Trump fi­nally gets to in­vestors

All the re­as­sur­ances that it’s busi­ness as usual have been whit­tled away and the mar­kets are spooked

Mail & Guardian - - Business - Nouriel Roubini

Be­tween pub­licly chastis­ing United States Fed­eral Re­serve chair­per­son Jerome Pow­ell and es­ca­lat­ing his trade war with China, Pres­i­dent Don­ald Trump has fi­nally rat­tled the mar­kets. Al­though in­vestors were happy to look the other way dur­ing the first half of Trump’s term, the dan­ger­ous spec­ta­cle un­fold­ing in the White House can no longer be ig­nored.

Fi­nan­cial mar­kets have fi­nally awo­ken to the fact that Trump is US pres­i­dent. Given that ev­ery­one has en­dured two years of reck­less tweets and pub­lic state­ments by the world’s most pow­er­ful man, the ob­vi­ous ques­tion is: What took so long?

For one thing, un­til now, in­vestors had bought into the ar­gu­ment that Trump is all bark and no bite. They were will­ing to give him the ben­e­fit of the doubt as long as he pur­sued tax cuts, dereg­u­la­tion and other poli­cies ben­e­fi­cial to the cor­po­rate sec­tor and share­hold­ers. And many trusted that, in the end, the “adults in the room” would re­strain Trump and en­sure that the ad­min­is­tra­tion’s poli­cies didn’t jump the guardrails of or­tho­doxy.

These as­sump­tions were more or less vin­di­cated dur­ing Trump’s first year in of­fice, when eco­nomic growth and an ex­pected in­crease in cor­po­rate prof­its, be­cause of forth­com­ing tax cuts and dereg­u­la­tion, re­sulted in strong stock-mar­ket per­for­mance.

In 2017, US stock in­dices rose more than 20%. But things changed rad­i­cally in 2018 and es­pe­cially in the past few months. De­spite cor­po­rate earn­ings grow­ing by more than 20% (thanks to the tax cuts), US eq­uity mar­kets moved side­ways for most of the year and have now taken a sharp turn south. At this point, broad in­dices are in cor­rec­tion ter­ri­tory (mean­ing a 10% drop from the re­cent peak), and in­dices of tech stocks, such as the Nas­daq, are in bear-mar­ket ter­ri­tory (a drop of 20% or more).

Though fi­nan­cial mar­kets’ higher volatil­ity re­flects con­cerns about China, Italy and other euro­zone economies and key emerg­ing economies, most of the re­cent tur­moil is be­cause of Trump. Last year started with the en­act­ment of a reck­less tax cut that pushed up long-term in­ter­est rates and cre­ated a sugar high in an econ­omy al­ready close to full em­ploy­ment. As early as Fe­bru­ary, grow­ing con­cerns about in­fla­tion ris­ing above the Fed’s 2% tar­get led to the year’s first risk-off.

Then came Trump’s trade wars with China and other key US trade part­ners. Mar­ket wor­ries about the ad­min­is­tra­tion’s pro­tec­tion­ist poli­cies have waxed and waned through­out the year but they are now reach­ing a new peak. The lat­est US ac­tions against China seem to au­gur a broader trade, eco­nomic and geopo­lit­i­cal cold war.

An ad­di­tional worry is that Trump’s other poli­cies will have stagfla­tion­ary ef­fects (re­duced growth along­side higher in­fla­tion). Af­ter all, Trump is plan­ning to limit in­ward for­eign di­rect in­vest­ment and he has al­ready im­ple­mented broad re­stric­tions on im­mi­gra­tion, which will re­duce labour-sup­ply growth at a time when work­force age­ing and skills mis­matches are al­ready a grow­ing prob­lem.

More­over, the ad­min­is­tra­tion has yet to pro­pose an in­fra­struc­ture plan to spur pri­vate-sec­tor pro­duc­tiv­ity or has­ten the tran­si­tion to a green econ­omy. And on Twit­ter and else­where, Trump has con­tin­ued to bash cor­po­ra­tions for their hir­ing, pro­duc­tion, in­vest­ment and pric­ing prac­tices, sin­gling out tech firms just when they are al­ready fac­ing a wider back­lash and in­creased com­pe­ti­tion from their Chi­nese coun­ter­parts.

Emerg­ing mar­kets have also been shaken by US poli­cies. Fis­cal stim­u­lus and mon­e­tary-pol­icy tight­en­ing have pushed up short- and long-term in­ter­est rates and strength­ened the US dol­lar.

As a re­sult, emerg­ing economies have ex­pe­ri­enced cap­i­tal flight and ris­ing dol­lar-de­nom­i­nated debt. Those that rely heav­ily on ex­ports have suf­fered the ef­fects of lower com­mod­ity prices and all who trade even in­di­rectly with China have felt the ef­fects of the trade war.

