The Trump trade

Why corporate America loves Donald Trump

American executives are betting that the president is good for business. Not in the long run

MOST American elites believe that the Trump presidency is hurting their country. Foreign-policy mandarins are terrified that security alliances are being wrecked. Fiscal experts warn that borrowing is spiralling out of control. Scientists deplore the rejection of climate change.

And some legal experts warn of a looming constitutional crisis.

Amid the tumult there is a striking exception. The people who run companies have made their calculations about the Age of Trump. On balance, they like it. Bosses reckon that the value of tax cuts, deregulation and potential trade concessions from China outweighs the hazy costs of weaker institutions and trade wars. And they are willing to play along with President Donald Trump’s home-brewed economic vision, in which firms are freed from the state and unfair foreign competition, and profits, investment and, eventually, wages soar.

The financial fireworks on display in the first quarter of this year suggest that this vision is coming true. The earnings of listed firms rose by 22% compared with a year earlier; investment was up by 19%. But as our briefing explains, the investment surge is unlike any before—it is skewed towards tech giants, not firms with factories. When it comes to gauging the full costs of Mr Trump, America Inc is being short-sighted and sloppy.

The view from the C-suite

Since winning Congress and the White House, the Republicans have sought to unleash the power of business. After the election Mr Trump held summits with tycoons, televised live from the boardroom at Trump Tower, and later from his new HQ in the Oval Office. Though bosses have tired of this kind of pantomime, particularly after Mr Trump’s equivocations over white-supremacist protests in Virginia last summer, they remain bullish. A reason is the Republican corporate-tax reform passed in December, the first on such a scale since 1986. It does several sensible things, including cutting headline rates to average European levels. The annual saving of $100bn is worth 6% of pre-tax profits (it accounts for a tenth of the fiscal deficit).

Deregulation is in full swing. This week saw a relaxation of banking rules (see article). The leaders of many agencies have been replaced with Trump appointees. The change at the top, firms say, means officials are being more helpful. A surprising number of boardrooms support a muscular stance on trade with China. If, for argument’s sake, China capitulated to American demands and imported $200bn more goods a year, it could boost the earnings of America Inc by a further 2%. The benefits for business of Mr Trump are clear, then: less tax and red tape, potential trade gains and a 6-8% uplift in earnings.

The trouble is that companies are often poor at assessing nebulous risks, and CEOs’ overall view of the environment is fallible. During the Obama years corporate America was convinced it was under siege when in fact, judged by the numbers, it was in a golden era, with average profits 31% above long-term levels. Now bosses think they have entered a nirvana, when the reality is that the country’s system of commerce is lurching away from rules, openness and multilateral treaties towards arbitrariness, insularity and transient deals.

As the contours of this new world become clearer, so will its costs to business in terms of complexity and predictability. Take complexity first. One of the ironies of the Trump team’s agenda is that, although they want to get out of businesses’ hair at home, when it comes to trade they want to regulate. When they tinker with tariffs, large numbers of firms have to scurry to respond because they have global supply chains. The steel duties proposed in March cover a mere 0.5% of American imports, but so far this month 200-odd listed American firms have discussed the financial impact of tariffs on their calls with investors. Over time, a mesh of distortions will build up.

Because trade is becoming more regulated, a new surveillance bureaucracy is sprouting. On May 23rd the Department of Commerce launched a probe of car imports. A bill in Congress envisages vetting all foreign investment into America to ensure that it does not jeopardise the country’s “technological and industrial leadership in areas related to national security”. American firms have $8trn of capital sunk abroad; foreign firms have $7trn in America; and there have been 15,000 inbound deals since 2008. The cost involved in monitoring all this activity could ultimately be vast. As America eschews global co-operation, its firms will also face more duplicative regulation abroad. Europe has already introduced new regimes this year for financial instruments and data.

