This latest episode of the AIQ Podcast explores the long-term impact of the Trump presidency.
Featuring contributions from Jeffrey Frankel, Michael Grady, Helen Thompson and Richard Saldanha.
Exploring how behavioural finance is being transformed by data science. Find out more in this episode.
We are assembled here today are issuing a new decree to be heard in every city, in every foreign capital and in every hall of power. From this day forward, a new vision will govern our land from this day forward. It's going to be only America first. America first. When Donald Trump delivered his inauguration speech on the chilly afternoon of January 20th, 2017, he pledged to break with the past by renegotiating trade alliances and reviving US manufacturing industries. He would put America first two years on.
And Trump has delivered on some of his promises, but his policies have also divided America and discomforted foreign allies. So what are the longer term consequences of his presidency? In this episode of the AIQ podcast, we explore whether the Trump era represents a brief detour on the path towards a more liberal and integrated global economy or the beginnings of a new, more unpredictable order. We will hear from experts in economics, politics and finance about the impact of Trump's policies and what life after Trump might look like in America and beyond.
We have a very crooked media. We had a crooked candidate do, by the way. But we have we have a very we have a very, very crooked media. I will say this, folks. Everything that's turning out now. It's amazing. That's come full circle. Boy, have they committed a lot of atrocities when you look. Have they done things that are wrong?
Trump's speech at the Conservative Political Action Conference in February is a perfect example of his style. He's taken a sledgehammer to the presidential norms. He mulls policy ideas over social media, threatens to interfere in judicial process, and slings insults at journalists and political opponents. On Trump's watch, US society is becoming ever more polarized. Consider the bitter round over the president's nomination of Judge Brat Cabinet to the Supreme Court. Seventy percent of Democrats and 62 percent of Republicans say they now live in fear of the other party.
Whether or not Trump comes to be seen by historians as the peak of American populism, the divisions he has exacerbated will take a long time to heal.
Here's Helen Thompson, professor of political economy at Cambridge University, with her take on things that debate, make sure that 2016 elections and campaigns around it just showed how deeply divided the United States was, how difficult it is for people on each side to the outcome of election results without seeing the opposition is fundamentally illegitimate. Presidency has been laid bad by Raw Politics power without all the respect for the symbolism that goes around it. And at the same time, you have parties that regard each other as energy terms, Western democracy and talking about resistance to elected president.
I'm not really sure about this.
For better or worse, Trump is also likely to leave a lasting impact on the American economy. Quick to take credit for strong U.S. GDP growth since his inauguration. Here he is giving a policy update in August.
It said now that our economy is the strongest it's ever been in the history of our country. And you just have to take a look at the numbers. Unemployment all time, historic lows. Black unemployment. Hispanic unemployment. Asian unemployment. Women unemployment. These are records that are being set on a weekly basis. Our country is doing phenomenally well. You look at what's happening outside of the United States. It's not a pretty picture inside of our country. We are just setting records and I'm going to keep it that way.
Are Trump's policies really responsible for the strong performance of the US economy? Let's have a look at the evidence. The administration's most high profile economic policy to date was the Tax Cuts and Jobs Act, passed by Congress in December 2017. This sweeping tax law will reduce tax rates for individuals and companies and provided incentives for U.S. multinationals to repatriate their overseas hoards of cash. The legislation may encourage greater corporate investment over the longer term, says Richard Saldana, global equities fund manager at A Fever Investors.
What's turbo charged? A particular stock market versus the economy? Because sometimes those two can be contracting. There's clearly the tax cuts. So that's what's provided the real boost the ratings this year. U.S. companies are printing 20 percent year over year earnings. So tax has been quite an important part of that. So there's almost a halo effect from the tax reform. And people talk about the headline tax cuts, which is important. But I think it's also important to remember the repatriation.
Once your companies bring the tax back onshore, they can deploy that capital more effectively. Clearly, somebody has to return back to shareholders. Fine, but no, we are seeing more capital going into CapEx and clearly over a longer time. That's kind of what you want. I think we're looking at US companies for a while now going actually or not investing enough in your own business. So I should. Futcher stunned to see that capex, which I almost think of as a secondary effect of the initial tax cut and the repatriation.
