Trump Is President: What Is Next?

Trump Is President: What Is Next?

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Key takeaway – In a surprise result, Donald Trump, the Republican candidate, won the Unites States (US) elections.  Over the next two years, both Presidency and Congress will be in the hands of the Republican party (GOP). These outcomes are in line with global trends: first, anti-globalization sentiment and populism are on the rise. Second, traditional polling techniques are proving unable to capture the dynamics of populist voting. Third, financial markets fail to anticipate developments. Going forward, Trump’s policies will veer toward pragmatism, and his electoral agenda is unlikely to be fully implemented. As a result, over the next two years the US economy – supported by tax cuts, fiscal stimulus and looser regulation – will grow above its current trend (accompanied by a mild tightening cycle). In the last two years of the presidential term, protectionism, a strong deterioration of the fiscal position, and inflation can hamper economic performance. In the short term, most markets are likely to suffer elevated volatility; over-bought and over-sold assets will create tactical exit and entry opportunities. In the longer term, the market impact is likely to be negative, with entry opportunities in mispriced assets.

In a surprise result, Donald Trump, the Republican candidate, won the US elections and will become the 45th US president. In spite of lagging behind in the polls throughout the campaign, Trump won 290 electoral votes out of a total of 538 (270 are required to win). Hillary Clinton, the Democrat candidate, won only 232 electoral votes[1] and swiftly conceded.

Over the next two years, both Presidency and Congress will be in the hands of the GOP. The second unexpected result was the Republican control of the Senate, with 51 seats won, against the 46 of the Democrats. As predicted, the Republicans maintained control of the House, with 239 seats, against 193 for the Democrats. Until the 2018 mid-term election, the GOP has full control of the Congress.

The results are in line with global trends: first, anti-globalization sentiment and populism are on the rise. In the post 2008-crisis environment, traditional parties are unable to manage. Confused citizens don’t feel represented and vote “against” rather than “for”. The resulting (incongruous) coalitions often lead to political impasse and paralysis. Governments – held at ransom by strong minority interest groups – are too weak to pass meaningful reforms, boosting far-right, isolationist and protectionist factions. Populism – by promising simple solutions to complicated problems – further undermines the political debate. The US was no exception.

Second, most polls are proving unable to capture vote intentions. Traditional polling techniques have proven unable[2] to capture the dynamics of populist voting, characterized by low participation and protest-driven choices. The day before the US election, Clinton’s likelihood of winning was estimated at 71.4 percent, against the 28.6 percent of Trump. Throughout the US presidential campaign, polls showed a consistent – although shrinking – lead for Clinton. Yet, Trump won in almost all the key “toss-up” states[3].

Third, financial markets failed to anticipate developments. Before the elections, the markets worried about the risks of a Trump presidency. Between October 25 and November 2, as Trump chances of getting elected were increasing, the Mexican Peso (MXN) fell by 4.6 percent – from 18.55 to 19.36 – against the US Dollar (USD), and the S&P500 declined by 2.7 percent. In the following six days, Clinton’s lead widened and the markets recovered: by November 7 (the day before the vote), the MXN had regained the 18.50 level, and the S&P500 had risen by 2.2 percent.

Impact on the economy: over the course of Trump’s presidency, GDP will grow in line with the current trend. Since the elections, Trump’s announcements[4] were conciliatory and constructive, lacking the ideological, populistic elements of his electoral agenda[5]. Most of his appointments[6] are centrist and his program is veering toward pragmatism. Over 2017-2020, Trump’s policies – assuming a selective adoption of trade restrictions[7] – will deliver an average real GDP growth of 2.3 percent per annum – in line with current policies[8] (i.e.: the “no policy change” scenario). Over the next two years, growth and inflation are likely to accelerate: the US economy will grow at 2.6 percent in 2017[9], and at 2.5 in 2018. Inflation will rise to 2.8 percent in 2017, to decline to 2.6 percent in 2018 (Table 1). In the last two years of Trump’s term, growth and inflation are likely to decelerate[10].