The expense of re-regulating trade could even exceed the benefits of deregulation at home. That might be tolerable, were it not for the other big cost of the Trump era: unpredictability. At home the corporate-tax cuts will partly expire after 2022. America’s negotiators are gunning for a five-year sunset clause in a new NAFTA deal, although Canada and Mexico would prefer something permanent. Bosses hope that the belligerence on trade is a ploy borrowed from “The Apprentice”, and that stable agreements will emerge. But imagine that America stitches up a deal with China and the bilateral trade deficit then fails to shrink, or Chinese firms cease buying American high-tech components as they become self-sufficient, or Mr Trump is mocked for getting a bad deal. If so, the White House might rip the agreement up.

The new laws of the jungle

Another reason for the growing unpredictability is Mr Trump’s urge to show off his power with acts of pure political discretion. He has just asked the postal service to raise delivery prices for Amazon, his bête noire and the world’s second-most valuable listed firm. He could easily strike out in anger at other Silicon Valley firms—after all, they increasingly control the flow of political information. He wants the fate of ZTE, a Chinese telecoms firm banned in America for sanctions violations, to turn on his personal whim. Inevitably, other countries are playing rougher, too. China’s antitrust police are blocking Qualcomm’s $52bn takeover of NXP, a rival semiconductor firm, as a bargaining chip. When policy becomes a rolling negotiation, lobbying explodes. The less predictable business environment that results will raise the cost of capital.

As America’s expansion gets longer in the tooth, these arbitrary interventions could intensify.

Mr Trump expects wages to rise, but 85% of firms in the S&P 500 are forecast to expand margins by 2019, reflecting a control of costs. Either shareholders, or workers and Mr Trump, are going to be disappointed. Given that interest rates are rising, a recession is likely in the next few years. In a downturn, American business may find that its fabled flexibility has been compromised because the politics of firing workers and slashing costs has become toxic.

Republicans are right that tax cuts and wise deregulation can boost firms’ competitiveness. But little progress is being made on other priorities, including repairing infrastructure, ensuring small firms are not squashed by monopolies and reforming the education system. Most firms pride themselves on being level-headed, but at some point that bleeds into complacency.

American business may one day conclude that this was the moment when it booked all the benefits of the Trump era, while failing to account properly for the costs. A strategy that assumes revenues but not expenses rarely makes sense.

New York property jitters herald declines elsewhere

Some treat housing like a tradeable asset and chase yields. But what happens next?

Gillian Tett

Hong Kong policymakers have tried to cool the housing boom by making it harder to extend mortgages © Getty

Clouds are hovering over New York’s housing market. A couple of years ago, property prices were spiralling ever higher — much like the new luxury skyscrapers now springing up in midtown Manhattan.

But estate agents say that sales volumes in the first quarter of 2018 were at their lowest level for six years. Meanwhile the median price per square foot was 18 per cent lower than a year earlier, according to some reports.

That leaves Manhattan estate agents nervously gossiping about the local outlook. However, it should prompt investors and policymakers to ask a bigger question: could New York’s jitters herald declines in other non-US real estate markets too? Do those global markets, in other words, display “ synchronicity ”, or spillover effects?

Until recently, many economists assumed the answer was “no”. Investors have long known that global equity and bond markets often move in tandem, because globalisation has knitted together investment flows and the investor base.

However, economists used to think that real estate prices were less correlated, since a house, unlike a stock, has a utilitarian function (it is a place to live), and real estate prices are often shaped by local factors. Estate agents in Manhattan, for example, are blaming the recent slowdown on the negative consequences of Donald Trump’s tax reforms — and a glut of new luxury properties.

But last month the IMF published its first comprehensive analysis of global property and this suggests that real estate is becoming prone to synchronisation too. Two decades ago, only 10 per cent of property price movements could be blamed on global — not local — factors. Now it is 30 per cent.