But while Trump's tax reform bill brought benefits for companies, his fiscal stimulus could be introducing new economic vulnerabilities that will do damage over the longer term. Here's Michael Grady, senior economist and macro strategist at A Fever Investors.
By itself, the tax cuts and spending boost as poorly about between four five, four seven five two growth this year or next. That's quite sizable amount. So the question is whether it's an appropriate thing for them to have done right at this point in time in the cycle. So you don't kind of look forward to 2020 and the spending boost will dry up and the initial boost from tax cuts goes away. You're looking at in terms of the delta, a fairly big headwind to growth in 2020 coming from sort of a booster point, five point five years, probably a headwind of maybe a quarter as well.
Half a point. Quite big. So calm is going to keep boosting forever. There is a payback at some point. Jeffrey Frankel, a professor of economics at Harvard University, served at the Council of Economic Advisors during both the Reagan and Clinton administrations. He believes Trump's procyclical 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 is difficult to recover.
He points to the fiscal expansion under George W.. Bush from 2002 to 2007, which left the US limited in how it could respond to the financial crisis.
The result was as credible, predicted. It was predicted that the Great Recession in December 2007, Washington itself constrained by the high level of debt limit, the magnitude and the length of the fiscal response. And I think that could be worse. Basically, I think go back to the law two to five time. When the US had such a strong economy, the level of unemployment was busy doing things to increase the budget deficit. And that means we won't have the fiscal space to respond when, for whatever reason, there is a recession as well as implementing stimulus.
When the going is good, Trump has signaled he would prefer a procyclical monetary policy, openly criticizing the Federal Reserve's decision to continue hiking interest rates despite strong growth and unemployment below four percent. 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.
For many years, countries have been taking total advantage of the United States on trade, whether they're allies or not. They looked at us really as a bunch of very soft touches. And that's what's happening anymore. The big one is China, because for a long period of time, China has taken advantage of our country. And I don't blame China. I blame the people that represented our nation to have allowed that to happen, where 375 billion dollars in trade deficits came about year after year.
We don't want that. Not fair. Not right. So we've place massive tariffs on China and the tariffs have really had a positive impact.
Soon after he took office, Trump withdrew the US from the Trans-Pacific Partnership, a trade agreement. This fulfilled a campaign promise and served only notice of his commitment to an America first stance on trade. Since then, Trump has renegotiated the North American Free Trade Agreement with Mexico and Canada, along with other trade pacts. But Trump's tariffs on China are the clearest example of his protectionism. In April, he announced around 60 billion dollars of levies on Chinese industrial exports to the US, prompting retaliation from Beijing.
On September the 17th, he upped the ante, taking to Twitter to warn countries that will not make fair deals with us that they would be tariffs. True to his word, he slapped tariffs on a further two hundred billion dollars of Chinese imports from China hit back with its own tariffs, targeting sectors such as agricultural produce and industrial products. Trump is pushing the US into a full blown trade war with China, according to Jeffrey Frankel, and he sees three possible outcomes.
Three possibilities. None of them are an improvement over where we were before. The best scenario is that foreign leaders have figured out that Trump likes to be able to declare victory, so they give him some face and concessions. Fair enough. He'll claim victory, stand down from the tariffs that have been passed, but really not escalate. Ideally, in the medium term scenario is that everybody put something terrorists peeps above the rest of the term, which is a slightly longer term damage.
After the Trump presidency, the terrorists to myself just instantly be negotiated back down again with everybody here being more wary of trusting us to those words. And then there's the worst case scenario where the world breaks up two trading blocks the surface.
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 Eurozone and Japan, regions in which trade accounts for around one third of GDP growth, would also be hit hard.
Grady, however, is not convinced the US would escape lightly if tariffs continue to rise.
