THE CONSEQUENCES OF TRUMP WIN / MACLEOD FINANCE

The consequences of Trump’s win

After the initial euphoria in corporate America comes the crash. Here’s why…

ALASDAIR MACLEOD

In futures trading, the initial reaction was for the S&P 500 to rise nearly 2% overnight. 

The dollar’s TWI soared 1.6% as well, while gold fell by 0.6%. 

These are reflex actions, which will be followed by more sober assessments of what a Trump administration means for America and the wider world.

Going on Trump’s economic and tax policies, he will need debt headroom to accommodate income and corporation tax cuts. 

This means the debt ceiling due to be reset on 3 January will need to be at least $40 trillion (currently nearly $36 trillion). 

Furthermore, his policy of increasing tariffs on foreign, particularly Chinese imports will increase the CPI, so we can forget currently discounted cuts in the Fed Funds rate.

Here are some of the knock-on consequences:

·      US bond yields are headed higher, likely much higher. The rise in the CPI could even lead to the Fed raising the funds rate.

·      The already stretched relationship between bonds and equities will see equities crash after the initial euphoria.

·      Refinancings in the corporate sector will be increasingly difficult, and where achieved will be at higher rates.

·      In short, the US is about to be overwhelmed by a debt crisis at the government level with serious consequences for debt zombies in the private sector.

·      In conclusion so far, start reaching for histories of the 1930 Smoot-Hawley Tariff Act to get a feel for the consequences of excessive tariffs.

·      Higher US bond yields will lead to serious consequences for other indebted nations — almost all of the G7 (Germany excepted, but she has other problems).

·      UK gilt yields will soar even relative to US Treasury yields. Japan becomes a horror show, and the EU will start collapsing under the weight of its debt and stagnant economy.

In short, financial assets were already on a slippery slope and they have just had an unwelcome dose of extra lubrication. 

For those who doubt it, riddle me this: How is a $40 trillion USG debt going to be funded? 

And at what rate? 

And at what maturities? 

When we had these problems in the UK in 1976 the IMF were called in (powerless in these circumstances today) and bond coupons rose to over 15%!

Some geopolitical consequences of US isolationism under Trump:

·      Trade wars will return with a vengeance with repeated rounds of tit-for-tat.

·      Ukraine is finished, the hot war being replaced with a cold one and Russia keeping its gained territories. Being abandoned by Trump, Europe will be left politically wrongfooted with its political credibility in tatters.

·      America will find it far more difficult to escape from the Israeli/Palestinian conflict. But the sacking of Netanyahu’s defence minister tells us that that’s not going well either and pressure on the US to step up her involvement will mount.

·      With tariffs against China and with US naval manoeuvres in the South China/East China seas and Taiwan, this theatre of cold war promises to become increasingly dangerous.

·      China’s economic difficulties will increase. Her response to these pressures might not be as benign as they have been so far.

In summary, get out of credit and into real, legal money which has no counterparty risk which is only GOLD.