Trump and new global macroeconomic paradigm

Dubai - There are parallels between the US president-elect and Ronald Reagan in the 1980s

As a student of financial market cycles, I am amazed by the eerie parallels between Donald Trump's promises and the macroeconomic policies of Ronald Reagan in the early 1980's. President Reagan slashed corporate taxes, raised defense spending, imposed protectionist tariffs on Japan (China was then a post Maoist state with a "peasant economy worth less than $100 billion!) and rolled back regulations in critical industries.
The result was a spectacular rally in the US dollar and the bond market meltdown as global capital rushed to the US to take advantage of, in German Chancellor Helmut Schmidt's words, the "highest interest rates since Jesus Christ". Yet Reagan took office amid a global inflation nightmare, which necessitates 20 per cent Treasury bill interest rates by Fed Chairman Paul Volcker, an epic monetary tightening that gutted the US farm belt, global shipping, Latin American sovereign borrowers and global crude oil/gold prices. As a teenage student at Wharton and the Deira Gold Souk, I remember fortunes were made and lost by Dubai merchants in the New York gold and oil futures markets.
Donald Trump is no Reagan 2.0 yet his election has also led to a surge in the US dollar and 48 trillion dollar losses in the world bond market. The ten year US Treasury note was 1.75 per cent on the eve of the election - and 2.35 per cent two weeks after November 8. The Republican Party is split between the all right/Tea Party and fiscal hawks led by Speaker Paul Ryan. China is the second largest economy in the world. The Cold War is over. The US economy is at full employment and wage inflation is above the Federal Reserve's two per cent target. Trump's economic populism can well plunge the global economy into its worst crisis since Lehman's failure in 2008.
While Trump's tax cuts and defense/infrastructure spending could add one per cent to the GDP growth rate, and cause the US Federal budget deficit to double from 3.2 per cent to 6.5 per cent and ignite inflation in an economy that is already at full employment. The Federal Reserve will be forced to react. The result? A much higher US dollar and a steep hike in the world's cost of financing that will be a disaster for the bond and property markets. A Fed rate hike in December is certain. So are at least four rate hikes in 2017. This was the reason gold plunged $130 an ounce just after the election while copper rose 18 per cent or 1,200 a metric tonne on the London Metal Exchange, its best week in 30 years. Aggressive Fed rate hikes are a disaster for gold but a sharp rise in the US industrial growth rate is nirvana for copper, the red metal! This macro scenario is a disaster for the owners of bonds and property financed with leverage, as is so common in the UAE. A protectionist backlash against global trade, a pillar of Trump's policy platform and his Rust Belt white working class support base, is inevitable as the US dollar surges in the world currency market.
If Trump sacks Janet Yellen at the Federal Reserve or ignites a trade war with China, all bets are off. The Superdollar and sky high interest rates would mean the world faces its first global recession since 2009. The sell off in technology, that most global and China centric of sectors, is an ill omen for 2017 - as is the meltdown in emerging markets.
There are clear winners and losers from Trump's win. Higher growth prospects led to a 8.5 per cent rise in US industrial shares in the week after the election. The rollback of Dodd Frank and a steepening of the US Treasury yield curve meant a 12 per cent rise in bank and life insurer shares on Wall Street. The end of Hilary Clinton's promised drug price controls meant a seven per cent surge in healthcare/biotech shares. The losers? Utilities, real estate shares and high yield telecoms that suffer when interest rates rise.
The US stock market has priced in a pragmatic Trump supported by a Republican Congress that can well enact tax reform and deregulation. The bond market meltdown assumes a higher inflation risk premium in 10-year US Treasury note as well as a rise in Federal government borrowing and Uncle Sam budget deficits. It also assumes a perma-hawk US central bank at the limits of its dual mandate.
The US stock market has been a money making feast since Trump's election. Yet America has just elected the most unpredictable, volatile President in its modern history. Riots and protests have erupted across the US International relations are tense and geopolitical black swans can well unnerve financial markets at any time Caveat emptor!
The writer is a global equities strategist and fund manager.