If they are big enough, there will be a lot of negative growth impacts both in China and in the US. I wouldn't like to admit to the latter, but there will be and it will be modestly inflationary, particularly the US Dexatrim billion, let's say 25 percent and 10 percent tariffs then probably knocking between half and three quarters a point off Chinese growth. That's not insignificant. Maybe you're at, according to a half of U.S. growth and adding a quarter point of inflation.
So, yeah, it would have more noticeable macro effects, more seats so far. And on financial markets, we would expect to see those areas that have already been negatively impacted. Which is essentially Asian EMS to some extent, the broader, even complex gas trade, along with Japan, Europe or the large trading was we talking about a third of our GDP through global trade.
We know that supply chains matter with these things these days.
And so there will be consequences, though his abrasive style masks certain continuity's. But the last administration, Trump is also having an impact on geopolitics. His open criticism of U.S. defense partnerships from Japan to Korea to NATO may be unprecedented, but his frustration to other countries are unfairly relying on the US to protect them is not long before Trump. Both Obama and Bush were complaining about NATO partners failure to spend two per cent of GDP on defense. The target amount agreed by the alliance.
Nevertheless, Trump's approach is very different from his predecessors. His 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.
We both want to do something. We both are going to do something, and we have developed a very special bond. So people are going to be very impressed. People are going to be very happy. And we're going to take care of a very big and very dangerous problem for the world. And I want to thank German Kim, who spent a lot of time together today, very intensive time. And I would actually say that it worked out for both of us far better than anybody could have expected.
The Singapore summit 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 canceled in May to the dismay of allies who helped secure it in the Asia Pacific region. Trump's actions may be giving China an opportunity to exercise greater influence on political and economic matters over the long term. Trump's actions may even be undermining the postwar Pax Americana, which brought growth. Here's Jeffrey Frankel again.
U.S. leadership, hopefully, even though he made mistakes. For the most part, it's been a positive horsehide from the end of World War two to the end of the 20th century, at least. But whether for that reason or some other reason, we have had since World War Two, a system that's been peaceful and a system that is based on principles which include the rule of law, free trade, equal economic opportunity, democracy, human rights, both on the economic front and the economic front.
I mean, in the thirties, it was possible to include Eastern Europe, for example, had to choose between communism and fascism. There were no other choices in the US. And the rest shows that there is a choice that can lead us forward in terms of these fundamental values and economic and political progress. And he was very successful. And I would argue that this is being fundamentally undermined.
Trump's policies may also leave long lasting effects on the environment. In June 2017, the president convened a press conference in the White House Rose Garden to announce he was withdrawing 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.
It is time to exit the Paris Accord. And time to pursue a new deal that protects the environment, our companies, our citizens and our country. It is time to put Youngstown, Ohio. Detroit, Michigan. And Pittsburgh, Pennsylvania, along with many, many other locations within our great country.
Before Paris, France, 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. If carbon emissions are not curtailed, it is probable that global temperatures would rise six degrees by 20 100. 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 would wipe 43 trillion dollars off the value of financial markets discounted to present day value.
That amounts to 30 percent of the world's entire stock of manageable assets. There are grounds for optimism, though. Trump's attacks on the environment, for example, a catalyzing support for the battle against climate change in America and beyond. Former New York Mayor Michael Bloomberg has led financial market efforts to tackle climate change by chairing the task force in climate related financial disclosures. He's also committed to make good any shortfall from the US federal allocation to the UN Climate Change Secretariat during the full year exit process from the Paris Agreement.
In California, the state government has committed to eliminate all carbon emissions and derive its power from exclusively carbon free sources by 2045. 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, at home, Trump's assault on democratic norms and the free press is summoning opposition from voices across the political spectrum.
Assessing Trump's longer term impact will ultimately be a matter for historians. Perhaps Trump will come to be seen to represent the beginning of a new age of turbulence, of broken trade deals, rising geopolitical tensions and rampant climate change. Then again, perhaps the Trump era will be recognized as the moment the world saw how fragile were the institutions and alliances. He took a path and began to piece them back together again. Thank you for listening to the AIQ podcast. Do look out for future episodes.