On November 9, 2016, after one of the most astonishing electoral outcomes of our lifetime, we wrote “The Day After.” That piece dealt with a couple of profound ways in which, to us anyway, American politics had changed, and one mega-trend that clearly had driven that 2016 outcome.
Well, here we are again, and the people have spoken again. Donald Trump is to become the 47th President of the United States and appears to have brought a Republican Congress along with him. The latter is key since enacting the Trump economic agenda will require a great deal of legislative help. And this time, as opposed to that earlier, broad “what lessons did we learn?” piece, the focus this time will be more narrow, i.e., what does that economic agenda, as enunciated on the campaign trail, appear to be? To us, that agenda has three pillars:
1) Tariffs
Even since Lord Keynes fist picked up paper and pencil, almost every world leader and serious economist has argued for free trade, which supposedly benefits everybody in the long run. Unfortunately, Keynes went on to say that, in the long run, we’re all d_ _ d. Globalization and free trade benefit many; but they victimize many others and succeed only when everyone is playing by the same rules. Referring to the old Soviet Union, an American diplomat once said, “When they come to the table, the Russian attitude is, what’s mine is mine and what’s yours is negotiable.” The Chinese appear to have adopted a similar attitude over the years. Donald Trump has vowed to impose a 60% tariff on all Chinese goods and a 10-20% tariff on the goods of others. Tariffs at these levels probably will not happen, however, we can expect a more careful look at our trade agreements and more tariffs as targeted weapons.
2) Lower Taxes
Lowering taxes was Donald Trump’s Job #1 in 2017. The result was lower brackets, a higher standard deduction, a larger child tax credit, a 20% deduction for some closely held businesses, and a larger estate tax exemption. Since the bulk of these tax cuts are set to expire at the end of 2025, a key question: Would they be allowed to expire? That question now has been answered, and any thoughts of raising the corporate tax rate from 21% to 25% or even 28% also are off the table. Other campaign trail ideas
involving the elimination of taxes on tips and Social Security benefits probably are as likely as 60% across-the-board Chinese tariffs, but you get the idea: According to the Donald Trump/GOP orthodoxy, economic growth causes a lot of ills, and lower taxes foster economic growth.
3) Regulatory Reform
The days of unbridled, laissez-faire Capitalism are not coming back. Unchecked regulatory power is a different kind of problem at the other end of the spectrum, however, and the search for a happy medium also is part of the Trump/GOP orthodoxy. You can expect the banks and energy companies to be among the beneficiaries of a careful review of governmental rules and regulations and the dismantling of many. A more benign antitrust environment also falls under this heading. The days of unbridled, laissez-faire Capitalism are gone forever, but here and elsewhere, we can expect more of an emphasis on healthy economic growth and less on other agendas.
Clearly, as you an see, we can expect the Trump economic team to be more pro-growth and pro-American business. The alternative in the team’s view is European-style Socialism with business high on the enemies list. Such a philosophy, of course, has drawbacks. As Mario Draghi, former head of the European Central Bank, recently reported, no listed European company valued at more than 100 billion euros ($111 billion) has been created in the last 50 years. That’s 5-0 years.
If you don’t mind, one more observation…
It’s been 76 years since “Dewey Defeats Truman” and 42 years since Regan/Carter, the election “too close to call” The science of polling and the overall expertise of pollsters supposedly have come a long way. Really? The sophistication of the statistics involved and the computing power may have come a long way; but how does one account for a respondent who tells you what you want to hear, or a large, silent group of statistical outliers from the other side of the political aisle? Polling’s shortcomings have been on full display in three recent, important events: the 2016 U.S. election, the 2016 Brexit vote, and last Tuesday’s election. Such events, it turns out, are not unlike the stock market, the behavior of interest rates, etc. Largely unforecastable.
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What to do now? You know us. We are not inclined to let the largely unforecastable alter our investment philosophies and policies. That which is “certain’ is a very small subset of the things constantly coming at us and trying to influence our behavior. We expect the markets to be volatile for a while, but ultimately, the sorting out process will come to an end. In the meantime and thereafter, stay diversified and stay the course.