The Trump legacy

As Donald Trump approaches the halfway point of his first term, there are signs his presidency will leave a lasting impact in America and beyond.

The year was 2007. Alan Greenspan, who had recently retired from his role as chairman of the Federal Reserve, was touring Europe to promote his memoir The Age of Turbulence, a book he famously wrote in longhand on yellow legal pads while sitting in the bathtub.

In an interview with a Swiss newspaper, Greenspan was asked how he planned to vote in the next US presidential election. The venerable economist thought for a moment, took a deep breath – and declared the question irrelevant. “[We] are fortunate that, thanks to globalisation, policy decisions in the US have been largely replaced by global market forces. National security aside, it hardly makes any difference who will be the next president.”1

It makes a difference now. Over the past decade we have seen the eruption of a crisis that ravaged the global financial system; a coordinated response from governments and central banks that stoked deficits and distorted asset prices; and a political backlash against the very market forces Greenspan believed to be irresistible laws of nature. Riding the populist wave is the American president himself: a property tycoon and reality television star who has successfully remade the Grand Old Party in his own image.

As Donald Trump approaches the halfway point of his first term, he continues to face questions over alleged collusion with Russia during his election campaign. The Democrats seized the House of Representatives during November’s mid-term elections, which could prevent him from implementing elements of his domestic policy agenda over the next two years. But thoughts are already turning to the longer-term consequences of his presidency. Does the Trump era represent a brief detour on the path towards the ever more liberalised and integrated global economy Greenspan celebrated, or the beginnings of a new, more unpredictable order? What should we expect from life after Trump?

To answer these questions, AIQ canvassed opinion from a range of commentators: advisers to the Reagan, Clinton and George W. Bush administrations; former officials from the World Bank, the International Monetary Fund and the US Treasury; foreign policy analysts; and Aviva Investors’ fund managers and economists. While there were a range of views, these experts agreed Trump’s legacy will be felt in five key areas: domestic politics; the US economy; global trade; international security; and the environment. 

1. US politics: deepening the divide

Trump has taken a sledgehammer to presidential norms. He mulls policy ideas over social media; threatens to interfere in judicial process; slings insults at journalists and political opponents; and fans the flames of violent street protests.

Political commentator David Frum, former speechwriter to George W. Bush and author of the book Trumpocracy: The Corruption of the American Republic, says Trump’s actions could irrevocably change US politics by casting lingering doubt on presidential authority.

“Trump is like the pebble in the shoe of American government. He doesn’t abide by its rules, he doesn’t abide by its norms. To some degree he changes government, but also to some degree government adapts. In many areas of government people are questioning whether the president’s words mean anything anymore. The military and the intelligence agencies are developing greater autonomy from the president under Trump. I worry a lot about this being a lasting development.”

The most striking example of the government’s growing autonomy from the president came in early September, when The New York Times took the unprecedented step of publishing an anonymous op-ed article from a member of the Trump administration.2 The piece detailed how senior officials are actively resisting the president’s more reckless impulses while pushing the more traditionally conservative elements of his policy agenda, such as military spending and tax cuts. The article even suggested Trump’s cabinet had considered invoking the 25th amendment, which allows for the vice president to take over if the commander-in-chief is unable to discharge his duties. Trump responded with a Twitter tirade in which he demanded the newspaper “turn over” its source.

More revelations followed in Fear, an exposé by veteran journalist Bob Woodward, whose reporting on the Watergate scandal helped bring down the Richard Nixon administration. Woodward alleged Trump’s former chief economic advisor, Gary Cohn, had taken to surreptitiously snatching documents from the president’s desk to prevent him cancelling trade agreements.3

Frum is sceptical that traditional conservatism will survive the populist onslaught, even if individual conservatives are resisting the Trump machine from within. In his view, Trump has so completely disrupted the Republican Party that the comparatively restrained politics of the Bush and Reagan presidencies is unlikely to survive as an electoral force; what would follow is unclear.

“We’re at a point now where it’s very hard to imagine that conservatism as we know it re-emerges. The political world post-Trump will look very different. You can see the energising of the Democratic left. And I think we will see the drift of business-minded people away from what has historically been called conservativism because it’s now so tainted by Trump,” says Frum.

“The closest analogy is to the post-Vietnam era. We used to have a Democratic Party that was a party of labour unions and farmers, versus a Republican Party of professionals and managers: after Vietnam we had a liberal and a conservative party. That shows the character of these parties is not permanent and could change again. And they will have to change.”

