for investors over the next four years.
From number 45 to number 7
Many lazy journalists have declaimed that Mr Trump is the first American President who has never held political office; and the first anti-Washington pugilist to arrive in Pennsylvania Avenue. They are wrong.
There was Andrew Jackson, 7th President of the USA (President 1829-1837). General Andrew Jackson was a mid-western, gun-toting, militia-running cowboy with a history of extreme violence who kicked the upper class dynast John Quincy Adams (son of John Adams, 2nd President of the USA) out of office in 1828. For all that, he was a fixer and a remarkably shrewd political operator who dazzled the Washington political elite even as he subverted them.
He is often remembered as the man who abolished America’s original central bank – the Bank of the United States (modelled on the Bank of England) because it was being run exclusively for the wealthy. He said it made the rich richer and the potent more powerful. I can quite imagine that the Donald might wish to abolish Chairperson Yellen for exactly the same reason.
It is extraordinary to reflect that America managed without a central bank from 1832 until the Federal Reserve was founded by President Wilson in 1912. Interestingly, President Jackson’s intervention in the American banking system was supposedly the reason for a nearly successful assassination attempt in 1835. (The would-be assassin was an Englishman; just as Mr Trump’s only failed assailant to date was a mentally fragile British student). Jackson was re-elected in 1832 and served out his second term.
What about number 31?
Herbert Hoover, a Republican, was a rich and successful businessman with investments all over the world. He was also an outsider, having never held elected office until he was inaugurated as 31st President of the USA in March 1929. He is still associated with massive infrastructure projects like the Hoover Dam, as well as the Mexican repatriation program, which deported over 500,000 illegal Mexican immigrants.
Hoover also placed tariffs on foreign products entering the US. But we now remember Hoover as the unfortunate incumbent who presided over the 1929 Crash and the Great Depression. Throughout the 1920s, the Federal Reserve’s easy money policies helped create an enormous stock market bubble. In August 1929, the Fed raised interest rates and ended the era of easy credit.
…markets are ultimately sustained by confidence – and Mr Trump, for all his faults, has that in abundance.
On Black Tuesday, 29 October 1929, barely seven months after Hoover took office the Dow Jones Industrial Average lost over 12 percent in a day. In the subsequent week it lost much more. This turned out to be the most devastating stock market crash in the US to date. And it was just the beginning of the Great Depression.
Jim Mellon tweeted last week that we might be moving from the Trump Bump to the Trump Dump. The US markets, up six percent since the election, are overvalued on all conventional metrics. I think Jim may be onto something. And yet markets are ultimately sustained by confidence – and Mr Trump, for all his faults, has that in abundance.
What have we learned about the Donald?
What we have learned since 08 November last year is that Mr Trump will continue to surprise, appal and bedazzle his own people and the world. History has entered unknown territory; but there will never be a dull moment so long as he is Chief.
We still know very little about Mr Trump’s economic and fiscal policy. We suspect that he is not too concerned about the national debt – after all, when yours is the mighty international currency you can spend as much of it as you like. There is some talk in Washington of the need to restore the link between the Dollar and gold – but would Mr Trump want that to be his legacy?
And in foreign affairs, we think that he will be nice to Russia, tough with China, supportive of Britain and rude towards Europe. Whether that adds up to a security policy remains to be seen.
We might do better to reflect that Mr Trump is actually playing a game with us. If Mrs May is a sphinx, Mr Trump is a magus. He is a master of uncertainty because so long as we are uncertain of his next move, he is ahead of us. Unpredictability bestows advantage.
President Tweet
When the new President gets up in the morning he scours the internet, gets cross and fires off on Twitter (NYSE:TWTR). This is the first US President – nay, the first world leader – who quite literally thinks aloud. It was assumed that he would change his ways having become President-elect. Instead, the volley of acerbic tweets intensified. Will the CIA manage to confiscate the new President’s cell phone? Almost certainly not.
An American company called Trigger Finance[i] has developed an app called Trump Triggers. Every time Mr Trump tweets about a quoted company it advises users how the stock is doing. In the last month Mr Trump’s menacing tweet about General Motors (NYSE:GM) for manufacturing the Chevy Cruze in Mexico knocked hundreds of millions of dollars off its market capitalisation. This is a new model of industrial strategy by social media.
This is the first US President – nay, the first world leader – who quite literally thinks aloud.
We shall therefore continue to know, on a daily basis, what the President makes of his critics (such as Meryl Streep) and opponents (such as Congressman John Lewis) in 140 blunt characters. But, in reality, Mr Trump uses Twitter for a greater purpose than abusing his detractors. He uses the medium to set the agenda and to bypass the mainstream media which he despises. In so doing he has liberated himself from the 24 hour news cycle. So President Trump will be his own PR machine and his own team of policy wonks.
But Twitter is, of its very nature, an ephemeral, superficial medium; and one much better at expressing emotion than ideas. The only people who will restrain him are the top members of his administration.
Messrs Tillerson and Mnuchin
Mr Trump’s team consists of a mix of wealthy businessmen, generals and Republican activists. Amongst these, two men stand out.
