UK equities
14 Nov 2016 | By Richard Buxton

Trump: the bull case

Having so completely misjudged the result of the UK's EU membership referendum, it will no doubt be easy for readers to cavil at what I am about to say.

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Having so completely misjudged the result of the UK’s EU membership referendum, it will no doubt be easy for readers to cavil at what I am about to say. But the fact is that even before the referendum, I warned that the consensus was far too dismissive of the prospect of Donald Trump winning the US Presidential election, and have long been on record stating that I thought the star of the US version of The Apprentice would be the next President of the United States.

Why does this matter? Not remotely, as an opportunity for me to regain some credibility as a political forecaster. But marginally, because at moments like this, I believe that investors have a tiny advantage over all those who are still reeling in shock at the ‘totally unanticipated’ result.

Watching the news coverage here on the West Coast of America where I have been holidaying, there is palpable shock. Talking heads are bewildered, resorting to playing excerpts of sound bites from Trump’s campaign as if to say not only, ‘well, we can’t really make sense of policy going forward out of that’ but also ‘jeez, that’s what you voted for…God help us all’.

Against this backdrop of revulsion, incredulity and reaction, I think it is important to recognise the significance of what has just happened. But unlike many commentators for whom Trump’s victory is being cast as a disaster, I disagree.

Yes, this is a sea-change. Yes, there are many uncertainties ahead. Yes, to a generation brought up on the beneficial impacts of increased globalisation of trade, the prospect of throwing that multi-year process into reverse is scary. But consider the following.

This is the end to the Washington consensus, to the era of ‘Davos Man’, to the belief that an elite knows best how to manage the global economy.

This is the high watermark of central bankers. From here, they will gently decline from being financial gods – arguably more powerful even than elected politicians, markets trembling on their every word – to officials, public servants of the common good.

For those of us who believe that central bankers have led us up a blind alley, this can only be good news. Negative interest rates, negative bond yields, central bank purchases of corporate bonds at yields well below those of the same company’s equity yield…this is Alice in Wonderland central banking.

The trouble is that for those central bankers promoting such policies, there is no exit route. To abandon such untried and untested policies would be to lose face, and that is the ultimate ‘no go’ policy option for them.

So, three cheers that sanity has prevailed in a democracy, through the unlikely candidate of Donald Trump. Central banks, starting with the US Federal Reserve, will learn that they are not the ultimate source of power in government.

A return to positive interest rates, to positive yields, to an incentive for savers to save and to creating a real cost of capital for entrepreneurs will all be hugely positive consequences of this electoral revolution.

What of protectionism, which we have all learnt to fear from the mistakes of the 1930s?

Here I have found myself increasingly persuaded that the mantra of ‘fair trade’ not ‘free trade’ is right. The world was able to cope when relatively small trading nations used a mercantilist model to buy their way into markets and raise their living standards.

But it cannot cope with a country the size of China running the same model. China now has such a dominant position in terms of productive capacity in basic goods that the world does not have enough demand to meet the supply.

China knows this. It is embarking on the transition to higher consumption, services and financial services, away from basic goods. But it is doing so slowly, as it cannot give up its instinctive tendency to export cheaply to the world.

Here, too, maybe a sea-change US government might be beneficial in making it clear that China has benefited too long from its policy mix. Maybe it needs to accelerate its domestic reform agenda, both closing excess capacity in basic goods and promoting asset-light services.

Media reaction when Reagan was elected President was alarmist. He was widely deemed a warmongering failed actor, with no credible prospects in government. He faced down the USSR, created supply side reforms which ushered in an era of prosperity for the US and elsewhere – and died a much-loved national hero.

I am not forecasting the latter for President Trump, but I do think commentators will be surprised by how positive his revolution will be for the US – and global – economy.

We may look back in time and reflect how good it was that we were all freed from the orthodoxy of rule by central bankers.


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