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President Trump

In the early hours of Wednesday morning, Donald Trump became the 45th President of the United States. In a longer post than usual, here is our immediate reaction.

The Result. Mr Trump won the electoral college by an estimated 306-232 but lost the popular vote by 59.9m to 59.7m. The Republicans also held on to power in the Senate (52 seats to 48) and the House (238 to 193). However, Senate legislation often requires 60 votes so do not expect Washington gridlock to cease.

Local Politics. With effect from 20th January, the US will have a real estate tycoon and reality TV star with no experience of public office as its president. He will also be the oldest first time president in US history at 70 years old. At first sight, it does not look promising.

However, there are a couple of historical parallels. The first is Dwight Eisenhower, US president 1953 to 1961, who also had never held public office, although he had run an army. The second is Ronald Reagan (1981 to 1989) who was 69 when he was first elected, also came from a showbiz background and held right-of-centre views. Both are held in high esteem in US history.

But Trump comes to office after a bitter and divisive electoral battle, which his acceptance speech acknowledged – “it is time for us to come together … I pledge to every citizen of our land that I will be president for all Americans”. Also, he is on bad terms with most of the Republican establishment. Many refused to endorse him or even vote for him.

And, like most presidents, he will find it difficult to get stuff done. As one example, he cannot fire Janet Yellen as chair of the Federal Reserve, no matter how much he wishes to do so. He will have to wait for her term to expire on 31st January 2018.

Perhaps the most important pointer will be how he builds the White House team. The three key posts are Treasury Secretary, Secretary of State and White House Chief of Staff. If he gets those right, then things may look up.

Global Politics. The two big losers could be Europe and Mexico. Trump’s America First agenda will mean the US is reluctant to guarantee European security via NATO. However, there is an argument that Trump would not want to look weak, for example, if Russia moves troops to Lithuania’s border. Expect Vladimir Putin to test his resolve at an early date.

We shall also see whether Trump follows through on his promise to build a wall and to re-negotiate the NAFTA free trade agreement. If so, then Mexico’s future for the next four years looks fraught. On all three issues – NATO, NAFTA and the wall – the reality in the White House may be different to the words on the campaign trail.

However, Donald Trump ran for the presidency on an anti-trade, anti-immigration and anti-climate change platform. All of these are bad for the rest of the world and we assume that he will at least try to keep his word.

Another key issue is whether Donald Trump’s angry populist style gains traction elsewhere. After Brexit and Trump, it is an obvious thought that Marine le Pen could now have a serious shot at the French presidency in April 2017.

The Economy. The big shift will be the mix of fiscal and monetary policies. While policy pledges were scarce, Donald Trump promised extra infrastructure and defence spending. With echoes of Reagan, he is also keen on tax reform and corporate tax cuts. The consequence will be a higher budget deficit and hence a tighter monetary policy to prevent over-heating.

The impact on growth of the Trump agenda may be roughly neutral – a boost from public spending but a drag from less trade and immigration. However, there is likely to be upward pressure on inflation from less immigration (restricting the supply of workers in a tight labour market) and more government spending (boosting an economy near full capacity).

The Markets. The initial reaction to Trump’s win looks about right – equities, Treasury yields and the dollar all up. Corporate America should gain from infrastructure spending and tax reform (but will be squeezed by higher labour costs); US Treasury yields may rise due to higher inflation and a larger budget deficit; and the US dollar will strengthen due to the looser fiscal, tighter monetary policy mix.

We expect these trends to continue but a key uncertainty is the FOMC meeting on 14th December. There has been talk that the Fed might postpone its 25 bps rate hike. For now, we think it will go ahead and, significantly, the Fed Funds future shows an 82% probability of a rate increases.

Word of the Day (with thanks to The Economist) – Snollygoster. The OED defines snollygoster as a shrewd unprincipled person, esp. a politician. You can decide whether Donald Trump is a snollygoster.

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