Even Trump’s oil poli­cies have cre­ated volatil­ity. Af­ter the re­sump­tion of US sanc­tions against Iran pushed up oil prices, the ad­min­is­tra­tion’s ef­forts to carve out ex­emp­tions and bully Saudi Ara­bia into in­creas­ing its own pro­duc­tion led to a sharp price drop. Though US con­sumers ben­e­fit from lower oil prices, US en­ergy firms’ stock prices do not. Be­sides, ex­ces­sive oil-price volatil­ity is bad for pro­duc­ers and con­sumers alike, be­cause it hin­ders sen­si­ble in­vest­ment and con­sump­tion de­ci­sions.

Mak­ing mat­ters worse, it is now clear that the ben­e­fits of last year’s tax cuts have ac­crued al­most en­tirely to the cor­po­rate sec­tor rather than to house­holds in the form of higher real (in­fla­tion-ad­justed) wages. That means house­hold con­sump­tion could soon slow down, fur­ther un­der­cut­ting the econ­omy.

More than any­thing else, though, the sharp fall in US and global eq­ui­ties dur­ing the past quar­ter is a re­sponse to Trump’s own ut­ter­ances and ac­tions. Even worse than the height­ened risk of a full-scale trade war with China (de­spite the re­cent “truce” agreed with Chi­nese Pres­i­dent Xi Jin­ping) are Trump’s pub­lic at­tacks on the Fed, which be­gan as early as the spring of 2018, when the US econ­omy was grow­ing at more than 4%.

Given these ear­lier at­tacks, mar­kets were spooked this month when the Fed cor­rectly de­cided to hike in­ter­est rates while also sig­nalling a more grad­ual pace of rate in­creases in 2019. Most likely, the Fed’s rel­a­tive hawk­ish­ness is a re­ac­tion to Trump’s threats against it. In the face of hos­tile pres­i­den­tial tweets, Pow­ell needed to sig­nal that the cen­tral bank re­mains po­lit­i­cally in­de­pen­dent.

But then came Trump’s de­ci­sion to shut down large seg­ments of the fed­eral govern­ment be­cause of Con­gress’s re­fusal to fund his Mex­i­can bor­der wall. That sent mar­kets into a near panic and the govern­ment shut­down was soon fol­lowed by re­ports that Trump wants to fire Pow­ell, which could turn a cor­rec­tion into a crash. Just be­fore the Christ­mas hol­i­day, US trea­sury sec­re­tary Steven Mnuchin was forced to is­sue a pub­lic state­ment to pla­cate the mar­kets. He an­nounced that Trump was not plan­ning to fire Pow­ell af­ter all, and that US banks’ fi­nances are sound, in ef­fect high­light­ing the ques­tion of whether they re­ally are.

Re­cent changes within the ad­min­is­tra­tion that do not nec­es­sar­ily af­fect eco­nomic pol­i­cy­mak­ing are also rat­tling the mar­kets. The de­par­ture of White House chief of staff John Kelly and sec­re­tary of de­fence James Mat­tis leaves the room de­void of adults. The co­terie of eco­nomic na­tion­al­ists and for­eign-pol­icy hawks who re­main will cater to Trump’s ev­ery whim.

As mat­ters stand, the risk of a fullscale geopo­lit­i­cal con­fla­gra­tion with China can­not be ruled out. A new cold war would lead to de­glob­al­i­sa­tion, dis­rupt­ing sup­ply chains every­where, but par­tic­u­larly in the tech sec­tor, as the re­cent ZTE and Huawei cases sig­nal.

At the same time, Trump seems to be hell-bent on un­der­min­ing the cohesion of the Euro­pean Union and Nato at a time when Europe is eco­nom­i­cally and po­lit­i­cally frag­ile. And spe­cial coun­sel Robert Mueller’s in­ves­ti­ga­tion into Trump’s 2016 elec­tion cam­paign’s ties to Rus­sia hangs like a Sword of Damo­cles over his pres­i­dency.

Trump is now the Dr Strangelove of fi­nan­cial mar­kets. Like the para­noid mad­man in Stan­ley Kubrick’s clas­sic film, he is flirt­ing with mu­tu­ally as­sured eco­nomic de­struc­tion. Now that mar­kets see dan­ger, the risk of a fi­nan­cial cri­sis and global re­ces­sion has grown. — © Project Syn­di­cate

Al­though in­vestors were happy to look the other way dur­ing the first half of Trump’s term, the dan­ger­ous spec­ta­cle un­fold­ing in the White House can no longer be ig­nored

Nouriel Roubini is a pro­fes­sor at New York Univer­sity’s Stern school of busi­ness and chief ex­ec­u­tive of Roubini Macro As­so­ciates

Dr Strangelove: Trump has spooked the mar­ket with his wild tweets, reck­less tax cuts and trade war with China and other trade part­ners. Photo: Jim Watson/afp

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