Signs of this political reordering became evident during the mid-term elections in November. A new cohort of young, left-wing Democrats featured prominently. Alexandria Ocasio-Cortez, a member of the Democratic Socialists of America, beaome the youngest Congresswoman in history, having seen off party veteran Joe Crowley to win a Democratic nomination in New York.

While Trump has galvanised resistance among the Democratic left, he has kept his core supporters onside, with approval ratings stabilising around the 40 per cent mark in most polls. The Republicans increased their majority in the Senate despite losing the House.

The president’s attacks on big business, along with his vociferous condemnation of international trade agreements, have played well with his base, although he has done little to remedy the very real issues facing the working class in post-industrial districts, notably the escalating opioid crisis that claimed a record 72,000 lives in 2017.4

Trump might appear to be a political one-off, but he did not come out of nowhere. His success has been facilitated by a growing frustration at structural trends such as rising income inequality, which have developed over many years. And his failure to attend to these issues may lay the ground for a more outlandish political figure to follow in his wake, according to Frum.

Meanwhile, US society is becoming ever more polarised, as evidenced in the bitter row over Trump’s nomination of judge Brett Kavanaugh to the Supreme Court. Fully 70 per cent of Democrats and 62 per cent of Republicans say they now “live in fear of the other party”.5 Whether or not Trump comes to be seen by historians as the ne plus ultra of American populism, the divisions he has exacerbated will take a long time to heal.

“The very nature of that 2016 election, and the campaigns around it, showed how deeply divided the US was and how difficult it is for people on each side to accept the outcome of election results without seeing the opposition as fundamentally illegitimate,” says Helen Thompson, professor of political economy at the University of Cambridge. Thompson argues these deep divisions, together with Trump’s lack of respect for presidential norms, means it is difficult to envisage a return to ‘normal’ politics after he leaves office.

“The presidency is being laid bare as just raw politics and power, without the symbolism that goes around it. At the same time, you have parties that regard each other as illegitimate and threats to democracy, and talk of resistance to elected presidents. I’m not sure how you come back from this.”

Trump benefited from growing frustration at rising income inequality

2. The US economy: short-term gain, long-term pain

How long Trump’s rustbelt constituency stays loyal – and who they vote for next – may ultimately depend on the performance of the US economy, and how the fruits of economic growth are distributed. The president is quick to take credit for a surge in equity markets and a continuing GDP expansion on his watch. But his fiscal stimulus may also be introducing new vulnerabilities, according to economists.

Trump’s most high-profile economic policy to date was the Tax Cuts and Jobs Act, passed by Congress in December 2017. This sweeping piece of legislation reduced tax rates for individuals and companies and provided incentives for US multinationals to repatriate their overseas hoards of cash, which may encourage greater corporate investment over the longer term. September’s Beige Book report, which collates data from different Federal Reserve Districts, points to evidence of rising capital expenditure across several sectors.6

US equities grew strongly over the first nine months of 2018, partly thanks to a year-on-year increase in per-share earnings of 24.8 per cent over the second quarter.7 While a bout of market volatility in late October eliminated most of these gains, as of October 25 the S&P 500 was still up more than 20 per cent since Trump’s election victory in November 2016.8 The underlying economy is also performing solidly, with second quarter growth hitting an annualised rate of 4.1 per cent in 2018, the fastest expansion since the third quarter of 2014.

“In isolation, the tax cuts and fiscal stimulus will add about 0.5-0.75 per cent to US GDP growth this year and next, which is quite a sizeable amount,” says Michael Grady, senior economist and macro strategist at Aviva Investors. “A separate question is whether it was appropriate for the government to implement stimulus at this point in the cycle, when the economy is already strong and monetary policy is steadily tightening. By 2020, that initial economic impetus will have faded and the US will be facing headwinds to growth of about 0.25-0.5 per cent, which is a considerable swing. And that’s before you factor in the longer-term implications of rising government debt.”

The International Monetary Fund has warned Trump’s economic policies could be unsustainable, with increased government expenditure on defence and domestic programmes forecasted to widen the US federal budget deficit to 4.5 per cent of GDP next year.9 One potential consequence is that inflation could tick higher, forcing the Fed to raise interest rates more quickly than the market expects.

