We haven’t paid much attention to US elections in the past…Democrats, Republicans, Bush, Clinton or Obama – there has been a broad acceptance of neo-liberal capitalist policies supported by globalisation. Yesterday, that changed.
Once again, we woke up to a shock result for world markets but clearly not for the scared and fed-up Americans who voted for Donald Trump. The people have chosen Trump and his campaign for change, and that is precisely what financial market participants fear. More change and more uncertainty on top of the uncertainty created by Brexit.
Once again, global markets are in turmoil. There is always uncertainty (in markets), but this kind of uncertainty pulls the rug out from under economies.
Here are our assessments as to why the market doesn’t like a Trump victory:
- Trump is an unknown. Unlike any president in our living memory, Trump has not served inside his political party or in government. We do not know whether he will deliver on his promises because we do not know how he will function within the American political system.
- Trump promised to renegotiate trade deals to bring back manufacturing jobs to the USA. This threatens globalisation and global trade. Economics 101 taught us that countries should spesialise in what they are good at and trade the rest. Globalisation and global trade has been leading factors in global growth. Trump promised to renegotiate long existing trade deals and the markets do not like the highly uncertain outcome of these negotiations.
- Trump also promised to stop immigration. Immigration has been one of the reasons the American economy has grown, unlike other developed economies where the lack of population growth has stalled economic growth, (Japan is the best example).
- The market fears the impact of Trump’s confrontational style on global political stability. At a particularly tense time in history with Russia, Turkey, Syria and the Middle East at dangerous crossroads, an unknown and seemingly volatile US president is cause for concern.
- Trump also indicated that he does not support the current US Federal Reserve governor. He is not in favour of the current monetary policy support for financial markets. It probably means a new, hawkish governor will be appointed in 2018.
We need to stay calm. In the words of my twelve year old daughter:”I don’t know why you are worried; politicians don’t do what they say they will do.” They seldom deliver on their promises, partly because the system does not allow them to. Some good may still come (thanks to Graeme Codrington for some of these points):
- He will only be in power for four years. My sixteen year old said on the way to school this morning: “Thank goodness, he’ll be gone by the time I reach the job market.” Laws take a long time to change and he will probably find that the political system will bury many of his plans.
- The American political system has been gridlocked for some time. Obama could not deliver because he did not control both the houses. Trump will and may be able to bring some of the changes needed to make the system more efficient.
- There are checks and balances in place in the system, which should keep him in check.
- The political system needs to change (that’s what people voted for) and perhaps Trump’s unorthodox ways might break the system so that people will have better choices in the future.
- The Americans will wake up to the fact that deals are difficult to change, just as the British did. Mexico, Canada, China and the rest of the world will not just say “Mr Trump have your way just because you are a star. “
- Trump may shake up the establishment, which may be a good thing for competition and accelerate change in government and business.
Brexit and Trump sends a powerful message to politicians around the world. There is a definite move towards the right. The people are electing champions for equality and nationalism. The people are voting against the establishment and for jobs.
There is increasing evidence that globalisation, although good for global growth, has been bad for equality. It has benefited the educated and the wealthy more than the poor and uneducated in developed countries. Those disenfranchised communities have not been taken seriously and the establishment has not helped to soften the blow. Of course, the lives of the poor in developing countries have improved but this barely features in politics in richer countries.
The permanent loss of jobs in the developed world cannot only be ascribed to globalisation. Technological changes and digitisation are already eating away even white-collar jobs.
Globalisation and technological advances are inevitable. However, politicians need to listen and help their people to deal with the fall out of these changes.
On global political risks
We are perhaps witnessing a once-in-a-lifetime shift in global sentiment. This is a tidal wave. Some of the potential future scenarios are indeed frightening. Breaking treaties, inequality and the rise of ‘saviour’ politicians are the stuff of world wars.
How this wave will collide with the unstoppable forces of globalisation and technological advances is uncertain.
Once again, this election result shows that betting on a particular outcome, worldview or scenario is dangerous. Diversification is your only protection against the unthinkable happening.
In addition, in years to come, the ability to change personal behaviour including personal spending habits might be the best protection against an unknown future. May saving come back into fashion!
No matter what, stay calm.
In the words of Warren Buffett, “For 240 years it’s been a terrible mistake to bet against America and now is no time to start.”
For more reading on the topic, please follow the links below.