Trump’s USA at war with itself and the world
Trump’s inauguration day was truly shocking. In stark contrast to an expectation of a speech of hope and unity, Trump cast himself as a revolutionary leader of a new movement of the “forgotten” common man and woman ready to end the “carnage” of America and the “ravages” of foreign plunderers. He used highly nationalistic language to invoke an image of a USA working class, empowered by God, at war with its own elite and the world. To make the picture more comical, frightening and shrill, his new Press Secretary Dean Spicer then proceeded to lambast the media and present spurious (alternative) facts on the size of the inauguration audience. The USA is beginning to look more like it will be at war with itself over the next several years as Trump stirs up divisions between his vision of the working class and his narrative of on elite in Washington and media accomplices. This uncertainty has contributed to some setback in US and global economic confidence. Trump’s policies are very positive for the USD in the coming year or two. But would also provide a sugar-hit to the US economy that lasts for a few years, followed by stagnation that could take a generation to recover from; steering it towards low-tech manufacturing, generating a high cost economy, discouraging investment in new technology, and encouraging other countries to pursue more fruitful economic relationships with each other excluding the USA. Trump’s policies are about taking a bigger slice of the global pie, but in the long run, they would shrink the pie more so from within the USA. The Trump economic team would argue that the USA has given too much of that pie away in the past and they can get it back, while avoiding shrinking the pie too much. The USA has the critical mass to benefit from an isolationist policy, to the detriment of the rest of the world, but only for so long. Initially Trump may drive the USD higher. His initial success may deepen the long-run pain.
USA at war with itself and the rest of the world
The unconventional Trump juggernaut continues to fascinate everyone including capital markets. The inauguration speech on Friday was one his most shocking actions to-date, followed by an eye-opening first press briefing by the new White House Press Secretary Sean Spicer.
Everyone expected Trump to follow the tradition of using this auspicious occasion to offer a message of hope and unity for the nation, perhaps even provide some sign of cooperation with other nations.
However, Trump went the other way and doubled-down on his vision of elites in Washington that he will vanquish and thumped his nose at the rest of the world.
He cast himself as a revolutionary leader of a new movement of the “forgotten” common man and woman ready to end the “carnage” of America and the “ravages” of foreign plunderers. He used highly nationalistic language to invoke an image of a USA working class, empowered by God, at war with its own elite and the world. It was a speech that you could easily imagine coming from a despot socialist leader. Shocking.
Quotes from Trump’s inauguration speech:
“for too many of our citizens, a different reality exists: mothers and children trapped in poverty in our inner cities; rusted out factories scattered like tombstones across the landscape of our nation; an education system flush with cash, but which leaves our young and beautiful students deprived of all knowledge; and the crime and the gangs and the drugs that have stolen too many lives and robbed our country of so much unrealized potential.
This American carnage stops right here and stops right now.”
“For many decades, we’ve enriched foreign industry at the expense of American industry; subsidized the armies of other countries, while allowing for the very sad depletion of our military. We’ve defended other nations’ borders while refusing to defend our own.
And spent trillions and trillions of dollars overseas while America’s infrastructure has fallen into disrepair and decay. We’ve made other countries rich, while the wealth, strength and confidence of our country has dissipated over the horizon.
One by one, the factories shuttered and left our shores, with not even a thought about the millions and millions of American workers that were left behind. The wealth of our middle class has been ripped from their homes and then redistributed all across the world.”
“Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs.”
“We will build new roads and highways and bridges and airports and tunnels and railways all across our wonderful nation. We will get our people off of welfare and back to work, rebuilding our country with American hands and American labor.”
“Whether a child is born in the urban sprawl of Detroit or the wind-swept plains of Nebraska, they look up at the same night sky, they will their heart with the same dreams, and they are infused with the breath of life by the same almighty creator.”
As if to complete the image of a would-be dictator, Trump again cast himself as the victim of a dishonest media that work for the elite. His new White House Press Secretary went out for his first briefing to deliver a long statement lambasting the press for its coverage of the inauguration, noting several ‘alternative facts’, in other words false facts, on the size of the inauguration audience.
The spectacle of Trump and Spicer on this day were comical, shocking, frightening and shrill.
So far Trump is flanked by some seemingly normal people, including his Vice President Pence and being supported by his seemingly normal party leaders in Congress like Paul Ryan.
Much of the media has been cowered into down-playing the non-sense being delivered by the Trump circle to avoid being labelled biased.
The wool has been pulled across the eyes of much of the nation with the help of some normal people that may hope that the Trump theatre is hype designed to keep public support, while their version of more progressive economic policy may be enacted. But there must be some fear creeping in that something more sinister is being peddled from inside the administration.
The USA is beginning to look like it will be at war with itself over the next several years as Trump stirs up divisions between his vision of working class trumpeters and his narrative of on elite in Washington and media accomplices. The faceless enemy includes many people that are currently providing him support such as House Speaker Paul Ryan.