Jeffrey Frankel, a professor of economics at Harvard University, served at the Council of Economic Advisers (CEA) during both the Reagan and Clinton administrations. He believes Trump’s pro-cyclical fiscal policy runs the risk of depriving the US of the cushion it will need to limit the damage when the economy inevitably enters another downturn. The result could be a deep recession from which it is difficult to recover.

“Pro-fiscal cyclical policy destabilises the economy when growth is strong. We saw that under George W. Bush during the fiscal expansion of 2002-2007, when the government cut taxes and increased spending at a very rapid rate. The result was – as could have been predicted and indeed was predicted – that when the Great Recession hit in December 2007 Washington felt constrained by the high level of debt, and limited the magnitude and length of the fiscal response,” says Frankel.

“That situation could be worse next time, given the almost unprecedented fiscal expansion we are seeing under Trump. You’d have to go back to the late 1960s, and probably to World War Two, to find a time when the US had such a strong economy and such a low level of unemployment and yet was increasing the budget deficit. It means we won’t have the fiscal space to respond when the next recession comes.”

Along with his pro-cyclical fiscal policy, Trump has worried at the edges of the Dodd-Frank legislation, which was introduced in 2010 to fix the systemic vulnerabilities exposed by the last crisis. His Economic Growth, Regulatory Relief and Consumer Protection Act, signed into law in May 2018, raised the threshold over which financial institutions are deemed “too big to fail” from $50 billion to $250 billion, and eased mortgage loan-data reporting requirements for most banks.

As well as deregulating and implementing stimulus when the going is good, Trump has signalled he would prefer a pro-cyclical monetary policy, openly criticising the Federal Reserve’s decision to continue hiking interest rates despite strong growth and unemployment below four per cent. Frankel does not believe Trump will seriously consider interfering with Fed policy; a greater long-term threat, in his view, is the potential fallout from Trump’s protectionist trade policies.

Figure 1
Trump’s pro-cyclical policy risks depriving the US of a fiscal cushion

3. Trump, trade and trust

On January 23, three days after his inauguration, Trump invited media into the Oval Office to witness the formal withdrawal of the US from the Trans-Pacific Partnership (TPP), a 12-country trade agreement painstakingly designed by the Obama administration to cement US authority in the Pacific region and contain China’s economic rise. “Great thing for the American worker what we just did,” said Trump, signing the order with a flourish of the presidential pen.10

Trump’s withdrawal from TPP fulfilled a campaign promise and served early notice of his commitment to an ‘America First’ stance on trade. Since then, he has renegotiated the North American Free Trade Agreement with Mexico and Canada and revised the US-Korea Free Trade Agreement. He has also threatened to pull the US out of the World Trade Organisation, and is currently blocking the reappointment of one of the WTO’s four remaining appeals judges, which could stymie the body’s dispute-settlement system.11

Trump’s tariffs on China are the clearest example of his protectionist tendencies. In April he announced around $60 billion of levies on Chinese industrial exports to the US, prompting retaliation from Beijing. On September 17 he upped the ante, taking to Twitter to warn countries that “will not make fair deals with us” that they would be “tariffed”. True to his bombastic word, he slapped new taxes on a further $200 billion of Chinese imports the following day. China hit back with its own tariffs, targeting sectors such as agricultural produce and industrial products.12

Some of Trump’s frustrations at China’s economic practices – such as its insistence on ‘knowledge transfer’ with foreign companies in exchange for market access – are widely shared by Western allies. But the US president’s stated objective to eliminate America’s “unfair” trade deficit through a raft of new bilateral deals flies in the face of economic logic, says Frankel.

“Trump’s tariffs will not improve US bilateral trade balances, because the sum of those balances has to add up to the overall trade deficit – and this is ultimately determined by the difference between national saving and investment. National saving is falling due to Trump’s tax cuts and fiscal stimulus, and that widens the current account deficit. The logical result is a worse trade deficit – precisely what Trump doesn’t want.”

Trump’s focus on the headline trade deficit figure also fails to account for some economic nuances. While it is true the US had a $375 billion trade deficit with China last year, US companies are far more active in China than vice versa. US multinational subsidiaries made $222 billion in sales to China’s increasingly-affluent consumers in 2015, according to the most recent official figures (data for Chinese sales in the US is not available, but they are likely to be far smaller).13 The trade deficit numbers do not factor in this corporate activity.

