Economic fallout of “Trumpism” and portfolio positioning
By Brandon Zietsman - February 8, 2017
We don’t really know what’ Trumpism’ means in any practical sense. The utterances of this administration (whether in the form of early morning tweets, Sean Spicer’s flip-flopping press briefings or Kelly Anne Conway’s fact-fumbling interviews) often suggest contradictory views. However, the actions in the form of executive orders and Steven Bannon’s influential role in the administration give us a clearer view of intent.
Then there’s the problem of guessing which policies will ultimately be enforceable. Ranged against the administration is a broad swathe of increasingly vociferous public and global opinion and institutional checks on executive power. These ranks include the 97 tech firms that have signed a court brief opposing Trump’s immigration policy – the same firms that pay the taxes required to fund infrastructure projects. There is a very a reasonable likelihood that campaign promises on immigration, extreme vetting and torture may fail constitutional and legal hurdles. It’s not clear that fiscal hawks in congress will support the ‘Wall’, especially since Mexico won’t be paying for it. Whilst the campaign to cut regulatory red tape and tax code complexity is laudable (and long overdue), congress is dominated by proponents of reduced spending and smaller government and is unlikely to support unfunded infrastructure projects that will raise the debt ceiling.
If Trump succeeds on getting an expansionary fiscal policy through congress, this will ignite inflationary fears, which may impact the timing, frequency and extent of rate hikes. The initial impact would be a strengthening dollar, which would boost exporters selling goods to the US. This may prove to be transient. A flood of cheap imports into the US is exactly what the Trump administration has set out to curb. Countries exporting to the US may then face a double whammy in the face of US protectionism. As US markets becoming increasingly inaccessible, I would expect current accounts to deteriorate and weakening currencies would hit the cost of servicing their US-denominated debt. Capital flows may reverse and, for the first time in decades, capital flows to emerging markets might turn negative, further compounding currency weakness and debt serviceability.
In the longer run, however, as the impact of US rate hikes are absorbed, higher US inflation would ultimately cause the dollar to weaken against global currencies based on inflation differentials – unless they too experience inflation and rising rates. A number of the Trump administration policies raise the spectre of a global currency war where nobody wins. The problem is that protectionism creates national pressure cookers. Anything that stifles or artificially impairs supply and demand means that imbalances become more isolated rather than dispersed. Hence, individual countries or regions might experience strong inflationary pressures whilst, for example, commodity exporting countries might experience deflation.
What does this mean from a portfolio and asset allocation perspective? Simply, multiple paths and scenarios exist depending largely on events that are impossible to forecast. Many asset managers may aggressively position portfolios based on their shorter term views, which may arbitrarily prove to be right or wrong – statistically, some will get it spectacularly “right” and vice versa. Intelligent diversification and a longer term outlook remains the appropriate strategy in times of extreme uncertainty and it is not a time for gambling on outcomes. When the shape of the risks become clearer, risk-based tilts may become more obvious.