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TRUMP 2.0

Carmignac’s Note

Author(s)
Frédéric Leroux
Published on
November 21, 2024
Read time
5 minute(s) read

European media outlets generally portrayed Donald Trump in a very negative light
during the election campaign. This Trump bashing has fuelled a lot of anxiety.
However, if Trump does pose a threat, it’s mainly with regard to the economy.
Instead of shaking our heads at his outrageous statements and behaviour, let’s
look back on his pragmatic approach to the economy during his first term and
from his current push to make the US government more efficient. Nothing
ventured, nothing gained.

Trump’s almost triumphal return to the White House – which may have surprised
pollsters, but not bookmakers – is seen as a sign of major changes to come that
will impact the economy, geopolitics, and society. Even before taking office,
Trump has revealed the names of most of his cabinet members, who generally share
his hardline view. And with both the Senate and House of Representatives also in
the hands of the Republican Party, he will have considerable leeway to implement
his platform, which should have significant consequences for the economy.

What is Trump’s platform?

What is Trump’s platform?

Economic and financial consequences

Caveat emptor


WHAT IS TRUMP’S PLATFORM?

As far as the economy is concerned, Trump was elected on a misunderstanding. On
the one hand, the Democrats lost on inflation and the feeling among US voters
that their standard of living has declined. But inflation was actually a global
phenomenon, and US households were better able to absorb it than those elsewhere
in the world thanks to substantial wage increases in the country. And on the
other, Trump’s economic policy will pave the way to future inflation.

Trump’s economic platform is based on five measures that will initially result
in faster economic growth and higher consumer prices. His plans to curb
immigration should be quick to implement. That will soon push up wages and
eventually affect all segments of the economy. His intention to cut taxes, and
especially corporate taxes, coupled with large-scale deregulation, will bolster
sentiment among business leaders and consumers. We’re already seeing signs of
this improved sentiment, and it should lead to greater capital investment and
consumer spending. Trump’s plans to increase tariffs will similarly lift
consumer prices by raising the cost of imports and discouraging domestic
manufacturers from lowering their prices. As far as Trump’s push to “cut the fat
out” of the US government is concerned, it could lead to a more efficient US
economy and a marked decrease in the cost of administration. But we’d be overly
optimistic to expect to see the effects anytime soon, even if Elon Musk is the
one charting the course. Under “Trumponomics”, the tax cuts would be funded by
the higher tariffs, preventing a further expansion in the fiscal deficit and the
need for additional financing. But any increase in tariffs – whether actually
implemented or used as a negotiating tactic – would go into effect only after
the tax cuts (if at all). We can therefore be sure that the initial consequences
of Trump’s economic policy will be faster economic growth, higher inflation, and
a worsening of America’s public finances.

On the geopolitical front, Trump won’t be able to resist an isolationist stance.
His penchant for isolationism led to a rather peaceful first term. He decided to
withdraw US troops from Afghanistan, entered into no new conflicts (apart from a
successful surgical strike against Daesh), and took steps to ease relations with
North Korea. That said, Trump’s isolationism should be put into perspective:
instead of refusing to defend America’s “allies”, he’ll probably ask them to
pick up some of the bill for US military protection. He’s regularly stated this
is his aim, and if he’s successful, the payments (along with the customs duties
actually implemented) would redress the country’s imbalances through a new Pax
Americana that is more mercantile than the previous one.

From a more short-term perspective, Trump could attempt to bring a quick end to
the war in Ukraine. Or he could decide to provide more unconditional support to
Israel than that provided under the Biden administration, especially in the
event of a more open conflict with Iran. In the first case, energy prices would
gradually decline, which would be good news for Europe. In the second, energy
prices could experience abrupt spikes. The energy price volatility that would
result from major developments on either front would have a smaller impact in
the US than elsewhere, as Trump will likely promote domestic fossil fuel
production and abandon environmental conservation efforts.

On societal issues, Trump’s intentions are clear. The Democrats may have lost
because of inflation, but Trump won due to his fight against the woke culture.
He has promised to introduce a law that would recognise only two genders in the
US, and any affirmative action measures will be frowned upon. We can also expect
to see an increase in tensions at American universities.


ECONOMIC AND FINANCIAL CONSEQUENCES

It’s clear what the initial economic consequences of Trump’s platform will be.
American exceptionalism (economic growth at any cost) will continue, fuelling
inflationary pressure in the process. China seems better prepared than Europe
for the economic battle that will ensue, but sooner or later, Beijing will have
to lend a hand to Chinese consumers, who are being battered by the country’s
ongoing property sector slump. Beijing will also have to direct its attention
towards its new friends in the Global South, to be able to sell to them what
countries in the North are about to tax heavily. While the US will see renewed
inflation, countries in the Global South will benefit from an influx of low-cost
Chinese imports. Europe will soon have to make some tough decisions – although
it’s not yet clear who will take and implement those decisions. Angelic Europe
will find itself standing alone and defenceless against the belligerent Chinese
and US. In the near term, the region will need at the very least an attuned
central bank.

Turning to the outlook for financial markets, and even though modesty is called
for when making forecasts, it’s fairly safe to say that the US dollar will
continue to appreciate against other main currencies, that the US Federal
Reserve will slow the pace of and then stop its rate cuts, and that both bond
yields and inflation expectations will steadily rise. The stock prices of
companies and sectors that are best poised to withstand the stronger dollar and
higher interest rates will continue to climb until the negative impact of the
increase in the discount rate exceeds the positive impact of the continued
increase in earnings on the valuation of the shares, as occurred in 2022. The
next US recession will probably be triggered by a drop in the value of financial
assets – leading to a negative wealth effect – prompted by excessively high
interest rates. Only then can we expect to see financial markets in the rest of
the world take the upper hand on markets in the US, helped by a weaker
greenback. But we’re not there yet.


CAVEAT EMPTOR

With Trump, more so than with any other major political leader, we need to make
a clear distinction between what he says – which is generally akin to an opening
bid – and what he actually does. Trump works on instinct and doesn’t follow any
particular ideology, which makes him particularly agile and adaptable. In these
uncertain times, perhaps that is his main strength, along with his exceptional
resilience that makes him appear unwavering. His volatility is unsettling but it
is consistent with the world today. We therefore should not be surprised if
there are in fact no tax cuts, no new customs duties, no deportations of illegal
immigrants, and no dramatic decreases in immigration, since all those factors
are inflationary and US consumers don’t want inflation. Trump’s instinct could
very well lead to such an about-face from his platform.

In that case, it would be his friend Elon – another mercurial character – who
would outline the main features of the Trump administration’s economic policy:
less government, fewer regulations, less bureaucracy, and less needless
spending, along with faster procedures, more innovation, more creativity, and
greater efficiency. In short, more economic growth and less inflation. That
would be Nirvana for financial markets in the US but total disarray for those
elsewhere. Sit tight and stay tuned!

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