This is still lower than for equities, where global correlations run at 70 per cent. However, what is striking is that this real estate synchronisation is affecting urban centres in both emerging and advanced economies. Or as the report notes: “House prices in major cities outside the United States — Beijing, Dublin, Hong Kong SAR, London, Seoul, Shanghai, Singapore, Tokyo, Toronto and Vancouver — are positively associated with US house price dispersions.”

This might seem unsurprising. After all, the global elite hop across borders at dizzying speed. So does financial capital, and sentiment-shaping news. Meanwhile, the market capitalisation of the real estate investment trust sector has tripled in the past 15 years, and large asset managers allocate on average of 11 per cent of their portfolios to property.

This has made the housing market more “financialised”, since some investors are treating housing more like a tradeable asset, chasing yields around the world. No wonder that a decade of ultra-loose monetary policy in the west has lifted so many geographically dispersed real estate boats.

But the question now provoking debate at the IMF — as well as in western central banks — is what happens next. One unwelcome consequence of synchronisation is that domestic policymakers have become less powerful. Previously, central bankers tried to prick housing bubbles by moving domestic interest rates. But this does not work as well in a world of flighty capital flows.

Some policymakers are exploring other tools. Ireland, for example, has tried to cool a housing boom by introducing rules that make it harder to extend mortgages. Canada and Hong Kong have used similar measures. But these homegrown measures have not been particularly effective at pricking domestic price bubbles when global liquidity was abundant. They are even less likely to work in reverse if the global tsunami of liquidity suddenly dries up.

Right now, there is no sign of this liquidity squeeze actually happening. Although the US Federal Reserve has raised rates six times in the past three years, this has notably not tightened financial conditions yet because policy at other central banks remains so loose. But the key point is this: if (or when) global financial conditions eventually become less benign, there will probably be downward movement in housing markets too, with some unexpected spillover effects.

Indeed, the most intriguing point in the IMF report is that “heightened synchronicity of house prices can signal a downside tail risk to real economic activity, especially when taking place in a buoyant credit environment”.

In plain English, this means that a correlated boom in global real estate markets can signal trouble ahead. We should keep a close eye on those estate agents’ reports in New York — as well as London or Hong Kong. The Big Apple’s jitters might yet be a canary in the coal-mine.

Why Reinvent the Monetary Wheel?

Robert Skidelsky

Close-up of money on keyboard

LONDON – Slumps have always been boom times for monetary experiments, and the economic collapse of 2008-2009 was no different. Underlying this recurrence is the instinctive feeling that economic calamities must have monetary causes, and therefore monetary remedies. There is either too much money, which causes inflation, or too little, which leads to depression. So the aim of monetary reformers –among whom are always a large number of quacks and cranks – has been to “keep money in order” and prevent its gyrations from disturbing the “real” economy of production and trade.

A further motive for monetary reform has been to head off more drastic surgery to the established order. If monetary fluctuations are the main cause of economic fluctuations, and if one can ensure the right quantity of money to support normal business activity, there will be no need for government interference. This has been the main teaching of economists wedded to free markets.

Few remember that quantitative easing (QE) marked the start of US President Franklin D. Roosevelt’s New Deal. With the US on the gold standard, the Treasury purchased gold to lift its price and thus augment the buying power of heavily indebted farmers. FDR’s gold-buying spree, described at the time by John Maynard Keynes as “the gold standard on the booze,” has been generally dismissed as ineffective. But, to counter the collapse of 2008, the monetarist chairman of the US Federal Reserve, Ben Bernanke, and other central bankers revived it in the form of massive purchases of government securities. “Unconventional monetary policy” – Keynes surely would have called it “central banking on the booze” – was the default recovery mechanism. Although most of the new money was hoarded or used for speculation, QE succeeded in fending off the call for expansionary fiscal policy.

Banking reform was also vigorously promoted in the wake of both slumps. In 1933, the US Glass-Steagall Act stopped commercial bank proprietors from speculating with their customers’ deposits. After 2009, the US Dodd-Frank legislation, the Vickers Report in the United Kingdom, and the European Union’s Liikanen report similarly aimed to make the banking system more “resilient” to “shocks.” Although the shocks to banking were the effect, not the cause, of shocks to the economy, this was ignored: Restore money and banking to order, the argument went, and shocks would stop.