The trade imbalance looks even less clear-cut when the global nature of modern supply chains is considered. Trump has called for Apple to repatriate the iPhone build from Chinese factories as part of his bid to revive US manufacturing. But while iPhone imports add billions to the trade deficit each year, recent estimates show China only makes about $8 per unit.14 The bulk of profits accrue either to Apple itself or to other countries that specialise in the more value-added components of the product. If the iPhone were entirely made in the US, its price would probably rise by at least $100, hurting America’s consumers.15

Nevertheless, Trump is pushing the US into a full-blown trade war with China, according to Frankel. He sees three possible outcomes. First, Trump wins some small but face-saving concessions from Beijing, enabling him to claim victory and de-escalate the dispute. Second, Trump enacts swingeing tariffs that wreak short-lived economic havoc, but which are negotiated back down by a more emollient successor. The third scenario would be the most damaging over the longer term: the prospect that the dispute sunders the global trading system into oppositional blocs reminiscent of the dark days of the protectionist 1930s.

The implications of the third scenario for global growth and financial markets could be severe. The biggest losers would likely be emerging markets, where living standards have been steadily converging with those in advanced countries thanks to the liberalisation of trade over recent decades. That convergence could slow or even stop altogether, hitting asset prices in these economies as growth slows and consumer spending falls. Equity markets in the euro zone and Japan – regions in which trade accounts for around one third of GDP growth – would also be hard hit.

Trump may be reckoning the US is rich and powerful enough to turn such economic chaos to its own advantage. It is a risky gamble. In a recent research note, Deutsche Bank analysts warned Trump’s attempt to achieve lower trade deficits at the same time as increasing fiscal stimulus poses “the most severe challenge to the international monetary order since the collapse of Bretton Woods in the 1970s”.

The problem is that the US requires foreign buyers for its debt even as Trump’s trade disputes threaten to erode the very Asian current account surpluses that fed appetite for Treasuries over the last two decades. The logical outcome: either higher government bond yields or – more likely – a weaker dollar, according to Deutsche analysts. The associated rise in borrowing costs might even wipe out the US economy’s ability to generate an income surplus on a growing stock of net foreign debt, the so-called ‘exorbitant privilege’ that had traditionally underpinned the dollar’s status as the world’s reserve currency. Such a reversal would be highly symbolic.16

Grady believes the dollar’s status as the world’s reserve currency is secure for now given the lack of alternatives, and that China and other major economies are likely to maintain large holdings of Treasuries. Neither does he think the doomsday trade scenario outlined by Frankel is probable. But he does not rule out a rise in Treasury yields – perhaps by 40 or 50 basis points – or a weakening of the dollar thanks to rising debt and flaring geopolitical tensions on Trump’s watch.

Experts on trade suggest Trump’s bonfire of the treaties will prove more directly counterproductive to his interests. Anne Krueger, senior research professor of international economics at Johns Hopkins University, has served as chief economist of the World Bank and acting managing director of the IMF. She says increased tariffs will cause short-term pain in the heavy industries Trump has made it his mission to protect, risking a political backlash at home.

“A lot of metal-using industries are going to be hit by the tariffs on steel and aluminium. There are reports of US plants laying off workers or shutting down because they can’t get the steel they need or because they can’t compete with the Europeans or the Japanese who are paying lower prices. So, it’s already beginning to hurt at the margins, even if it is not fully showing up in the data yet.”

Krueger also worries about the lasting effects on the reputation of the US among other countries. “The fact that there are treaties and agreements we have signed, and then reneged on, will make us less trustworthy in the future. I don’t understand why anyone would go into a trade agreement trusting the US after it renegotiated the Free Trade Deal with South Korea, and then imposed further tariffs on top of that. It seems to me the damage being done in terms of trust is incredibly important.”

Research shows that in the wake of China’s accession to the WTO in 2001, it was not simply lower tariffs that promoted trade and economic growth, but a reduction in uncertainty about the future direction of tariff rates.17 Trump’s protectionist policies are causing uncertainty to rise once more, as countries worry about the longer-term implications of trade wars. Whoever is next in line to be “tariffed”, the US won’t be immune from the damage.

Trump’s tariffs will not improve US bilateral trade balances

4. Geopolitics: spheres of influence

Trust is also a central issue in international diplomacy and defence. Even Greenspan conceded the president can have a decisive impact on national security. But Trump’s influence in this area is difficult to assess, partly because his abrasive style masks certain continuities with the last administration.

