Perspectives – Are you not entertained!

The new US administration has certainly hit the ground running. It has come as a surprise to much of the media and the commentariat that Trump is following through on so many of his campaign promises, and so early. We have been expecting an aggressive and nationalistic policy approach to trade and economic policy under the new administration, hence we are not overly surprised at the stance, although perhaps taken aback at the pace.

Are you not entertained?

The title references Maximus’ line from Gladiator where, having been maltreated and abused by Commodus for many years finds himself in the arena in Rome. In our view, there is a clear parallel here, where Trump tried to pursue his America first policy in his first term, only to be stymied by the state agencies, poor appointments and elements of his own party. On this occasion, he seems determined to sidestep these forces by driving so hard and fast they are unable to organise opposition.

The specific actions on trade policy thus far are easy to misunderstand. These early moves are more part of his policy of securing the border from illegal immigrants and drug smugglers rather than part of his trade policy. The trade policy actions will come later. What it does prove is that even large trading partners will have to cave to the US’s demands, as most have far more to lose than to gain.

From a financial market point of view the key issues will be how the tariff negotiations play out over time and the deregulation of US industry.

The tariff issue is easily misunderstood. It is not remotely possible for US manufacturing to replace more than a tiny fraction of the goods China and the world exports to the US. What the US is attempting, is to secure a much greater share of the value added from these goods, either in the form of tariffs, taxation or corporate profit.

To take a simplified example, iPhones are designed in the US and built in China. In the current system, the bulk of the value add from this system arises in Ireland where the intellectual property is held. This is where the profit is booked, and the tax ‘paid’. This is clearly an artificial construct. iPhones are obviously a US product where the value is created in California and the low value process of putting them together takes place in China. The US wants these profits booked in at home. It doesn’t really expect much, if any of the low value-added processes to move back to the US, although some will. It wants the cash and profits to return to the US where they really arise. This is an extreme example of what has been going on in many industries, companies have been taking advantage of a generous tax and tariff regime. A reordering could make a material difference to the US government finances. At the margin, it may also benefit wages and jobs in the US, at the expense of those in other developed markets.

The other large issue is deregulation. From a financial market point of view, banking deregulation. It is notable that the leaders of the largest banks were quick to get behind Trump’s campaign. Since the GFC, banking regulation has been highly restrictive compared to most of history. Deregulation would have a material impact on the availability of loans and importantly liquidity. Modern economies are driven by debt creation, in particular by commercial banks. An improvement in commercial bank confidence and an unleashing of the ability to lend would have a material impact on both the US economy and importantly, liquidity and financial asset prices.

Trump appears determined to execute his agenda at a pace that confounds the ability of his opponents to organise any defence. In our view the agenda is clear and the impact similarly so. It is a world of economic nationalism, the great game is in play and those with the strongest hand and a willingness to play it, will come out ahead. In this environment, we clearly need to be alert to the risks, there will surely be many bumps on this path and further surprises, like those we have already seen. Given that, it pays to focus on the medium-term trends and the agenda, rather than get enmired in immediate policy action. It is certainly going to be an entertaining period.

David Jane

Premier Miton Macro Thematic Multi Asset Team