A risk for markets over the coming years is simply the stability of government as we wonder if the Republican members of Congress can work with a White House that has cast it as an enemy.
A risk for markets is the stability of the Trump administration that has opened war with the media. It must worry markets that a cowered media will fight-back and destroy the credibility of Trump and/or force him into even more ridiculous and aggressive attacks that his veneer of sensible supporters can no longer over-look.
CNN, the prime target of Trump, does appear to be taking a more combative approach with Trump. CNN is main-stream media and by any reasonable scale of media bias sits near the middle. The reality is that Trump is out-there on both fringes of the political spectrum appealing to both extreme left (trade protection and working class jobs) and far right (anti-immigration, stronger military, ant-climate change). It is hardly surprising that CNN is going to be calling Trump out for extreme policy direction and his ‘alternative facts’.
This uncertainty is probably contributing to some correction on USD and US yields this year. An image of the USA at war with itself with a President that draws from both ends of the political extreme could drive down domestic and global economic confidence. It is, therefore, generating some support for havens including JPY, gold and to some extent EUR.
A sugar-rush for the USA economy, before long term problems
The policy direction of the Trump administration generates upside risk for US yields and the USD. They would create a sugar-rush hit for the economy, US asset prices, boost inflation and the USD. What follows the sugar-rush is potentially far less positive for the US economy and the USD, but that could be years in the making and is less certain.
These policies include corporate tax cuts and tax-breaks for companies repatriating profits. This has helped boost the USD via flows to equities and the potential boost to growth and inflation driven by tax cuts. More directly, it may boost the USD as companies repatriate offshore profits that may currently still be held in foreign currencies.
The fervent America first anti-trade anti-immigration rhetoric is also potentially very positive for the USD. The USA is the world’s largest consumer, and if it were to employ an isolationist agenda, it has the critical mass to succeed for several years in boosting GDP by relying mostly on its own demand. But this is inflationary; it will increase the costs of imports and make labor more expensive. It is potentially very inflationary if these policies are pursued to the extent Trump’s extreme rhetoric suggests. Higher inflation means higher interest rates, driving up the USD. More directly, tougher restrictions on imports have the potential to narrow the trade deficit, further driving up the USD.
Longer term, an isolationist policy could be very detrimental to the US economy, directing more of its productive capacity to areas where it has a low comparative advantage, such as basic manufacturing. Trump’s support for middle-class workers drives investment to areas where the USA has no natural advantage that does not require new technology. It risks stagnating progress, pushing the US towards a high-cost country, discouraging new investment over the longer term.
Furthermore, the USA’s influence in global economic development will diminish as the rest of the world turns away from the USA to pursue more fruitful economic relationships with other countries. USA companies that seek to export to other markets will find this more difficult. In the end, Trump’s vison for making “America great again” may prove to be a massive set-back from which the US takes generations to recover.
Taking a bigger slice of pie
Trump’s policies are basically about the USA taking a bigger slice of the global pie, not growing that pie. In fact, the longer-term risk is that his policies shrink the pie more from within the USA than outside.
Trump’s economic team’s challenge is to pursue the main thrust of the Trump dogma (cut out a bigger slice of the pie) while limiting the unwanted side-effect of shrinking the pie.
They may claim that the USA has given away too much of the pie in the past without reaping enough of the rewards of growing the pie (via receiving cheaper imports and pursing industry in more higher value goods and services, utilizing its comparative advantages in higher education and highly evolved legal and social systems).
At issue for the future of the USA and many other countries is that the benefits of globalization appear to have flowed to the few and the distribution of wealth has become too skewed. This may have been a factor in generating the populist political movements in several countries and the new villain of so-called elites.
These elitist villains are anyone that might oppose the new champions of the middle-class like Trump. Unfortunately, these new lines in the political divide also manage to suggest that those that support social inclusiveness are elitist, opening the way for another destructive avenue for social divide.
There is a lot for the USA to come to terms with in the Trump years. Trump wants to stop his vision of American Carnage, but it he has fueled hate and division and what follows may be yet another distraction for those around Trump that may be seeking economic reform.
First order of business – put up borders
As we wait for hopefully more progressive policies from the Trump team, out of the box, we are getting rhetoric and actions from the Trump circle that point to isolation. By executive order, on his first business day in office, Trump formally pulled out of the Trans-Pacific Partnership negotiated by former President Obama.
The hope that optimists have for Trump is that as a business-man he will make policies that help business. He also appears to be practical, meeting directly with the CEOs of major US companies to gauge their opinions and seek support for his policies for boosting manufacturing and implementing border taxes.
Meeting directly with key figures across a range of issues during his transition to President, many coming from the alternative point of view, might be regarded as a strength of his approach to date. One might hope that this is a sign of practical policy making and consensus building that contrasts with his alarmist rhetoric and battle with straw-figures like the media.
One more clearly positive message for the economy is that Trump said he would reduce government regulation by at least 75%.