Table 1: US: expected GDP growth, inflation and policy rates

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Trump’s economic program is built around two pillars: fiscal loosening and protectionism. The key elements of Trump’s plan are: i) lower fiscal pressure: a) income tax cuts for all income-groups, including the super-rich (the top individual rate will decline from today’s 39.6 to 33 percent, above the originally-declared 25 percent); b) corporate tax cuts (from 35 to 15 percent), and c) repatriation of earnings from subsidiaries at a flat rate of 10 percent; ii) fiscal stimulus through infrastructure spending: earlier in the campaign, Trump pledged to invest USD 550 billion over five years[11]; subsequent spending estimates rose to USD 800 billion – 1 trillion, supported by government bonds; iii) increased protectionism: imposition of tariffs – 45 percent on products from China and 35 percent on several Mexican products – and revisions to the Trans-Pacific Partnership (TPP)[12] and the North American Free Trade Agreement (NAFTA); iv) stricter immigration controls: promised measures include the deportation of 11 million immigrants (reduced to “2-3 million undocumented immigrants with criminal records” after the election) and the construction of a wall on the border with Mexico; and v) loose regulatory and financial supervision: Trump is likely to adopt a softer – compared to Clinton’s – stance on financial sector regulation[13] and a lighter regulatory framework.

Over the next two years, Trump’s economic plan is likely to accelerate growth: tax cuts and fiscal stimulus will increase consumption and investment; looser regulation will help businesses and banks. Tax cuts will support domestic consumption by: a) increasing disposable income; and b) lifting company’s earnings and, as a result, increasing stocks valuations. The minimum wage might be increased. Domestic investment[14] will be lifted by the implementation of the infrastructure stimulus plan[15]. The reduction and simplification[16] of the body of legislation applied to US businesses (the financial sector in particular) will help improve sentiment.

In the long run, protectionism, a strong deterioration of the fiscal position, and inflation can hamper growth[17]. In the last two years of Trump’s term, the combination of lower trade volumes, large fiscal deficits and higher interest rates are likely to offset the impact of the fiscal stimulus (tax cuts and fiscal spending). Over time, economic performance might be hampered by: i) protectionism: if implemented, Trump’s protectionist measures are likely to create disruptions in global trade flows[18] and reduce national income in the US, Mexico and China among others[19]; ii) rising deficit and debt: as fiscal revenues decline and expenditure rise, the budget deficit and public debt will increase (according to  the Tax Policy Center, over the first decade the federal debt would rise by USD 7.2 trillion)[20], putting upwards pressure on Treasury yields; iii) inflation: the stimulus plan, launched when the US economy is around full employment[21], can create inflationary pressures, pushing the Fed to normalize rates, with negative implications for financial markets and credit; and iv) regressive tax policy: as highest income brackets benefit more, tax cuts can hamper the impact on growth of a reduction in fiscal pressure.

However, Trump’s electoral agenda is unlikely to be fully implemented. Before Inauguration Day (January 20, 2017), the president-elect and the Congress’ leadership will shape the legislative agenda by setting the term priorities – a crucial process to reduce uncertainty. The Trump administration is unlikely to fully implement what promised during the campaign, due to: a) the elevated political and economic cost of the measures; b) the potential lack of support in the Congress – despite Republican control of both houses; c) the lack of detail of most proposals and d) Trump’s inclination to alter his stance in key subjects[22]. The fiscal elements are “low-hanging fruits”, likely to: a) find limited opposition in Congress; and b) have a significant impact on growth. Regulatory changes – likely to be less radical than promised – will also support growth, in particular in the banking sector[23]. The President has the authority to renegotiate[24] trade agreements, but would face testing hurdles[25] if he did.

An isolationist foreign policy will increase the influence of China and Russia. Trump is likely to revise the US alliance system, because “it is obsolete” and “the US is bearing most of the costs”. If poorly handled, these positions are likely to weaken the EU-US alliance, the North Atlantic Treaty Organization (NATO) and the United Nations (UN) system – potentially resulting in a diminished role of the US in global affairs and higher global instability. In other words, putting “America First” will bring about protectionism and isolationism. Trump’s foreign policy challenges are: i) in Asia, where the US has lost influence over the past decade; a US withdrawal would strengthen China’s geopolitical ambitions[26] and push Japan and South Korea – portrayed as “free riders”– to build nuclear weapons[27] to deter North Korea, possibly starting a regional arms race; ii) in Europe, where a weakening of NATO[28] and improved US-Russia bilateral relations would strengthen the Kremlin and make Eastern Europe[29] more vulnerable to Russia’s assertions of power; and iii) in the Middle East, where Trump promises – “war on radical Islam” and the abrogation of the international nuclear deal with Iran[30] – can strengthen Russia’s role in the region[31] and push Tehran to develop nuclear weapons.