Trump’s open criticism of US defence partnerships – from Japan to Korea to the North Atlantic Treaty Alliance (NATO) – may be unprecedented, but his frustration that other countries are unfairly relying on the US to protect them is not. Obama himself described certain allies as “free riders” in a candid interview laying out his pragmatic approach to foreign policy in The Atlantic magazine, near the end of his presidency.18 Long before Trump, both Obama and Bush were complaining about NATO partners’ failure to spend two per cent of GDP on defence, the target amount agreed by the alliance.

“The questions Trump is raising with respect to burden sharing are not crazy and earlier American presidents have raised them,” says Hal Brands, Henry A. Kissinger professor of global affairs at Johns Hopkins University and author of the book American Grand Strategy in the Age of Trump. “But Trump is not simply frustrated with American allies; he sees no value in American alliances. That is a very different position to be taking.” 

Trump’s willingness to ride roughshod over diplomatic orthodoxy led to an historic meeting with North Korea’s Kim Jong Un in June. The summit encapsulated Trump’s erratic approach to foreign policy: a matter of months after threatening fire and fury on a leader he dubbed “rocket man”, Trump was glad-handing with Kim in the luxurious surroundings of Singapore’s Capella Hotel.19 It was a public relations coup for both men, but the conference ultimately yielded little in terms of concrete concessions, unlike Obama’s legally-enforceable Iran nuclear deal – which Trump unilaterally cancelled in May to the dismay of allies who had helped secure it.

Trump’s major overseas military actions have both come in the Middle East. In the first year of his presidency he deployed the largest conventional weapon in America’s arsenal – the so-called Mother of All Bombs – against ISIS militants in Afghanistan,20 and ordered precision missile strikes in Syria in response to a suspected chemical weapons attack by Bashar al-Assad’s regime.21 

Despite these deployments, Trump has equivocated over whether he would be willing to defend NATO allies in Eastern Europe. This had led some commentators to fret that he is surrendering the US’ post-war leadership role and inaugurating a new geopolitical order that cedes influence to Russia in Europe and China in the Asia-Pacific.22 Under Xi Jinping, China is forging ahead with the ‘Belt and Road’ programme, a vast network of infrastructure projects that extends from the deserts of Central Asia to the Gulf of Oman to the East African coast. Beijing has also launched a rival to the World Bank, the Asian Infrastructure Investment Bank, and has started to show greater willingness to use military force to defend its interests, even as the US rethinks its overseas commitments.

“Over the long-term, Beijing does see this as an opportunity to greatly expand China’s soft power in Asia and more broadly,” says Michael Hirson, director of Asia research at Eurasia Group and formerly the US Treasury’s chief representative in Beijing. “Trump’s ‘America First’ policy, and retreat from multilateralism, are creating new space for China to show leadership on global issues like climate change. 

“China is not ready to challenge the US for the mantle of global leadership, especially on security issues, but it is increasingly willing to act as a rule-maker in the global system and not just a rule-taker. This doesn’t mean casting off the existing multilateral structure of the WTO, the IMF, etc., but does mean shaping the system to China’s benefit.”

Trump has sporadically indicated he is aware of the need to show greater commitment to the Asia-Pacific region as China becomes more assertive. At the 2017 Asia-Pacific Economic Cooperation Summit in November 2017, Trump stressed US support for the ‘Free and Open Indo-Pacific’ policy, originally proposed by Japan, which seeks to protect freedom of navigation and keep shipping lanes open. And his threats of tariffs on China could be interpreted in geopolitical terms as a blunt attempt to contain the rising Asian power, Grady points out. 

The length of Trump’s presidency is likely to determine whether China can take a greater leadership role in the region. Countries in East Asia are generally adopting a hedging strategy: building their economic integration with China while maintaining a strong political-security relationship with the United States. Four more years for Trump could force these countries to abandon the balancing act and swing further into China’s orbit, according to Hirson, although he points out that many governments in Asia and Europe are wary of allowing Beijing to assume a dominant role.

Trump is pushing the US into a full-blown trade war with China

5. Climate change: après Trump, le deluge?

One of the Trump’s eccentricities is his tendency to conduct presidential business beneath the swaying palm fronds at Mar-a-Lago, his country club on the Florida coast. He informed Xi Jinping of the Syrian missile strikes over chocolate cake on the Mar-a-Lago terrace, while hosting the Chinese leader at the resort.

