Trump Victory Implications

Posted | 02/11/2016 / Views | 3495
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In case you missed it Trump now leads the polls in the US.  As we discussed Monday, this market had a Clinton victory fully priced in.  This miraculous turnaround in the polls predictably saw the market react immediately.  The Dow fell below 18000 before settling just above, likewise S&P500 fell below 2100 before a late small rebound. Gold was up $13 and silver 50c seeing the GSR fall to 70 (topically after yesterday).

Simon Johnson is a professor at MIT's Sloan School of Management and a former chief economist at the International Monetary Fund (IMF).  In an opinion piece in today’s AFR it would be fair to say he did not hold great hopes for the global economy should Trump win.  This is his conclusion:

“Trump promises to boost US growth immediately to 4-5 per cent, but this is pure fantasy. It is far more likely that his anti-trade policies would cause a sharp slowdown, much like the British are experiencing.

In fact, the impact of a Trump victory on the US could well be worse. Whereas British Prime Minister Theresa May's government wants to close Britain's borders to immigrants from the EU, it does want trade with the world. Trump, on the other hand, is determined to curtail imports through a variety of policies, all of which are well within the power of a president. He would not need congressional approval to slam the brakes on the US economy.

Even in the best of times, US policymakers often do not think enough about the impact of their actions on the rest of the world. Trump's trade-led recession would tip Europe back into full-blown recession, which would likely precipitate a serious banking crisis. If this risk were not contained – and the probability of a European banking debacle is already disconcertingly high – there would be a further negative spiral. Either way, the effects on emerging markets and all lower-income countries would be dramatic.

Investors in the sharemarket currently regard a Trump presidency as a relatively low-probability development. But, while the precise consequences of bad policies are always hard to predict, if investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market.”

As Simon says, the market, whilst off relatively modestly last night, is still not believing a Trump victory is likely.  A Clinton victory is still largely priced in.   As Brexit taught us, that can be a dangerous position to assume, especially as the Trumpanaut has defied every disbeliever in its path so far.  Brexit also taught us not to underestimate the level of anti establishment and anti globalisation sentiment amongst the 90% left behind since the GFC.  Clinton is the very embodiment of all that people detest in our political system.

Now please don’t get us wrong… We are most certainly not Trump supporters.  But as Greg Canavan pointed out last week at The Great Repression conference you cannot invest based on emotion or bias.  Wishing for Clinton to win, or ‘surely Trump won’t win’ is not an investment strategy.  Being prepared for either eventuality is.