The new US Secretary of State as of today is the Texan oil man Rex Tillerson, for the last ten years CEO of Exxon Mobil Corp (NYSE:XOM). One of Mr Tillerson’ many awards is the Russian Order of Friendship. Yet at Mr Tillerson’s nine-hour confirmation hearing before the Senate on 11 January he told Senators everything that they wanted to hear. He said that Russia “constituted a danger” and that he favoured maintaining sanctions. He blamed Russia’s “aggression” towards Ukraine since 2014 on an “absence of American leadership”.
However, in contrast to Mr Trump’s expressed view, Mr Tillerson said it would not be acceptable for some US allies (i.e. Japan) to acquire nuclear weapons. He also did not see the need for a register of Muslims, saying he did not support targeting any particular group[ii]. So it turns out that the new Secretary of State has fairly mainstream views on foreign policy.
Mr Tillerson said he would recommend a full review of the nuclear deal with Iran but he did not call for an outright rejection of the 2015 accord. He said China should be denied access to islands it had built in the contested South China Sea. He even called Mexico “a long-standing neighbour and friend of this country”. His testimony was described by Fortune as calm and measured.
And the Treasury Secretary is Steven Mnuchin, an ex-Goldman Sachs banker turned Hollywood movie financier with no previous government experience. Mr Mnuchin, who ran a hedge fund specialising in distressed debt, will be charged with a major overhaul of the US Federal tax code. As well as cutting personal taxes, Mr Mnuchin has signalled that the US corporate tax rate could be reduced from 35 percent to 15 percent, leading to the repatriation of billions of dollars from offshore.
Mr Mnuchin has already advanced the Mnuchin Rule that there will be no absolute tax cuts for the rich – something on which he was grilled by Senators at his own confirmation hearing on 19 January. Most of the hearing was taken up by an enquiry into Mr Mnuchin’s “byzantine” personal tax arrangements.
Intelligence?
The new President takes office having grievously offended the entire US intelligence establishment – not least the CIA whom he compared to Nazi Germany – over his denial of Russian hacking and the elusive Russian dossier. The Donald thinks they are a bunch of losers; they think they are the indispensable security elite.
One thing we know about the US intelligence establishment is that they are very well placed to let slip information that compromises their opponents. That said, the incoming Director of the CIA, Mike Pompeo is highly respected in Washington and is widely regarded as being an excellent choice[iii].
Who will win? Short-term: Trump. Medium-term: the CIA. As Keynes said, in the long-run we are all dead. But then Mr Trump’s motto is probably that of the Indian Prince:
One crowded hour of glorious life/ Is worth an age without a name.[iv]
Climate confusion
At the Senate hearing Mr Tillerson dodged a direct question on whether he believed climate change was caused by human activity. “The risk of climate change does exist and the consequences of it could be serious enough that action should be taken,” he said. He added that the ability to predict the effect of greenhouse gases was “very limited”.
Mr Trump knows, as a businessman and deal-maker, that climate change is not just about raw science. Rather, it is about game theory.
Mr Trump is clever enough to understand that the fundamental science of global warming is clear. But he is also intelligent enough to know that the projections of temperature increases are based on questionable models. Therefore, Mr Trump knows, as a businessman and deal-maker, that climate change is not just about raw science. Rather, it is about game theory. Why should we accept restrictions on our carbon emission when others don’t? The art of the deal.
Expect a backlash
Brexit (when it happens) will be irreversible, but the Trump administration is temporary. Just as Mr Trump’s rise represents a backlash against Mr Obama’s presidency and all that that entails, so there will surely be a backlash against Trumpism in due course. The bookies are offering even odds that Mr Trump will either be impeached or will resign during his first term[v]. The odds of his serving two full terms are even smaller. (Mind you the bookies and other secular experts are often wrong, these days).
The State of the Union
After eight years of Mr Obama’s administration nearly 95 million Americans are out of the labour market, 50 million are living in poverty and 47.5 million are on food stamps[vi]. There are more black men in prison than ever before. Household debt is back at record levels. Wall Street is still rampant, while Middle America has lost hope.
And America has been reduced to a bit part player in the Middle East. It’s time to Make America Great Again.
On the other hand, there might be a recession under his watch during which things could get much worse. And there could be a nasty spat with China. North Korea is apparently about to launch a missile, so things could move fast. We just don’t know how things will turn out.
We’ve fallen through the screen into a reality TV show. And it’s totally compelling. Indeed, Dickensian:
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity…[vii]
[i] Website at: https://www.triggerfinance.com/
[ii] See: http://fortune.com/2017/01/12/rex-tillerson-donald-trump-confirmation-hearing/
[iii] For example former CIA Director General Michael Hayden, speaking on BBC The World at One, 16 January 2017.
[iv] The Call, by Thomas Osbert Mordaunt (1730–1809), a British officer and poet.
[v] See: https://www.thesun.co.uk/news/2643286/will-donald-trump-complete-first-term/
[vi] See: http://usdefensewatch.com/2017/01/an-open-letter-to-meryl-streep/
[vii] A Tale of Two Cities, by Charles Dickens (1857) – opening lines.