The presidential election was weeks ago but votes are still being counted. Millions of absentee and postal votes are being tallied, yet Clinton’s win was comprehensive. As I write, she is over 2.5mn votes ahead - a lead that will grow given the count in democratic-leaning California, New York and Washington. In the end, Clinton’s lead is greater than the 10 previous US Presidents. Most Americans didn’t buy into the hate, lies, bigotry or conspiracy theories. They don’t want America to disengage from the outside world or turn against free trade.
But that’s not how America will be governed. What’s relevant in presidential elections is not how America thinks, but how voters in single states think and specifically the ‘swing’ voter. Historical voting patterns leave only certain states with swing voters. So, only one in ten states is really relevant. Within these, it’s also difficult to gauge which of the many possible demographic groupings may switch allegiance and, though small in number, alter the course of the whole country.
In 2016, this was Michigan, Pennsylvania and Wisconsin. Here, the key group of ‘white, less-educated males’ switched en masse from the Democrats to Republicans. Presidential runners must identify potentially key demographic groups and convince them of a better future than their opponent, while assuring others you won’t damage their future. Trump seems to have done this in saying China and Mexico took American jobs, promising to rectify that through import tariffs, spending on infrastructure, and pledging tax reductions (but not lowering social security).
Some swing voters should have realised that these grand promises would make them worse off. Usually the electorate rejects policies that are clearly improbable. Instead, Trump was given the benefit of the doubt. There’s distrust and contempt in Hillary Clinton and Washington in failing to achieve much in the last few years except shutting down the federal government in 2013. Trump’s personality and intellectual defects were nothing versus the sin of being a political insider. Voters are so fed up with the current system that they took a big risk on a highly eccentric, 70-year old political novice. Trump did not win because he was a Republican: he won because he’s not a politician of any stripe.
Trump’s disruptive force is also important as it airs views previously taboo in polite or economic conversations. Immigration is out of the closet, and it’s okay to be resentful. The same applies to international trade. Neither discussion is good for economic growth’s dependence, for example, on a flow of immigrants to increase economic activity and maintain the balance of workers to retirees. Otherwise our societies grow older sooner, and it’s harder still to fund pensions and healthcare through taxes. Lower immigration ultimately means taxes would go up and retirement ages rise. This is an issue that no politician wants to confront, doubtless as it would result in electoral annihilation. Neither Trump nor our own immigration hawk, Theresa May, have highlighted that lower immigration has a cost.
International trade also allows goods to be bought at the lowest possible cost. Otherwise taxpayers subsidise less efficient, domestic industries. The hope is that lost manufacturing jobs are replaced with jobs in other industries or locations. It leaves winners and losers but, as a whole, society would be poorer without globalisation. Trump didn’t mention this aspect of his anti-trade agenda. It is also why Brexit’s success depends on Britain conducting at least as much trade internationally as with Europe. If Brexit is about protecting British workers from foreign competition, however, that comes at a cost (remember the 1970s).
Trump’s immigration and trade policies would not be good for big US companies. Their most labour-intensive operations moved abroad years ago. Importing goods to sell in the US would be more expensive if tariffs rise to ensure American jobs. Moreover, less immigration (so fewer immigrants) would leave the domestic labour force smaller and so more expensive. This would simply mean a transfer of wealth from shareholders to employees.
You might think that these issues would have investors running from US assets. Investors have surprisingly rushed to buy American shares while dumping others. Stockmarkets are saying that Trump won’t wage trade wars on China or Mexico and that America can protect itself from rising labour costs. It’s as if only the capital-friendly aspects of Trumponomics are seen, linked to the traditional Republican Party’s role as a friend to business, resulting in a favourable outcome. Markets are saying “Trump’s rhetoric was electioneering” and “he won’t really follow through”. After all, Trump is constrained by Congress from executing his most damaging ideas and, with his legacy in mind, promises to blue-collar workers can be discarded.
Anticipating this post-election, we increased our portfolio exposure to US companies, and banks in particular. We are struggling to like stockmarkets more broadly, given the relative high risk of serious US trade, fiscal and foreign policy mistakes. Populism also has yet to run its course and Europe has impending elections in the Netherlands, France and Germany.
While stockmarkets are prone to over-enthusiastic opportunism, bond markets tend to be grounded in reality. They are selling off. They fear a willingness to gamble with national debt –big government spending in the short-term in the hope that economic growth picks up and eventually spawns enough tax receipts to pay back the debt. If it were that easy, however, everyone would be doing it. Bonds are also starting from stratospheric valuations, so are likely to be sensitive to perceived risks. While our portfolios have been underweight bonds for years, we halved our allocation soon after the election.
Let’s not forget what Obama promised in 2008: “Change We Can Believe In”, “Change We Need” i.e. change. He failed to change much. Obamacare, his main contribution, missed its mark. It made healthcare more affordable to millions of poorer people but raised middle class healthcare costs. Some Obamacare beneficiaries even resent having to buy health insurance. Trump is expected to be a more forceful agent of change. But only half the population wants Trump’s form of change. US society is now split between urban and rural, old and young, university-educated or not. These divisions are not so different to Brexit and are not going away.
Can Trump effect change to satisfy his voters, let alone both sides of the divide? As an insider, versus outsider, he may soon lose his halo. He is now at the centre of the swamp he vowed to drain. As a businessman, he can easily be accused of favouring employers over employees. Presidential aspirants can lob-in hand grenades from the side-lines, but Presidents need to build consensus with incremental change. If Trump fails to deliver, where will the disaffected turn next?
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