The Fed is likely to hike rates in December, if volatility remains low and economic data strong. In line with market[32] and analysts[33] expectations, the Fed’s Federal Open Market Committee (FOMC) is likely[34] to proceed with a 25 basis points (bps) hike in its December 14 meeting[35], if: a) over the coming four weeks financial markets stay stable – and labor-market and inflation data remain strong; and b) Trump’s announced fiscal stimulus increases inflation expectation. Emerging market (EM) will suffer outflows as markets price in the hike, and EM assets, including currencies, will suffer. However, if volatility were to significantly increase: a) the hike would be postponed to H1-2017, b) the USD would weaken against other major currencies; and c) bonds prices would increase.

In the first two years of Trump’s presidency, a tighter monetary policy is to be expected. For years, Republicans called for: a) stricter monetary rules; and b) a reform of the Fed. Going forward, conservative lawmakers will pursue these ideas with more intensity. During his campaign, Trump repeatedly condemned the Fed’s dovish stance[36]; besides, he will appoint[37]: 1) in 2017, two candidates to fill vacant positions on the Fed board, de facto influencing the FOMC[38]; and 2) in 2018, the replacement of the Fed’s Chair, most likely replacing Janet Yellen. Additionally, Trump plans to cut taxes and increase spending – in an economy at full employment – will increase inflation expectations, making higher rates more likely. In addition to the December hike, in 2017 the Fed will proceed with three 25-basis-points hikes – in Q1, Q2, and Q4 – lifting the year-end policy rate to 1.5 percent. In the first half of 2018, two additional 25-basis-points hikes – in Q1 and Q2 – will bring the policy rate to 2.0 percent (Table 1). In the second part of the presidency, as the initial drivers of growth lose steam and Trump’s expansive fiscal policy starts to require support[39], the Fed might adopt a more dovish stance.

Impact on the markets: in the short term, markets will suffer elevated volatility. Mispriced assets will create tactical exit and entry opportunities. As Trump details his plans, financial markets will undergo a period of elevated volatility. If misaligned with fundamentals, over-bought and over-sold assets will create tactical entry-and-exit opportunities for risk-prone investors. Indeed, Trump’s election was followed by a few hours of panic-selling[40]; yet, within a few hours of the victory speech, most assets pared losses[41] and prices returned to pre-election levels[42]. Safe assets mirrored the performance of risky assets: initially, demand rose sharply and then softened[43]. In the days after the election, the markets absorbed the news about – and grew comfortable with – Trump’s less-confrontational tone, pro-growth policies and picks for senior administration positions. Higher investor confidence lifted market sentiment: stocks were boosted by prospects of corporate tax cuts, infrastructure spending and financial deregulation: the Dow Jones Industrial Average (DJIA) set a new record[44], and the S&P500 (SPX) almost rose to a record-high[45]. Expectations of a growing fiscal deficit triggered a sell-off of government bonds: yields in 10-year treasuries rose from 1.83 the day before the election to 2.26 percent on November 14 (its highest level since January 1, 2016). Safe haven assets, like gold, suffered price-declines, creating entry-opportunities as a protection against short-term volatility. Trump’s victory brought about USD strength[46] and a broad weakness in EM currencies[47]. The post-election normalization is not complete: some assets – e.g.: the MXN and the Turkish lira (TRY) – have not regained pre-election levels and some elements of Trump’s electoral agenda – for instance, the impact of potential restrictions in global trade – have not been fully priced in.

In the longer term, the market impact is likely to be negative, especially if trade restrictions are adopted – with entry opportunities in mispriced assets. In the first year of the Trump administration, stocks are likely to benefit. At first, lower corporate taxes are likely to support earnings, and then fiscal expansion will increase revenues[48]. Trade restrictions are likely to be limited[49]. Bond prices are likely to decline, and yields will be pushed up by: a) rising fiscal deficits and debt; and b) a higher growth differential (i.e.: the US economy will expand faster than other DMs). However, US yields will remain subdued, supported by the ongoing shortage of safe assets and by global demand. By 2020, the 10-year bond yield (UST) is expected to increase from current levels (less than 2 percent) to between 3 and 4 percent[50]. Currencies will remain volatile. In the long term, were US debt to significantly rise, the USD will weaken, but its role of global reserve currency[51] will not diminish, supporting it value. Commodities are likely to be negatively affected by a global deceleration in trade and a rise in global uncertainty, except gold, likely to benefit. Lower growth and an expansion of domestic supply will negatively impact oil prices, but Trump’s anti-Iran rhetoric might prevent sharp declines.