The irony is that Trump’s policies could be hastening a rise in global temperatures that would send floodwaters sluicing through the gilt-lined suites of his favourite hotel.23 In June 2017, the president convened a press conference in the White House Rose Garden to announce he intended to withdraw the US from the Paris Agreement on climate change, an accord that commits signatories to cut carbon emissions and hold global temperatures at less than two degrees above pre-industrial levels.

This decision was criticised by statesmen and women in the US and around the world, but perhaps the best repudiation of Donald Trump’s stance on climate change comes from an unlikely source: Donald Trump himself. In 2009, ahead of the UN Climate Change Conference in Copenhagen, Trump and his three adult children signed an open letter to Obama that called for “meaningful and effective measures” to limit global warming. “We have the ability and the know-how to lead the world in clean energy technology,” the letter read. “But we must embrace the challenge today to ensure that future generations are left with a safe planet and a strong economy.”24

Trump has failed to follow his own advice. He has appointed two fossil-fuel advocates to run the Environmental Protection Agency (EPA): his original pick, Scott Pruitt, stepped down in July amid a corruption scandal and was replaced in an acting capacity by former coal-industry lobbyist Andrew Wheeler.25 The EPA has rolled back regulations that stop energy firms from leaking methane, a greenhouse gas, into the air.26 Bundled in with Trump’s tax bill, meanwhile, was a provision that opened up Arctic refuges to oil and gas drilling, threatening a pristine wilderness that is considered by environmentalists to be a crucial bulwark against climate change.27

Withdrawing from the Paris Agreement could be the most damaging of all Trump’s presidential actions, not just for wildlife and ecosystems but for markets and economies. A wealth of research shows the world is stuck between two main hazards in grappling with climate change. If countries move too quickly to limit carbon emissions, large swathes of the oil and gas sector will be severely affected. A Barclays study claimed that $34 trillion would be wiped off the value of companies in the fossil-fuel industry if the world cut carbon emissions to their target level overnight.28

On the other hand, there is the even greater risk of inaction. If carbon emissions are not curtailed, it is probable global temperatures would rise six degrees by 2100, more than enough to unleash disastrous flooding in coastal cities from Miami to Shanghai. Research from the Economist Intelligence Unit, commissioned by Aviva Investors, shows the physical damage caused by such a profound environmental shift could wipe $43 trillion off the value of financial markets, discounted to present-day value. That amounts to 30 per cent of the world’s entire stock of manageable assets.29

“The point of the Paris Agreement is to try to steer the global economy between these two extremes by encouraging a smooth transition towards a low-carbon future,” explains Steve Waygood, chief responsible investment officer at Aviva Investors. “This is in the best interests of governments, markets and societies. If the US drags its heels under Trump, it is more likely it will have to enact a more hurried transition further down the line to catch up with emissions reductions and halt potentially-catastrophic temperature rises, disrupting various industries.”

But there are grounds for optimism. Waygood observes that Trump’s attacks on the environment are catalysing support for the battle against climate change in America and beyond as people unite against a common enemy.30 Former New York mayor Michael Bloomberg has led financial-market efforts to tackle climate change as chair of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.31 He has also committed to make good any shortfall from the US federal allocation to the UN Climate Change Secretariat during the four-year exit process from the Paris Agreement.32

In California, the state government has committed to eliminate all carbon emissions and derive its power from exclusively carbon-free sources by 2045. Governor Jerry Brown deliberately framed the pledge as a response to Trump’s “gross ignorance” on climate issues.33 In September, Brown co-chaired the Global Climate Action Summit in San Francisco, which brought together representatives from the public sector, business and finance to put pressure on governments to deliver the Paris objectives.

The Trump legacy

Similar trends are evident in other areas in which Trump has attacked the traditional consensus, as stakeholders come together to form a united front and defend the institutions he has assailed. His stance on trade appears to be fostering a thaw in relations between China and Japan, for instance.34 And China, Russia and the EU are working together on a plan to provide Iran with economic incentives to abide by the terms of Obama’s nuclear deal, to the chagrin of the Trump administration.35

At home, Trump’s assault on democratic norms and the free press is summoning opposition from voices across the political spectrum, according to David Frum. “There has been an extraordinary rise in civic engagement. 2018 will see the highest number of women running for office ever recorded. Everyone who works in journalism is aware of intense public interest in our work. And at the same time as there is damage being done to the trading system and the Western alliance, a lot of people maybe understand the preciousness of those things a little bit better than they did when those things were more secure.”

