Trump Victory Comments

From the perspective of the rates markets, I see limited effects of the Trump election victory when we look at known information. There is some uncertainty around that given the lack of credibility of his election positions, and his policy response to an economic emergency may matter. The significance of his victory will be more in foreign affairs and the American culture wars, and there is no automatic linkage from those to the economy (but the possibility is a major source of uncertainty).

Equities - Yay

Trump is going to lavish favours on the business sector, which is presumably positive for equities. Although there will be a predictable knee-jerk reaction (equities up means “economy good,” and “economy good” means “bond yields up), I am skeptical that the largesse for firms the Republicans support will make that meaningful a difference to the economy. (Another issue for the equity reaction is that Harris lost, which changes the outlook as well. However, the baseline for my comments is the Biden administration, not a hypothetical Harris one.)

Fiscal Policy (Probably) Looser

It is reasonable to expect that the Republicans will run loose fiscal policy, while at the same time wailing about future fiscal liabilities due to social programmes. The solution to this situation is cuts to social programmes and taxes (for reasons that are not entirely clear for the latter). Since fiscal policy was hardly contractionary before, I am unsure how much a difference that will make.

Debt ceiling crises will likely be put on hold, which may eliminate the fictional fiscal risk premium.

Tariffs

Trump is fascinated by tariffs, as they are a way to punish enemies and raise revenue. Although many countries should expect to get hit by tariffs, I seriously doubt that some of the more “out there” policies (e.g., replacing income taxes with tariffs) will be attempted, as even the wackier members of the cabinet will not be able to get the numbers to work.

“War on Undocumented Workers”

Another eye-catching campaign promise was to deport (somehow) over 10 million undocumented workers (a.k.a. “illegal immigrants”). Such a policy would imply an ethnic cleansing that would be large, even by Twentieth Century standards. One might hope that this would not be attempted in the interest of avoiding mass bloodshed. (One obvious problem is that other countries would not accept 10 million deportees.)

In the absence of such a radical policy, the “War on Undocumented Workers” will fail for exactly the same reason the “War on Drugs” failed. The “wars” in question are just a public relations exercise to impress political constituencies and to allow the enforcers to work over weaker population groups. So long as the demand for drugs/undocumented workers is not impaired, demand will create its own supply.

Concluding Remarks

I was never a person who cared about short-term market movements, and I do not in fact know what the market response to the election was. From an outsider’s perspective, the most important result of this election is what Americans do to themselves, although NATO and Ukraine are likely to be affected. In the absence of some truly radical policy shifts — and we have no idea whether Trump has the stamina to enact such — it may be hard to discern the effects of the result on macro data a decade out.

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(c) Brian Romanchuk 2024