Text and data updated on November 17, 2016, 10 am GMT. We thank Mert Yildiz for comments and suggestions. All errors are ours.

 

[1] As of November 17, Michigan’s 16 electoral votes are still unassigned.

[2] Recently, polls have failed to predict the outcome of the Brexit referendum, the peace agreement between the Colombian government and the FARC, and the US presidential election.

[3] The states where the difference in voting intention between the two candidates was less than 5 percent.

[4] In his acceptance speech early on Nov. 9, Trump sent an inclusive and conciliatory message that was reinforced by the comments of senior leaders of both political parties, including Hillary Clinton, House Speaker Paul Ryan and President Barack Obama. Trump’s immediate post-election remarks pointed to a reflationary economic scenario, stressed pro-growth elements (i.e.: infrastructure spending, corporate tax reform and deregulation), and de-emphasized the protectionist measures featured in his campaign that would expose the economy to stagflationary pressures  (such as tariffs on China and Mexico, and the dismantling of the North American Free Trade Agreement – NAFTA).

[5] The Democratic minority in the Senate will be able to filibuster any radical reforms that Trump proposes.

[6] Trump’s vice-president, Mike Pence, is an establishment GOP politician. Trump’s choice of Reince Priebus as Chief of Staff is seen as creating constructive links with Congress, enabling the President to get things done. Reportedly, Trump is considering mainstream Republicans for his cabinet, including former Speaker of the House Newt Gingrich, Tennessee Senator Bob Corker, Alabama Senator Jess Sessions, and former mayor of New York City Rudolph Giuliani. Also, former Goldman Sachs partner Steven Mnuchin – a loyalist to Trump due to his involvement in the Presidential campaign – is rumoured to be nominated as Treasury Secretary. Additionally, House Speaker Paul Ryan and the Republican leadership in the Senate have more mainstream GOP views than Trump on trade, migration, and budget deficits.

[7] Growth estimates assume full implementation of Trump’s tax-reduction and fiscal-expansion plans, while the bulk of the electoral promises will not be implemented. Instead, his administration will scale up the level of conflict with China and Mexico in international forums.

[8] In June 2016, an analysis completed by Moody’s estimated the impact on growth of Trump’s policies, Clinton’s policies and a “no policy change” scenario. In this assessment, by 2020, Trump’s policies – assuming a partial implementation – would: a) deliver an average real GDP growth of 1.5 percent per annum (lower than the “no policy change” scenario, currently delivering 2.3 percent), and lower than the 2.4 percent of Clinton’s policies) and b) add 3.6 million jobs to the current employment levels, i.e.: 4.1 million jobs less than under a hypothetical Clinton’s presidency (i.e.: Clinton’s policies would have created 7.7 million jobs). The analysis fails to take into account the announced infrastructure plan, therefore, growth is likely to be underestimated.

[9] In 2017, tax cuts for individuals and businesses are likely to lift consumer demand and output growth.

[10] Trump’s policies are likely to bring about weaker global trade, a deterioration of the US fiscal position, and lower Western influence at the global level. In the US, if expectations are not met, consumer and business confidence will decline, creating a drag on GDP growth.

[11] Trump hinted that he intended to double Clinton’s spending plans (USD 275 billion over five years).

[12] The TPP involves 12 countries: the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru. The pact aims to deepen economic ties between these nations, slashing tariffs and fostering trade to boost growth. Member countries are also hoping to foster a closer relationship on economic policies and regulation.

[13] For example, Clinton had made a priority the appointment of the Federal Reserve Vice Chair of Supervision – in charge of overseeing bank’s regulation and the implementation of the Dodd’s Frank law –, which had remained vacant since the law was enacted in 2010.

[14] Capex of the top 1,500 listed US firms declined to 6.1 percent of revenues in 2015, down from nearly 10 percent in 1980, but better than the 5.2 percent a decade ago.

[15] At the moment, the infrastructure plans of the Trump administration are vague (see the American Action Forum for a critical review of both Republican and Democratic infrastructure proposals). The media suggest that defense spending (e.g.: adding 42 ships to the navy, renewing nuclear and missile defense) and transportation will be central.

[16] Trump might impose an initial moratorium on new regulation and a simplification of existing regulation.

