In times of uncertainty, Erik Fossing Nielsen, Global Chief Economist of Unicredit, is for me once again an example of clarity.
Happy Sunday –
– if that’s the right greeting today, the first anniversary of the multiple terror attacks in Paris. It seems a good time to think of the victims and their families and friends, and to reflect on the challenges facing our Western democracies.
Not entirely unrelated, Donald Trump won the US election on Tuesday, and the world went crazy with stories of how wrong the polls had been about this “populist wave” sweeping America, and how – in extension of Brexit – Europe is about to fall to nationalism and populism as well.
Markets reacted broadly as expected (risk-off) – for the grand total of about five hours. Then Trump delivered his victory speech (in which the campaign’s mostly kindergarten language was replaced by standard presidential victory stuff), people concluded that Trump will be a relatively traditional GOP president, Carl Icahn announced that he had walked out of the victory party to buy a billion dollars worth of US stocks, and equities rallied, the long end of the treasury curve sold off dramatically, the dollar got stronger and EM weakness continued.
There are certainly reasons to think that the Trump presidency will be less bizarre than what he outlined during the campaign, but I’m amazed by the general comfort expressed in markets by what could become the biggest shift in American domestic and foreign policy since the Second World War, and – maybe even more importantly – steered by a reality TV star, who has never held public office, never has been involved in public policy, who has a somewhat questionable business record (with due respect to all the money he has made), facing tens of legal actions against him, and with a rather erratic behavior and word choice the moment he gets away from his handlers.
Maybe it’ll all end well, but at this stage, optimism must depend more on belief than on knowledge or analysis. So let me bookend today’s note with pieces of wisdom from two of my heroes from the creative world, hoping they’ll provide some guidance:
In 2000, The Simpsons had a now famous episode called “Bart to the future.” In this prophecy, Simpsons writer Dan Greaney predicted that Donald Trump would be president one day (he has this week explained that he was just trying to come up with the most absurd idea possible.) The episode deals with the immediate aftermath of the Trump presidency, when Lisa Simpson has been elected president. As she settles in to the Oval Office, she complains that she has “inherited quite a budget crunch from President Trump.”
Did Greaney maybe see the future back then: Trump presidency, irresponsible budget expansion, and a woman to replace him to sort out his mess?
- I’ll first briefly argue why you don’t need to worry that the US “populist wave” will wash ashore in Europe.
- I’ll then outline why you do need to worry about Trump, maybe not for the very short term (although not even sure about that), but for the medium term – and for the democratic world more broadly.
1. Don’t worry about Europe.
I’m going to make two key points in this section: First, in spite of the outcome of the election, the US is not experiencing a “populist wave”, and second, European democracies are designed (maybe by luck) in a way that prevents an extremist (or a TV star with no coherent policy vision) from gaining measurable power.
First, forget about the headlines: There is no “populist wave” in America. Yes, Trump won against the odds, but – as I noted last Sunday – going into the election, the serious aggregators of polls in the US had his chances of winning at about one third, (a number that changed quite a bit during the last weeks as the FBI announced new concerns about Clinton’s emails, and then – not really.) Stating the obvious: A one third probability comes out every … three … times. So it was not that surprising, after all.
Turning to the actual outcome, Trump’s victory was not a big nationalist or anti-establishment movement rolling across the US – but Trump may choose to interpret it that way and act accordingly. (I see some similarity here with the Brexit vote and Theresa May’s interpretation of it, as laid out in Birmingham.)
While Trump won the election by gaining more electoral college votes than Hillary Clinton, he still lost the popular vote – as have the Republicans in seven out of the last eight presidential elections. On the latest numbers, Clinton won about 400,000 more votes than Trump, and the estimate (when mailed-in votes are all counted) is that she’ll end up having beaten Trump by about 2% in terms of actual votes. Trump got fewer votes than Romney did in 2012, and even less than McCain in 2008. So, I fail to see the “wave” of populism here.
Also, in spite of the fact that US presidential elections increasingly resemble a TV reality show, American democracy continues to be characterized by a shocking decree of apathy in the population. Even with all the hype about Trump getting new voters out, only 55% of eligible voters actually voted on Tuesday. In terms of numbers, Trump’s 59 million votes represent only about 27% of the 219 million eligible voters, who could have gone to express their protest against the establishment in hope for the “I’m Your Man” who claimed to be able to fix it all! And those 27% surely include a large number of traditional “establishment” Republicans, who are far from being populists.
So is that it? Some unknown fraction of 27% of eligible voters is all the anti-establishment movement could muster? Not much of a wave in my opinion!
But given the somewhat peculiar design of American democracy (designed in 1787 and never revised), marred by the two most unpopular candidates in history, that’s what it took to propel a TV star to power.
