Pride before the fall
When Donald Trump won the presidency in November 2016, we believed he would struggle to make headway on virtually all of his flagship policies.
And so it has been. The wall remains but a literary device, healthcare reform has dropped from the agenda and the infrastructure splurge is only now being debated in Congress. The reason we were dubious is because for Mr Trump to make headway on these policies he has to get the votes in Congress. For all his talk of being a grand dealmaker, the Hill has mostly stumped him so far. The one triumph, his tax plan, was helped over the line by a Republican caucus that is ideologically inclined to cut taxes whatever the goal and whatever the weather. Even this tax reform, with such a favourable tailwind, was heavily compromised.
However, our scepticism about Mr Trump’s ability to tame Congress didn’t extend to the thinking he would be completely ineffectual in the White House – and it still doesn’t.
There is plenty that Mr Trump can do by executive fiat. He has already done much, although you won’t be able to point to any specific legislation. Since becoming president, he has replaced heads of department, adjusted operating aims of agencies under his direct control and generally pushed a different culture from his predecessor. The general direction is toward a more business-friendly approach. He appears to be trying to make government departments less focused on punishing companies for past mistakes and instead concentrate on making it easier to do business. This is both commendable and damning. Less spent on red tape means more money in the pockets of workers and investors, but it also increases the risk of corporate skulduggery.
The revelation that Facebook was party to a large-scale privacy breach is a case in point. All over the world, people are beginning to understand just how much information they have offered up on the altar of simplified networking. Many are aggrieved. We could be entering a new era of backlash against the technology sector that has ridden so high for so long. The past decade has been one long whipping session for the banks whose excesses, excessive risk-taking and fraud drove the 2000s boom and, ultimately its bust. Facebook is bleeding users after the revelations and founder Mark Zuckerberg has promised better controls. But could other tech companies be similarly complicit?
The internet is the gateway to our 21st century world, and above it reads a single commandment: “Don’t read the comments.” But it should probably have a footnote: “Don’t read the terms and conditions either.” Every day, millions of people agree to contractual agreements without even a cursory glance at them. In our age of big data and e-commerce, personal information is gold dust. Each person’s personal data is worth virtually nothing (commercially speaking) to them, but when aggregated it’s worth $460bn. In a world where people have been so cavalier with their information, you have to expect that the gold rush has attracted cowboys. Just how deep the problem runs is yet to be seen.
Index
1 week
3 months
6 months
1 year
FTSE All-Share
-3.1%
-7.3%
-2.9%
-0.6%
FTSE 100
-3.3%
-7.8%
-3.6%
-1.9%
FTSE 250
-2.3%
-5.3%
0.0%
4.4%
FTSE SmallCap
-2.8%
-3.8%
0.3%
7.2%
S&P 500
-7.5%
-8.6%
-0.4%
-1.0%
Euro Stoxx
-4.3%
-6.3%
-4.7%
4.7%
Topix
-4.6%
-6.9%
3.1%
4.2%
Shanghai SE
-5.2%
-6.2%
-6.3%
-6.4%
FTSE Emerging Index
-4.5%
-2.2%
2.2%
7.3%
Source: FE Analytics, data sterling total return to 23 March
Gambling man
But one of the largest unilateral effects President Trump can have is on trade.
This is one of the areas that the president has almost an unfettered hand. We detailed the benefits or free trade and the potential for a trade war that could come of tit-for-tat tariffs in our Trade of the century report, of November 2016. Mr Trump has pulled the trigger on hefty tariffs for foreign steel. While a blanket tariff of 25% on steel imports and 10% on aluminium imports, there are a bunch of exemptions that mean only China and countries that contribute only a small proportion of total US exports are hit. China’s response has been relatively modest, boosting tariffs on US pork, fruit and wine and some other products. If it really wanted to send a message it would have included soybeans, aircraft and sorghum. Then the US upped the ante last week by threatening more tariffs on $60bn of undefined imports.
Stock market investors took the tariff news pretty badly. The S&P 500 fell 5.9% last week, even more in sterling terms, as Mr Trump’s latest moves led to fears of a trade war. Even before accounting for the prospect of a trade war between two of the world’s largest economies, the tariffs will hurt most US businesses. It will reduce the amount of steel in the marketplace, boosting the price. American steel producers will celebrate this fact, but there are many thousands more people to whom pricier steel means less investment, less consumption and fewer jobs. Everything from construction to aerospace will be affected, all across the US.
A similar scenario played out last year when Mr Trump imposed a 30% tariff on Chinese solar panels. Only 14% of the 260,000 Americans who work predominantly in the solar panel industry manufacture the panels, the rest are installation engineers or sell associated products and services. This overwhelming majority is highly sensitive to changes in demand for solar, and a significant increase in the price of panels tends to dissuade people. Several downstream solar companies have begun laying off workers this year.
Mr Trump’s end game is a bit vague. It’s hard to tell how much further he will go with tariffs and trade. As Mr Trump’s rhetoric reaches fever pitch, his Treasury Secretary Steven Mnuchin is in China hammering out a deal that may mean the metal tariffs are scrapped before they are even enforced. The two countries are apparently trying to rebalance the US trade deficit with China by reducing Chinese tariffs and improving intellectual property laws to entice American businesses to export more to the Middle Kingdom.
If it comes off, the bargain would probably rank as one of the best deals Mr Trump has ever brokered. But it’s a massive gamble.
Bonds
UK 10-Year yield @ 1.45%
US 10-Year yield @ 2.81%
Germany 10-Year yield @ 0.53%
Italy 10-Year yield @ 1.87%
Spain 10-Year yield @ 1.26%
Economic data and companies reporting for week commencing 26 March
Monday 26 March
Trading update: Pennon Group
Tuesday 27 March
US: Consumer Confidence Index
Preliminary results: Moss Bros
Quarterly update: United Utilities; Ferguson
Wednesday 28 March
UK: Nationwide House Price Index, GfK Consumer Confidence (Mar); Lloyds Business Barometer (Mar)
US: MBA Mortgage Applications; Wholesale Inventories; GDP (Q4); Personal Consumption, Crude Oil Inventories
EU: GfK Consumer Confidence (Apr)
Quarterly update: DFS Furniture; Hilton Food Group; TUI,
Thursday 29 March
UK: Net Consumer Credit (Feb); Mortgage Approvals; GDP (Q4);
US: Personal Income (Feb); Initial Jobless Claims; Chicago Purchasing Managers Index; University of Michigan Sentiment Survey; Baker Hughes Rig Count (Mar 30)
EU: German Unemployment Rate; German CPI;
Quarterly update: RPC Group; SSE
Julian Chillingworth
Chief Investment Officer