[17] In other areas the lack of policy definition prevents an assessment on whether their impact would be positive or negative for growth. In energy, for instance, Trump’s positions seem to be supportive of higher oil prices (refusal to embrace previous agreements to prevent global warming, statements supporting the American oil sector and anti-Iran rhetoric). The impact of trade protectionism could however offset their effect.

[18] A suspension of the TPP or NAFTA agreements, or the imposition of high tariffs in Chinese and Mexican goods will diminish income and profits in all countries involved, could initiate a trade war and would significantly weaken other existing international trade agreements. The Peterson Institute estimates that a full war trade (full imposition of the announced tariffs on China and Mexico and a symmetrical response from these two countries) would result in an average real growth in the 2017-2020 period of 1.2 percent, compared to 2.3 percent, if the war was aborted after a year, growth would average 2.3 percent, only marginally below the baseline (which assumes no change to current growth) of 2.4 percent. Note: The Peterson Institute analysis is based on Moody’s model.

[19] In 2015, Mexico run a current account deficit of USD 31.7 billion with the US, its main trade partner, but a trade surplus – which does not include transfers and remittances – of USD 60 billion.

[20] According to the Tax Policy Center, lost revenues could amount to more than USD 4 trillion over the next five years and USD 9.5 trillion over the next decade (before accounting for added interest costs or macroeconomic feedback effects), resulting in an increase in national debt of 80 percent of GDP unless massive spending cuts are implemented. Three considerations apply to this analysis: a) the estimates were calculated based on Trump’s initial proposal; since then some changes had been adopted – for example, the increase of the maximum rate for the richest segment of the population from 25 percent to 33 percent -; b) the estimates used figures provided by Trump during the campaign (USD 500 billion over five years), which had been increased since then; and c) the Tax Policy Center is considered a prestigious independent think tanks (linked to Brookings Institution) in the field of tax analysis, but it has also been accused of pro-Democratic bias in the past.

[21] As of October 2016, the US unemployment rate was 4.9 percent.

[22] More recently, Trump proposed top individual tax rate was elevated from 25 percent to 33 percent during the campaign. Numerous proposals have been removed from his online program.

[23] In terms of banking regulation, Trump campaign promised to undo the Dodd-Frank Act. Yet, according to the WSJ, “repealing the law and its many rules seems unlikely to gain much traction in Congress. And even many banks admit they have spent so much time and money complying with the law, they would rather keep it. Several Obama administration officials said on Wednesday that they did not expect Congress to completely repeal Dodd-Frank. Instead of undertaking such a costly and controversial effort, one likely possibility is that the Trump administration and Congress would take aim at a handful of specific rules that most irritate the banks, including what is known as the Volcker Rule, a centrepiece of Dodd-Frank that prohibits banks from placing risky bets with their own money”.

[24] Rules designed to frustrate attempts to reopen trade agreements once they have entered into force require that any party seeking to renegotiate must give the other party or parties 180-day notice of withdrawal. Under US law, the president has the power to make that declaration, and Trump has said he will do so. At that point, a new agreement could be negotiated. During the 180-day notification period, the parties could hold “consultations” (effectively renegotiating the existing agreement), but at the end of the 180-day notification period, the agreement would expire unless replaced by a new one. Source: Peterson Institute, 2016.

[25] At most, the administration is likely to bring some anti-dumping and other high-profile trade cases against China. The Peterson Institute notes that, even though some observers have questioned whether the president has the legal authority to implement the trade policies, “President Trump could act under a variety of broadly written statutes. Adversely affected US and foreign firms could request injunctions from the federal court system, but the courts have generally deferred to the executive on these issues. Moreover, President Trump would have just won the election after running on a platform of carrying out just these actions; he could therefore rightly claim a political mandate to do so. To block implementation, the plaintiffs would have to prevail on every justification, of which there are many; the president would need the courts to acquiesce on only a single rationale to sustain the policy. Appeals could go all the way to the Supreme Court. Even in the unlikely case that in the end the courts ruled against him, a President Trump would probably have at least a year or two to implement his preferred policy unilaterally”.

[26] In the area of trade, given Trump’s dismissal of the TPP, China launched a Beijing-led Asia-Pacific free trade area, inviting all TPP potential members. Were the US to pull back, the region would be left vulnerable to Chinese aspirations. The Philippines and Malaysia are already looking at China for leadership.