Assessing Trump’s longer-term impact will ultimately be a matter for historians. One can imagine a time, half a century from now, when a venerable policymaker retires and settles down to write their own memoir of politics and economics in the 21st century. Perhaps Trump will be seen to represent the beginning of a new age of turbulence – of broken trade deals, rising geopolitical tensions and rampant climate change – that makes Greenspan’s pre-crisis worries look trivial by comparison. Then again, perhaps the Trump era will be recognised as the moment the world recognised how fragile were the institutions and alliances he took apart, and began to piece them back together again.

Trump and the markets

Trump’s policies have already had a profound effect on financial assets. The bull market in US equities gathered pace on his watch – at least until October's slide – thanks to extra momentum from the tax reform bill and the promise of ever-greater fiscal stimulus. And at a time when structural volatility is ticking higher – due to the gradual withdrawal of the extraordinary central bank support that had long kept a lid on market movements – Trump’s unpredictable pronouncements on trade and corporate sectors have stoked price gyrations in various sectors. So what is the outlook for global asset classes under the Trump presidency? And is he permanently altering the market landscape? We asked Aviva Investors fund managers for their views.

James McAlevey, head of rates, portfolio manager AIMS Fixed Income

High federal debt is a problem that is not going away and this is a deep structural issue Trump has exacerbated with fiscal stimulus. The US entitlement programme is very expensive and it’s only going to get more expensive given the demographic backdrop. Projections from the Congressional Budget Office have debt rising to 100 per cent of GDP by the end of the decade, and 152 per cent by 2048. Until government and federal authorities change the fiscal framework in a material way, we’re stuck with very large deficits in the US.

The US has been helped by the exorbitant privilege of having the dollar as the world’s reserve currency. But that’s why we feel there’s a very large conflict in terms of what Trump’s trying to achieve: namely, issuing debt at the same time as challenging those countries that have been primarily responsible for funding the US deficit. We don’t expect a big sell-off of Treasuries among Asian central banks, but the flow into Treasuries is clearly falling compared to the situation in the post-crisis period. So demand for US government debt is going to have to come from domestic sources, where demand looks quite saturated: the US market already holds more Treasuries as a percentage of GDP than at any time since the 1960s. We expect the market to clear, but Treasury yields might have to rise materially.

james

Josh Lohmeier, head of North American investment grade

From a credit investor’s perspective, Trump’s policies have benefited risk assets in the US in the short term, largely due to the corporate tax cuts. Any time you deliver a significant boost to cash flows right to the bottom line of corporate income statements, that is going to stimulate the price of those assets. In the short term, the tax reform bill has probably prolonged the business cycle and the rally in US assets.

What is harder to pinpoint is the extent to which Trump’s rhetoric on trade policy and the potential for a trade war will impact the global economy. In the first instance, it is bad for confidence given the uncertainty that surrounds such a large range of outcomes. Another concern is the impact the fiscal boost to the US economy will have on the US deficit over the longer term.

What we are left with is more questions than answers on what future trade policy will be and how big the deficit will get. I suspect the market today is choosing to focus on the tangible short-term positives of what is driving economic growth in the US and keeping a watchful eye on the range of outcomes of these other factors. For the time being, the shorter-term tangible positives are winning out, with the cash-flow boost to corporate earnings more than offsetting the longer-term fears of trade wars.

james

Richard Saldanha, global equities fund manager

The tax cuts have provided a ‘halo effect’ in US equities. US companies are printing year-over-year earnings of over 20 per cent, and the tax cuts are a big part of that. But it’s also important to remember the repatriation of offshore profits. Once companies bring cash back onshore they can deploy it more effectively. Some of that capital will be returned to shareholders via buy-backs and dividends, but we are also seeing more money going into capital expenditure as well as M&A. Over the longer term, that increased corporate investment will bring benefits.

On the other side, Trump increases tail risks. His Twitter posts can cause volatility among the companies or sectors he attacks, such as pharmaceuticals or tech. His stance on trade is the big longer-term concern. A full-blown trade war would be negative not just for US equities but for equities and other asset classes globally, because protectionism and tariffs are detrimental to growth. It’s frustrating as an investor, because the only way you can deal with the associated uncertainty is to apply a discount – perhaps a small percentage, but a discount all the same – to your valuations across the board, even if a full-blown trade war isn’t your base scenario.

Richard

Alistair Way, head of emerging market equities

It’s been a disappointing year for emerging market equities, which have underperformed compared with the developed markets. A strong dollar and a US tightening cycle have played a part in that, as have idiosyncratic difficulties in Turkey and Argentina, but Trump’s protectionist rhetoric has also been a key factor.

