The results of Trump’s election have caused a significantly different effect on the markets than analysts and economists predicted. Stocks did not crash and burn for more than a few hours. They have instead risen dramatically to mark new all time highs. Volatility demonstrated by the VIX has calmed to historically reasonable levels too.
Despite this, many any have expressed concerns over President Elect Trump’s trade and economic policies. These will have a real impact on your personal investments going forward. Though Trump has significant successful business experience, he has never governed.
Consider that Mr. Trump goes to Washington riding a wave of hostility towards free trade. He could easily become the most protectionist American President since Herbert Hoover. The new President elect is against the two main free trade deals with Asia (the TPP Trans Pacific Partnership) and the European Union (the TTIP Transatlantic Trade and Investment Partnership).
He will probably succeed in his threats to scuttle both. China is the likely beneficiary of such a move as they are ready to offer their own pan-Asian trade agreement to fill the vacuum. NAFTA is also at risk of being repealed.
Trump harshly criticized the North American Free Trade Agreement constantly while running for office, correctly calling it the first nail in the factory workers’ proverbial coffins. This deal that regulates all trade between the U.S., Mexico, and Canada is something he can repeal without congressional help. Trump has vowed to put tariffs on Chinese and Mexican imports.
If he succeeds, prices for American consumers will rise dramatically. This will be more aggravated when U.S. exports likely suffer tariff retaliations from China and Mexico. It could even lead to a trade war.
The last time the U.S. carried out such protectionist policies happened under Herbert Hoover in 1931. The Smoot-Hawley Act erected the largest tariffs in history on imports coming to the United States. The act and subsequent retaliation were among the underlying causes of the Great Depression.
The other centerpiece of Trump’s economic ideas centers on massive tax cuts and infrastructure spending. He dreams of becoming another President Reagan. Trump wishes to outlaw the estate tax, slash the highest levels of income taxes, and cut by more than half the business tax rates. These will be most beneficial to you who are corporate or high earning individuals, though many would gain something.
Assuming the Republican-controlled Congress approves these measures to coincide with Trump’s intended major infrastructure building program, they will certainly increase growth. The U.S. terribly needs to improve its airports, highways, electrical grid, and water infrastructure. The theory is that interest rates at extremely low levels would allow America to embark on this spending spree cheaply.
The problem is that it is still a spending spree, even if it appears to be on cheap terms now. The Committee for a Responsible Federal Budget has assessed this as an independent think tank. Their troubling conclusion is that these plans will cause the U.S. government debt levels to explode. They predict the government debt to GDP ratio will rise by an astonishing one-third in ten years.
Government bonds are dropping in value, demonstrating the worries of higher government borrowing and more debt. On top of this, Moody’s has just opined today that the future of the U.S. Aaa credit rating is in jeopardy over the medium term from these very policies.
Will your portfolio weather the debt explosion of the new administration?
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