Second, such a rise of a completely inexperienced populist is very unlikely to be repeated in Europe for at least three reasons:
(i) While there is good evidence that some European countries include a bigger share of extreme-leaning voters than, say, maybe the 14% in the US (I’m generously guessing that half the Trump votes were extreme protest votes), any fraction of extremists below 30%-40% won’t come to significant power in Europe because of our different electoral systems.
Remember, there is no case of extreme politicians hijacking existing parties in Europe, like Trump master-minded his hostile take-over of the GOP in the US, so their only realistic way to power is via the establishment of a new party – which is time consuming and generally complicated.
Of course, new extreme parties have been formed in most European countries, and they have made an impact. Mainstream parties have adjusted their policies somewhat, particularly on immigration, to stem the rise of these new parties. You can think of this as an unfortunately slippery slope towards less good policies by the mainstream in power, and/or you can think of it as a useful safety valve in the system. In one extreme case (the UK), the newcomers (Ukip) didn’t gain power, but eroded the historically weak spine when it comes to EU policies of an existing party (the Tories). But there is no similar picture anywhere else in Europe.
Getting to power via a new party requires a large share of the public vote. Even in France, where Marine Le Pen is expected to make the second round of the presidential elections next year, opinion polls show that it’ll take an exceptionally weak alternative candidate for her to win the final prize. The most recent regional elections may be the best guide: After the first round, Le Front Nationale was leading in half the French regions, but mainstream parties then cooperated in the critical regions, and the Front failed to win a single one of them, including where Marine Le Pen was the candidate.
And even if Le Pen were to win the presidency (terrible as that would be), she would still have to rely on parliament to an entirely different decree than Trump has to deal with Congress, where “his” party has a majority. I remind you that in spite of all the huffing and puffing about the Front, they have just two members of parliament. There is a very long way to go for them to win serious power in France!
But much of the media love contagion story. Here is what has driven me completely mad: Even otherwise well informed media have drawn parallels between Trump (after Brexit) and the upcoming Italian referendum. As you hopefully know, the Italian referendum is about simplifying governance and has absolutely nothing to do with populism. I hope Renzi wins the referendum because it’ll then become easier to get reforms through, but if he doesn’t, it’ll be “more of the same”, rather than a sign of any “populist wave” (certainly, the several respected Italians who, for various reasons, say they’ll vote “no”, would surely object to being thought of as part of a populist wave.)
(ii) Freewheeling US television, where news and views are increasingly being mixed in programs, with no regulatory oversight, surely played a role in the rise of Donald Trump. No European country suffers this degree of unaccountability in television with comparable politically bias at several TV stations. (Yes, Trump’s use of social media also helped, but here I’m sure European politicians are learning the lesson real fast.)
(iii) The frequently suggested “inspiration” from Trump’s victory to Europe’s nationalists is not a concern for me, at all. Plain and simple, for that channel to work, the nationalist experiment in Trump’s US (or in the UK, on its way out of the EU) will need to show reasonable signs of economic and political success to become models for European nationalists. Personally, I have no doubt about the effects on growth and income distribution of nationalistic policies, so no worries here. (Immigration is a more complex issue, which mainstream European politicians will need to address – and for now it looks like they are doing so with a good degree of success.)
2. The worries about Trump’s America.
Importantly, I do not intend to make any projection of the future here; the uncertainties are simply too great at this stage. Instead, I’ll highlight what I like and what I don’t like from what I have seen so far with some suggestions of what I’ll look out for: in coming months:
First, in terms of who’ll actually run things, we’ll need to wait and see the key government appointments, both to key departments, but also to the White House. The transition team got off to a rocky start, with VP-elect Pence quickly replacing Christie as chairman – a change reportedly masterminded by Jared Kushner (Trump’s son-in-law), whose family has a long running conflict with Christie.
I’m not sure if Pence’s elevation in the transition team is good or bad news because both are experienced lawmakers (with a broadly equally conservative political tilt.) Maybe more importantly is the position of the Trump dynasty. I was stunned to see that all three of Trump’s adult children, as well as son-in-law Kushner, are on the transition team. Such family involvement in key appointments is unheard of in the US, and – frankly – resembles more family dynasties in developing countries than that of a mature democracy.
Second, on economic policies, it seems relatively clear that we’ll get some fiscal expansion, including both tax cuts (mostly for firms) and a spending boost for infrastructure and defense. The announced order of magnitude is an eye-watering USD 1 trillion, but Congressional leaders, including Mitch McConnell, have warned against too much deficit spending.
