January 28, 2017
There have been so many Trumps on display in the past few days that it’s anyone’s guess who will actually turn up for the first 100 days. The first few days have been extraordinary and kind of scary in terms of the president’s grasp on economic reality.
For example, he said he would slap a 20pc tariff on Mexican goods to make “Mexico pay for the wall”. But what he doesn’t understand is that when you impose tariffs, it is the poor white Americans who buy dishwashers made in Mexico at Walmart that actually pay the tariff. This is how tariffs work. The consumer pays. So it’s poor white Americans — the very people who voted for Donald — who will pay for the wall.
But economic logic apart, what is even more fascinating is the various Donalds on display so far. Economics is only the half of it. Who do you think will be the dominant Donald?
Will we get Boardroom Trump? The no-nonsense, straight-talking, waste-cutting, four-times bankrupt, business genius who will slash taxes and get corporate America purring again? This is the golf-club superhero, the darling of the 1pc. That’s the man the markets think they see.
Or what if we get Stag-night Trump? You know the pussy-grabbing, dodgy-dealing, locker-room Trump, who is one scandal away from impeachment? That’s the dude the media thinks it sees.
Or what about Town Hall Trump — the gold-plated, KFC-chewing, class-warrior capitalist who’s gonna stick it to the Man for the little guy? That’s the “straight-up guy made good” that Nascar America from Wisconsin to Pennsylvania thinks it sees.
But there’s also Late Night Trump. He’s the narcissistic, thin-skinned, keyboard warrior furiously tweeting away from the Oval Office at 4am, hitting out at his mainstream media enemies, stoking rage in the heartland, uncensored, unchecked, unhinged. This is the creature cyberspace thinks it sees.
There’s also ‘America First’ Trump. The wall-building, hombre-watching, China-bashing, alt-right flirting, bring ‘em all back home Donald, who will make America great again by cutting it off from the rest of the world. This is the leader the rest of the world thinks it sees.
Don’t forget Bob the Builder Trump! He’s the construction guy who’s going to rebuild America’s infrastructure and give formerly Democratic blue collar, Bud-swilling, MMA-watching working dudes decent jobs on the sites again. He’s the guy, the people who deserted Hillary — the Trump Democrats — think they see.
But which Donald — or combination of Donalds — turns up in the next 100 days is anyone’s guess.
One thing is clear: he has quasi-despotic powers.
With majorities in the Senate and House, he can appoint who he wants, to whatever job he wants. He can also, like his reality TV ‘Apprentice’ character, fire whomever he wants.
His cabinet reflects this power. But he needs results quickly because these total powers last only 24 months, at which point we will see the great American bi-annual referendum on the president, known as the Congressional elections.
This is where the checks and balances of the American system kick in. This is what the Founding Fathers inserted into the constitution just in case power went to a future president’s head.
So on the policy front, expect a whirlwind first 100 days that focuses on the US. Sure there’ll be foreign misadventures such as the ‘building the wall’ fiasco, but domestic politics remains the life-blood of the Trump revolution.
First we will see Boardroom Trump — the economic hit-man, beloved of the markets, who will cut corporation tax “bigly” and give a one-off amnesty for US corporate money “resting in accounts” abroad. Expect cash to flow back to Uncle Sam. This poses problems for the IFSC, which is little more than a safe deposit box for US multinationals.
But what then?
Will we see a massive kick to American investment driving the economy as promised by Mr Trump?
I’m not too sure because I don’t buy the line that US corporate investment has been low because corporate America doesn’t have enough money. At 9.5pc of GNP, American profits are at the highest level in my lifetime.
Corporate America arguably has too much cash.
Rather than a surge in factory building, it’s more likely that the offshore money will come back to the States, the tax will be paid and the cash will either be redistributed in the form of a massive one-off dividend to shareholders (it’s their money after all) or it will be used as a war-chest to buy companies.
I suspect new multinational money will revert to being held abroad. So we will see an outflow from Ireland, followed by a gradual rebuilding of the position until US corporate tax rates align with Ireland’s. This is unlikely, even in the medium term.
In the first 100 days, expect to see Bob the Builder Trump in full swing. Mr Trump will expand the fiscal deficit and my bet is that the fiscally constipated right-wing of the Republican party will do what they always do — rail against deficits in opposition, yet gorge on other people’s money when in power. This is straight from Reagan’s playbook.
Only Democrats are fiscally conservative in power and only Republicans are fiscally incontinent once they’ve got their hands on the levers.
But like everything with Mr Trump, there’ll be a twist. Donald isn’t about to unveil a public works scheme but rather a public private partnership for the already wealthy.
He is going to give equity holders in leveraged public infrastructure an 82pc tax credit. This is not infrastructure investment: this is public-sanctioned larceny on a scale that might make Donald’s mate Vladimir Putin blush.
The Trump Democrats mightn’t twig who’s really making money — nor might they care, so long as they are working full time at Walmart.
America First Trump will announce wall building, mass deregulation and drill, baby, drill! Wall Street will love this.
Despite the higher deficit, I suspect the Fed’s Janet Yellen will be more accommodative to Mr Trump, and short rates will move up – but this is not Paul Volker; rates should peak at 2pc with a risk premium added on the long end. A central bank that has missed its forecasts on the down side for five straight years in a row can hardly get all-aggressive on the upside now.
The dollar should remain strong. Remember a currency is just a relative price and looking relatively around the world, I’m not hearing convincing stories. For the dollar to weaken, something else has to be getting stronger.
As for equity markets, they’ve gambled bigly on Boardroom Trump, but remember there are multiple Donalds out there and each one carries specific threats to America’s stability.
Remember Stag-Night Trump only has to be let out once for scandal to immobilise this administration. Late Night Trump will court controversy. Meanwhile, beginning with Mexico, America First Donald angers former allies and potential foes everywhere.
Buckle up for the first 100 days.