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The politics of change

The most accurate thing stated by Trump during his campaign was “It’s going to be brexit plus plus plus…” and indeed it was, with Trump defying the closing polling and the ever more fancy infographics suggesting a win for Clinton. The reaction in markets verifies this comment. Things that are up; gold (4%), the yen (3.6%), the euro (2.3%) and volatility. Things that are down; the dollar (down 2% on dollar index), stocks (Nikkei down 6%), bond yields (down 12bp) and oil (down more than 1 USD). What will determine if these moves are enhanced over the coming days and weeks is the degree to which Trump moderates or enhances his campaign rhetoric, especially in the areas trade, the economy and the Fed. That may appear unlikely at first sight. Why change what got you votes in the first place? But it’s hard to see on-shoring as being a net gain for the economy, running against basic theory of comparative advantage. He’s promised growth of 5-6%, but that can only happen long-term if your population grows a lot faster (i.e. immigration) and they become much more productive.

The immediate battle will be with the Fed, both on policy and personality. On policy, the market pricing for a Fed move has moved below 50%, from over 80% before the election. If the Fed don’t move, they risk appearing politicised and likely antagonising the new President. Trump thinks the Fed and Yellen are already there, which is why the Fed chair could conceivably resign before she is pushed (her term due to expire in 2018). For choice, I think they will follow through. Both the weaker dollar and fall in bond yields, other things equal, provide a monetary boost, but the fall in stocks (if sustained) works in the opposite direction.

Before then, markets are currently dealing with what is a fairly unprecedented level of uncertainty. One of my most hated phrases is ‘markets hate uncertainty’. Markets are built on uncertainty and risk (another name for the same thing). If there was certainty, there would be no market. On the upside, there are fifty-two days between now and the inauguration in January during which Trump will either bring clarity or add more confusion to markets. Furthermore, we now have a Republican President, Senate and House, something that has not been seen in modern times, but there are questions as to what extent they will be able to work together rather than against each other. In contrast to nearly every other Presidential election in recent times, the volatility is likely to increase after the event, rather than decrease.

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