If you drill down into the indices, what’s interesting is that small-cap emerging market equities have underperformed, and that partly has to do with the higher weight of export companies among small caps, which are vulnerable to a downturn in global trade. Chinese equities have also suffered disproportionately, which suggest Trump’s targeting of China is having an impact. 

As for whether this a longer-term problem, it’s difficult to say. Rising trade has been a key driver of growth across emerging economies and a key factor in the convergence between emerging and developed markets over the last few decades, so greater protectionism is a big risk. But given how interconnected the global trading system is, this isn’t just a problem for emerging markets. Some of Trump’s more extreme threats, such as relocating iPhone production from China to the US, would bring all sorts of consequences for supply chains and the cost of goods for consumers and companies across the world.

Alistair

Continue reading AIQ

Investment thinking from Aviva Investors
  1. Quoted in Adam Tooze, Crashed: how a decade of financial crises changed the world (Allen Lane, 2018)
  2. “I am part of the resistance against the Trump administration,” The New York Times, September 2018
  3. Bob Woodward, Fear: Trump in the White House (Simon & Schuster, 2018)
  4. National Institute on Drug Abuse figures, August 2018
  5. Statistic quoted in Steven Levitsky and Daniel Ziblatt, How democracies die (Viking, 2018)
  6. Federal Reserve Beige Book, September 2018
  7. Thomson Reuters, August 29
  8. Bloomberg, September 13
  9. Staff report on the US, IMF, July 2018
  10. ‘Trump says withdrawal from TPP a “great thing for the American worker,”’ Newsweek, January 2017
  11. ‘Trump: US will quit World Trade Organisation unless it “shapes up,”’ The Guardian, August 2018
  12. ‘China promises ‘retaliation’ against new US tariffs,’ Financial Times, September 2018
  13. ‘Trump forgets that US companies in China are doing a roaring trade,’ Financial Times, June 2018
  14. ‘We estimate China only makes $8.46 from an iPhone,’ The Conversation, July 2018
  15. ‘How much would the iPhone cost if it were made in America?,’ Vox, September 2018
  16. ‘America First; dollar last,’ Deutsche Bank Markets Research, April 2018
  17. See ‘Upsetting the Apple cart,’ The Economist, September 2018
  18. ‘The Obama Doctrine,’ The Atlantic, April 2016
  19. ‘North Korea-South Korea talks: from “fire and fury” to diplomacy,’ Vox, March 2018
  20. ‘Trump drops the Mother of All Bombs on Afghanistan,’ The New Yorker, April 2017
  21. ‘Donald Trump orders precision strikes against Syria,’ Financial Times, April 2018
  22. See AIQ issue 2.
  23. According to data from the National Oceanic and Atmospheric Administration, Mar-a-Lago would be partially submerged by 2100 if sea levels rise by three feet, which is less than the rise predicted in some extreme climate scenarios. ‘Donald Trump’s Mar-a-Lago Florida estate to be submerged by rising sea levels due to climate change,’ April 2017
  24. ‘An ad Trump signed demanding action on climate change,’ The New York Times, June 2017
  25. ‘EPA chief Scott Pruitt resigns amid ethics scandals,’ CNN, July 2018
  26. ‘Trump administration wants to make it easier to release methane into air,’ The New York Times, September 2018
  27. ‘Trump administration takes first steps toward drilling in Alaska’s Arctic refuge,’ Science, April 2018
  28. ‘Fossil fuel industry risks losing $33 trillion to climate change,’ Bloomberg, July 2016
  29. This is a present-value figure, discounted from a future value of $200 trillion. See ‘The cost of inaction: recognising the value at risk from climate change,’ Economist Intelligence Unit, 2015
  30. ‘The world will uphold the Paris Agreement, with or without Trump,’ Aviva Investors, June 2017
  31. Steve Waygood is a member of the FSB TCFD, representing Aviva plc.
  32. ‘Michael R. Bloomberg provides funding for UN Climate Change Secretariat to ensure US will honour Paris commitment,’ Bloomberg statement, April 2018
  33. Jerry Brown: Trump's 'gross ignorance' main obstacle in climate change fight,’ The Guardian, September 2018
  34. ‘Trump’s tariffs prompt thaw in China-Japan ties,’ Financial Times, September 2018
  35. ‘EU, China and Russia in move to sidestep US

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