Macroeconomic Color: MAGA 2:0

Global Economic and Financial Impact

“I want to be resurrected as the bond market because “you can intimidate everyone”

James Carville

Following Trump’s electoral victory, the United States and the world will be facing a vastly different economic and financial environment.  What follows is a preliminary assessment of the impact of what is called MAGA 2.0

Bond Markets, Inflation and the Dollar:  The Trump program of deep tax cuts, higher spending, trade wars and high tariffs and deregulation will worsen an already difficult fiscal trajectory.  The Trump administration will inherit a federal deficit of 7% of GDP and a federal debt held by the public of almost $28 trillion (100% of GDP).  Trump has promised to renew the 2017 tax cuts (due to expire in 2025).   In combination of all his other electoral promises on spending and taxation, it is estimated that his policies would add almost $8 trillion to the Federal debt by 2035.  In addition, the promised tariff increases of anywhere from 20% to 60% will feed into higher inflation.  Bond markets are taking notice, bumping the 10-year Treasury yield by 15 bp to a five-month high of 4.42% the day after the election.  The upward pressure on yields is likely to continue over the medium term, which should translate into a stronger dollar, as well as higher mortgage rates.   The inflationary pressure should also present a dilemma for the Fed: should it continue with its gradual monetary easing, or hedge its bets by delaying any further rate cuts.

Graph: US. Government Debt Held by the Public (% of GDP)

Oil Markets:  Currently a one-month delay by OPEC+ in beginning to restore higher product levels has had a minimal impact on oil prices.  While Trump has promised to “drill, baby, drill”, U.S. hydrocarbons production is already at a record level, and any impact of Trump energy policies will be minimal in the medium term.  The main risks to global oil supplies are geopolitical.  Clearly, the election of Trump has introduced considerable uncertainty in this regard.  On one hand, Israel hardliners could interpret his election as giving them a freer hand in confronting Iran, as well as Hezbollah and Hamas, which could lead to greater tensions, and higher risks of escalating the Iran-Israel conflict.  On the other, Trump’s transactional approach to international relations and his vague proposals of negotiating with Iran could lead to an easing of risks.   On balance, however, the risks are tilted to the downside (i.e. increased tensions), so the situation in this regard needs to be closely watched.

Global Financial Architecture:  A Trump presidency is likely to be highly confrontational in international financial relations. Escalating trade wars with allies as well as foes should undermine global financial cooperation and intensify the global economic fragmentation.  An expected reversal of the U.S. on climate change will also introduce more uncertainty and chaos in the global financial climate change agenda.  At the same time, rising U.S fiscal deficits are likely in the longer term to undermine global confidence in U.S. sovereign bonds and accelerate the trend away from the dollar as a reserve currency.   The resulting global financial uncertainty and chaos would also amplify the Global North-Global South divide and strengthen the case for organizations such as the BRICS.

Trump has always prized his role as an agent of disruption, and we are likely to see a great deal of disruption over the next few months and years. Ultimately, however, markets rule, and  they will determine the cost of higher economic policy chaos and financial and economic uncertainty.  Stay tuned for further analysis.