This is the context in which the rise of cryptocurrencies – the latest explosion of monetary mania – should be understood. These “peer-to-peer electronic cash systems” aim to cure economic ills by monetary measures, but this time by bypassing banks altogether. Why do we need these diseased intermediaries, cryptocurrencies’ inventors ask, when we can create electronic storage and transaction systems, secure to their users and invisible to would-be controllers?

The technical details of the new cash-generation systems are difficult to grasp; their inspiration is not. The start of Bitcoin in January 2009 coincided with the banking crisis. Banks went bust or were rescued from insolvency by taxpayers. Understandably people wanted to find a way to keep their money and monetary transactions out of the reach of failing banks and voracious tax authorities. The new cryptocurrency offered a solution.

Many motives lay behind the appeal of Bitcoin, not least opportunities for speculation, drug trafficking, and money laundering. But behind the more sordid motives lay Friedrich Hayek’s dream of a free market in money. Hayek introduced his proposal for privately issued competitive currencies at the height of the inflationary surge of the mid-1970s, which he attributed to excessive credit creation by central banks. “If we want free enterprise…to survive,” he argued, “we have no choice but to replace the government currency monopoly and national currency systems by free competition.” Government could not be stopped from making money go bad, Hayek wrote. “Government has failed, must fail, and will continue to fail to supply good money.”

Bitcoin can be seen as an attempt to use new technology to stop money from going bad. For example, the total supply of bitcoins is fixed, as it would be – more or less – for a gold-backed currency. Paradoxically, although it is created out of nothing, it will offer no possibility of money “creation.” Bitcoin will be “mined” in diminishing quantities until it is exhausted in 2040, having delivered 21 million digital coins. In other words, there is no elasticity in the currency. This means that long before the mine is exhausted, the currency will run into the same problem as the gold standard: not providing enough money to support a growing economy and population. This would be exacerbated by any tendency to hoard bitcoins.

At the same time, cryptocurrencies provide no security against inflation. Hayek thought that a competitive currency system would eventually lead to a monopoly of the one that kept its value best. But we have, of course, been through exactly this process of weeding out inflationary currencies throughout history, and we ended up with central banks. It is amazing that anyone should consider it necessary to retrace these steps, only to end up in the same place.

The fact is that human societies have discovered no better way to keep the value of money roughly constant than by relying on central banks to exercise control over its issue and to act directly or indirectly on the volume of credit created by the commercial banking system. The Hayekian diagnosis of the last crisis – excessive creation of credit by the banks – is correct as far as it goes. But one has only to ask why this happened to understand that there are no mechanical answers to the question or solutions to the problem. It’s not quite true to say, “Look after the economy and money will look after itself.” But it is nearer the truth than the belief that monetary reform on its own will cure the problems of a sick economy.

Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

Poland Prepares for Contingencies

By Jacob L. Shapiro

The staring contest between Poland and the European Union continues. The issue now appears to be over the appropriate response to the U.S. termination of the Iran nuclear deal. The EU has remained a steadfast supporter of the deal, officially named the Joint Comprehensive Plan of Action. Earlier this month, Brussels committed to continuing implementation of the JCPOA and even launched a process to activate a never-before-used EU statute that would, in the European Commission’s words, “forbid EU persons from complying with U.S. extraterritorial sanctions.” The EU’s high representative for foreign affairs and security policy doubled down on this stance on May 21, responding directly to a strident speech by U.S. Secretary of State Mike Pompeo by insisting that, for the EU, there is “no alternative.” For once, it seemed the EU’s position was unambiguously unanimous.