I don’t know what share of his fantastic spending plans Trump will get through Congress, but I would be surprised if it’s not a decent chunk. Standing up to a new president, who won against the odds, and helped deliver a majority in Congress, is not straight forward, I suppose. But to what degree Trump will fight for a big number, or “cut a deal” I don’t know. (I just can’t wait to hear the Gobbledigook from Paul Ryan and other deficit hawks when they explain why they now support a larger deficit.)
This will increase the probability of the US extending its growth run through 2017 and into 2018 – but fuelling the economy at this late in the cycle with debt-financed stimulus will significantly increase the probability of a hard landing in 2-3 years.
Third, there is a high probability of liberalization, particularly of environmental standards, to encourage energy production, but possibly also for the financial sector. That’s all good for (at least short-term) growth, but it also tends to lead to further concentration of industries in these sectors, an issue which is increasingly weighing on US competitiveness, and fuelling profits over wage growth.
Globally, I’m more worried because of the measurable probability that we are facing the end of US leadership. While there have been some serious misfiring in US foreign policies in the past, and Continental Europe has been perfectly capable of leading it’s own foreign policies, sometimes to better effect than what comes out of Washington with usual support from London (e.g. the Ost-Politik in the 1970-80s, the opposition to the Iraq war, the Iran nuclear agreement and to some extent the Minsk agreement), I don’t think there is any doubt that the democratic world would benefit from continued US leadership. But the prospects are not good.
On trade, I think it’s a given now that TPP won’t be ratified, TTIP ends right here, and NAFTA will probably see some (minor) amendments. Will the US really walk away from the Paris climate deal? I just don’t know. Even China is warning against this prospect. And will Trump really try to amend or cancel the Iran agreement (which is a multilateral – not bilateral – agreement)? Maybe. And Russia/Ukraine? Trump has a peculiar relationship with Russia, which I suspect goes well beyond what is publicly known. We’ll see – but Europe will (wisely) renew the sanctions in December.
Here is my point: A big fiscal boost will help the US economy for a year or two, and facilitate normalization of interest rates by the Fed. This lends support to a bullish view of equities (particularly in energy and construction) – at least so long as people don’t start to worry too much about the expansion of public debt (presently at 114% of GDP!) or the increasing probability of a hard landing.
This will push the treasury curve upwards, probably with further steepening to come. The dollar may well remain strong in this scenario, also because of expected tax-related corporate profit repatriations.
But the steam won’t last. When exactly the roof comes down, I don’t know. It’ll depend largely on the “standing” of the president, the route he takes on international trade, as well as on the type of fiscal measures.
The bigger questions, therefore, are:
(i) How will Trump fare on the policy front while fighting an estimated 50-70 existing private legal cases? The US has never had an incoming president so challenged in court (he’ll next appear in court in early January before taking office, but this will occupy his time for months or years to come, unless he manages to settle – assuming he can afford it.)
(ii) How long he’ll remain interested in policy making, and might he zoom out when he realizes that dealing with even a GOP-dominated Congress is somewhat different (and surely less enjoyable for a man with his temperament) from dealing with sub-contractors on a building site?
(iii) How will he react if his relationships with key Russians are indeed more complex than known, and it is made public? Key commentators have suggested that the Russian connection could be the real reason why he refused to make his tax returns public.
(iv) How will he respond to his core voters in the Mid-West (and the rust belt) when they do not see the promised results from his campaign? He has already run into problems on the fiscal stimulus plans, he has said – after meeting Obama – that he no longer wants to repeal ObamaCare, just fix some parts of it, and key advisors have said that there’ll be no wall on the Mexican border.
So many questions and issues. Respected commentators, including David Brooks, traditionally a conservative, have suggested that Trump might resign or be impeached within a year. No serious person has ever before suggested that about a president-elect.
Trump may embrace a big part of the traditional GOP, but he will not be a “traditional president” – and I don’t mean that positively in terms of market stability – volatility is likely to be the name of the game for some time.
So, struggling a bit to put it all together, let me return to how the world of art often proves visionary. My beloved Leonard Cohen died on Monday, the day before we experienced what he might have had in mind when he – in 1988 – published the following on his “I’m Your Man” album:
Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That’s how it goes
But don’t despair and certainly don’t give up. Just four years later (which happens to be the length of a normal presidential term!) in 1992, Leonard Cohen enriched us with this wonderful encouragement and observation (from Anthem on The Future album):
Ring the bells that still can ring
Forget your perfect offering
There is a crack in everything
That’s how the light gets in.
So, on that note, I’ll walk out and enjoy the lovely autumn weather here in Chiswick, thinking about the many affected by the terror a year ago – and waiting for the cracks in today’s set-up to show, because they will. Light will get in…
Thank you Erik for another stimulating and thought provoking piece.