Trump reflation bubble will burst, warns Doctor Doom
THE Trump “reflation rally” on global bourses is seriously overstretched and ignores the risk of dangerous and impulsive actions by the White House, the world’s roving “Dr Doom” has warned.
Prof Nouriel Roubini said President Donald Trump’s grand plans to slash taxes are empty rhetoric and his bonfire of regulations will yield nothing of substance, leaving the economy stuck in the low-growth rut that he inherited.
“Corporate tax reform is going to be a mini-mouse, not a tiger,” he said, speaking at the Ambrosetti forum of global economists on Lake Como.
“It leaves a $2 trillion to $3 trillion hole in revenue. Savings from health care are not going to happen. The border-adjusted tax is not going to happen either. It is dead on arrival,” he said.
“There is no financing to make tax reform revenue-neutral, and without that it will blow the deficit. Republican hawks in Congress are not going to vote for it,” he said.
The US Senate has in effect blocked the border tax. The protectionist scheme would in any case lead to an explosive rise in the dollar, overwhelming the benefits for the US. “The last thing the administration can accept is a stronger dollar. It would kill the economy,” he said
The final result is likely to be a modest cut in the corporate tax rate from 35pc to 30pc, offset by an extension of the tax base. It will be nothing like the “big-bang” plan for a 15pc rate floated by House speaker Paul Ryan.
Mr Roubini, founder of Roubini Global Economics, was an unlikely bull 18 months ago when others were alarmed by the Chinese currency scare. He correctly called that episode a “false alarm”. Now he is swinging back towards the bearish camp.
While there is still life in the world’s ageing economic expansion, the same may not be true for asset markets. The six to 12 month “sugar high” from the Trump trade is already fading: risks are rising. “Corporate sector non-financial debt in the US is at an all-time high, higher than levels that led to crises in the past,” he said.
Central banks may not come to the rescue next time, either because they have run out of ammunition, or in the case of the US Federal Reserve because it no longer wishes to do so.
Prof Roubini said the US economy is already growing close to its full-employment speed limit of 1.75pc to 2pc. The Fed would offset any extra stimulus from Mr Trump by tightening monetary policy faster and harder.
Fear of a tougher Fed is already unsettling markets. Investors were caught off-guard by the latest minutes suggesting that the bank may start to sell its $4.5 trillion holding of US Treasury debt and mortgage bonds as soon as this year. Nobody knows for sure what will happen when this moment of “quantative tightening” finally arrives.
Prof Roubini said Mr Trump’s drive to repeal scores of regulations will not make any appreciable difference to US economic vitality, describing his goal of 3pc to 4pc growth as absurd. “It’s mission impossible. People are delusional if they think growth can be increased like this. These sorts of changes take years,” he said.
While markets have over-estimated the “good Trump”, they have vastly underestimated the risk of a “bad Trump”: a protectionist who resorts to sledgehammer methods if the economy disappoints and his popularity crumbles. This view was widely shared by top global asset managers at a closed-door meeting at the Ambrosetti forum. “We see big risks on the horizon but nothing is priced into the markets. The credit impulse is starting to fade,” said the manager of one giant Asian fund.
The hazards are equally great in Europe where those left behind by globalisation are organising themselves politically. Prof Roubini said: “Populism is a major tsunami and it is not going away soon. Marine Le Pen could win in France even if she loses. You could have a situation where the Front National and extreme Left go out into the streets and prevent any reform from happening.”
Prof Roubini said Mr Trump’s decision to launch cruise missiles against the Assad regime in Syria reveals an extraordinary dangerous impulse. In this case the attack took place as Mr Trump was having dinner with Chinese leader Xi Jinping and was clearly a message to others – North Korea, Iran, or indeed China – that this White House will strike suddenly and violently.