The first sign of trouble came May 21 when Poland’s foreign minister, during a visit to Washington, said that although Poland was in favor of EU moves to protect member states from the ill effects of U.S. sanctions, it “understood U.S. concerns.” The following day, Poland’s prime minister went a step further, saying Poland would seek to serve as a mediator between the EU and the U.S. to resolve the impasse. This is something of an about-face for Polish foreign policy. After all, it was just last week that Poland went along with the European Commission’s decision to reactivate the so-called blocking statute designed to shield EU affiliates from the negative effects of sanctions. For the EU, Poland’s move is an ill-timed, high-profile crack in the bloc’s condemnation of the U.S. withdrawal from the JCPOA.

It also stands in contrast to Germany’s recent moves. Germany’s foreign minister met May 22 with U.S. officials to continue lobbying against new American anti-Iran sanctions. Meanwhile, German Chancellor Angela Merkel is traveling to China to talk trade and the Iran deal. Even without Germany’s criticism of the U.S. withdrawal from the deal, this would have been a difficult trip abroad for Merkel – China and Germany are increasingly competing with each other on the global market, even if they are united in their opposition to U.S. protectionism. But now Merkel must decide whether to align Germany with China on the Iran nuclear deal in the same week that China is landing strategic bombers on disputed islands in the South China Sea. The timing is coincidental, but in effect, Berlin is cozying up with Beijing while Warsaw is kowtowing to Washington.

That Poland would be more amenable to the U.S. on this issue – and for that matter, on any issue – fits with the general trend of the U.S.-Poland relationship. The U.S. has made significant military deployments in Poland and offered ironclad promises of support in the event of Russian aggression. And the U.S. represents one of Poland’s few viable options for reducing its economic dependence on German trade. After all, Poland remains a key cog in the German supply chain, and an economic break with Germany is a bigger threat to Poland than any Russian moves against Warsaw. It also costs Poland little to voice support for the U.S. on Iran. In doing so, Poland gets to flatter the U.S. while in practice still supporting EU moves to limit the threat of U.S. sanctions on the Continent.

Despite the low-cost and relatively meaningless implications of the Polish gesture, it will have ramifications for Poland’s already strained relationship with the EU. In March, Poland made important concessions to the EU when it modified controversial domestic judicial reforms. Just a few weeks after the changes were passed, however, the European Commission insisted that Poland had not gone far enough. Additional concessions will be difficult, as Poland’s foreign minister warned. Earlier this month, the lower house passed new measures limiting the ability of the Supreme Court to overturn past verdicts, but the changes must still be approved by the Senate and President Andrzej Duda – hardly a foregone conclusion considering Duda has already come under criticism from his own political party for vetoing key party projects and entertaining EU concessions in the first place.

Looming over all this are upcoming European budget negotiations – talks that the European Commission has used in the past to threaten Poland into submission. Though Poland has shown that it is willing to make some compromises ahead of the predictably contentious budgeting process, it has yet to see the same from the EU’s western heavyweights, Germany and France. At a time when Berlin and Paris are seeking to increase the EU’s authority, Poland is looking to be treated as a partner with an equal voice in making EU rules. If this cannot be achieved, Poland will pursue a more flexible relationship with Brussels, whereby the economic benefits of EU membership continue while leaving space for countries to pursue independent foreign policies more consistent with their national interests rather than with European unanimity.

It would be an exaggeration to describe this as a Polish break with the EU, as most Western media headlines have done. When it comes to the JCPOA, Poland is offering the U.S. words of support, but it is still backing the EU when it comes to actions. But there is indeed a serious rift between Poland on the one hand and Germany and France on the other when it comes to dealing with the United States. Just as Germany and France are looking to reimagine the EU to serve their own national interests, in part by strengthening the bloc and pushing back against the U.S., Poland is seeking a more independent foreign policy, one whose ultimate goal is protecting Warsaw’s, not Brussels’, interests. Still, it is not yet clear whether Poland’s interests are best served by breaking with the EU, just that Poland is preparing for the contingency.