We have seen many political developments since Donald Trump’s inauguration day which have demonstrated a departure from official protocol and generally accepted ‘presidential behaviour’.
Most of these deviations, whether tweets, disrespectful media comments, or outspoken and offensive statements to other leaders, have been mocked and this has ultimately encouraged micro-analysis of his every move.
Nevertheless, he has done one thing which has broken with recent political habits: he has stuck to his campaign pledges made as candidate Trump and set off at breakneck speed.
If we look through all the media scrutiny and obsession for mishaps and opportunities for gossip, which is an irrelevance for investors, Trump has been true to his word and his supporting voters must feel pleased with what he is doing so far. This is, of course, based on the assumption that this is why they voted for him and not just in protest against Hillary Clinton.
This helps with trying to see through the fog of the future because it makes the outlook more predictable. We can be pretty certain that he will make a big splash very soon with regard to his tax policies and this has been supporting the markets.
Exactly what it will do to the Federal Reserve's balance sheet is a major side issue and whether he will get this through Congress, is another, but there is little doubt that his intention remains and he will push as hard as he can to implement it.
We have seen a sign of this determination with regard to the travel ban and his willingness to take on the courts. His arguments with regard to blaming any future attack on their decision to block does not stand up to legal scrutiny, but this simplistic rhetoric is what has resonated with the electorate and is a major reason why he is in power.
Political arrogance from those in power is the nub of the rise of the populist vote and Trump does, at least for the time being, appear to be respecting why he won the election and is determined to follow through with his pledges to his voters.
Performance of S&P 500 since presidential election
Source: FE Analytics
However, the one thing that did strike me after this weekend’s visit from Japanese prime minister Abe was the lack of any media fodder to gossip about. Even the much predicted round of golf was screened from the media – probably to prevent reporting of his triple bogey on the eighth hole or such like. The major story was the 19 second handshake; pretty thin pickings really.
We know nothing about the trade talks and this is really important as Trump has previously put Japan in the basket of being a currency manipulator and US job destroyer leading to perceived unfair trade imports. He has placed Japan firmly in the tariff crosshairs along with China, Germany, Mexico and any other country that contributes to the US trade deficit. Reassuringly there were no social media posts on trading but that implies no change from either side.
Without exception, the biggest unknown of this presidency is how true to his word Trump will be with regard to his pledges on trade protectionism.
If he backtracks, then the voters of the so-called ‘rust belt’ will be in uproar as they are expecting their old jobs back, whether that is building cars or mining coal.
Most economists agree that any form of trade tariff is bad for mutual prosperity and flies in the face of modern free-market economics which has existed for the last 40 years.
Tariffs make goods and services more expensive for the end consumer and lead to an inefficient allocation of capital and sub-optimal cost bases. It may preserve jobs or reintroduce previously redundant ones in the short-term but in the long run, turnover and profits fall as output becomes uncompetitive and prices rise. Those same preserved jobs ultimately have to go anyway as their employer struggles to compete and remain profitable.
Usefully, we have historical precedent for such a protectionist stance and it comes in the form of the Smoot-Hawley Tariff Act of 1930. This was designed to protect the US economy from cheap foreign imports, thereby preserving US jobs and it was believed this would subsequently lead to a recovery from the economic depression of the time. The aftermath as far as markets are concerned, not all of which was a direct result of this policy, was a further 10 per cent fall in the S&P 500 and rampant inflation three years later as prices spiralled. Imports into the US fell by 60 per cent causing an initial fall in inflation but then as other countries subsequently retaliated, inflation spiralled and global trade fell by 30 per cent leading to a global recession. Developed nations saw their exports fall by 30-40 per cent whilst the US suffered most with exports falling by 60 per cent.
It is this experience that most disturbs economists and academics with regard to Trump’s anticipated trade policies. Having appointed Peter Navarro to head the newly formed White House National Trade Council which reports directly into Trump, the anti-China thinking that Trump espoused on the hustings is unlikely to change – it is just a question of how aggressive and vocal it becomes.
US inflation over 3yrs
Source: FE Analytics
As with Trump’s travel ban, this could erupt over a weekend from an executive order or a tweet. So far, none of the media splashes have caused market consternation or economic concern. However, bearing in mind the lack of consideration regarding media fall-out from Trump’s delivery of his travel ban, it can only be a matter of time before we encounter a trade proclamation that is truly disturbing, leading to market volatility.
The lack of media substance from the Japanese premier’s weekend visit suggests that Trump’s protectionist ambitions remain in place. To the outside world, it was all smiles, but when Japan needs and is getting 100 per cent military support from the US, there is negotiating leverage here and I am of little doubt that this will be exploited to the full as Trump pursues his trade agenda. There is common mutual suspicion of China but from different perspectives, one from trade and one militarily.
The current near record low levels of volatility in the markets look sustainable for about as long as it takes for an incendiary anti-China tweet to be typed. Perhaps the reassurance on the military support for Japan was reiterated ahead of the planned trade attack on China, just in case observers were unsure. This most sensitive area of trade conflict is going to rear its head before long and bring the most contentious of Trump’s policies to the forefront of investor’s minds. I can’t see it going down well with markets.
Guy Stephens is technical investment director at Rowan Dartington. All views are his own and should not be taken as investment advice.