[27] In March, Trump said: “There’ll be a point at which we’re just not going to be able to do it anymore. Now, does that mean nuclear? It could mean nuclear… If Japan had that nuclear threat, I’m not sure that would be a bad thing for us”.

[28] During his campaign, Trump repeatedly claimed that: 1) the NATO – which for decades counterbalanced Russian influence in the region – is an “obsolete” organization; and 2) US contributions to NATO are excessive and its European members are “freeloaders”. At 3.6 per cent of GDP, US defense spending is considerably above NATO’s 2 per cent target. In 2016, of the 28 NATO members, only Britain, Estonia, Greece and Poland will meet the commitment.

[29] In particular, former Soviet Union countries such as the Baltics (Estonia, Latvia, and Lithuania), Ukraine, and Georgia.

[30] In July 2015, Iran reached an agreement with six world powers, after two years of negotiations. Under the deal, which was incorporated into international law by the UN Security Council, Tehran agreed to reduce its nuclear activity while the west lifted many sanctions on the Islamic republic. Trump and his advisers have given ambiguous answers about whether they would really seek to undermine Barack Obama’s historic deal with Iran. Trump has said that the agreement would be dismantled or at least restructured. During the third presidential debate, president-elect Trump described the agreement as “the stupidest deal of all time”. On Iran’s side, President Rouhani has bet on the deal ending Iran’s international isolation, attracting foreign direct investment and fostering economic growth. His chances of being re-elected to a second term at next year elections depend on him being able to show to the population the benefits of the nuclear agreement.

[31] In Iraq, the fight for regional hegemony between Saudi Arabia and Iran will continue to divide the country; a defeat of the Islamic State (IS) will not bring the Sunni-Shiite-Kurd conflict to an end. In Syria, where direct US intervention is unlikely, Russia will consolidate its presence as a permanent force, and Iran will not maintain its longstanding influence; the US is likely to accept Assad as president – at least through a transitional period.

[32] On November 9, 2016 (the day after election day), the market-implied probability of a December rate hike declined to below 50 percent, but, following the trend of most financial markets, it recovered previous levels and stabilized within hours. By 1pm EST, the market expectation of a hike in December was back up to 76 percent, the level expected a day earlier. On November 17, according to FedWatch, the probability of a 25 bps hike in the December 14 meeting was 90.6 percent, and the probability of at least one further hike in 1H 2017 was 62.6 percent. These probabilities are calculated on CME Group 30-Day Fed Fund futures prices, which have long been used to express the market’s views on the likelihood of changes in US monetary policy. Source: CME Group, 2016.

[33] On November 9, Reuters surveyed 62 economists, and 85 percent stated that the Fed would go ahead with a rate rise in December.

[34] On November 14, 2016, Dallas Fed President Robert Kaplan – from next year, a FOMC voting member – declared “the time for removing some monetary policy accommodation may be nearing”. The same day, Richmond Fed President Jeffrey Lacker added “easier fiscal policy may require higher interest rates down the road”. On November 15, 2016, the usually dovish Fed Governor Daniel Tarullo indicated that “the discussion has shifted to when to raise rates than how much slack is left in the economy”.

[35] On October 15, 2016 the probability (based on futures pricing) of a December hike was 66 percent; it rose to 80 percent the day after Trump was elected and climbed to 94 percent on November 17, 2016. Source: Bloomberg, 2016.

[36] Trump’s campaign accused the current ultra-loose monetary policy to unfairly penalise savers. Early in his campaign, Trump called himself “a low-interest rates person”, but by the end he was warning of the danger of low rates. Judy Shelton – a member of Trump’s economic advisory team economist and co-director of the Sound Money Project, which campaigns for a hawkish monetary policy – has accused the Fed to have created a “false economy”. Thomas Barrack – chief of Colony Capital and a Trump economic advisor – has stressed that it was time for a shift in the policy mix: “There needs to be change. We need something other than central bank intervention to deliver growth”, pointing to fiscal policy and infrastructure spending in particular; Anthony Scaramucci – a hedge fund manager and Trump advisor – said: “I definitely think we will have a shift from monetary policy to fiscal policy, most of the central banking community is calling out for other legs of the stool”. Over the past years, Trump’s repeatedly questioned  the effectiveness of prolonged central bank stimulus and expressed concerns that such measures were creating a “false economy.” These indications followed complaints during the campaign about the independence of the Fed and the competence of its leadership. Trump has repeatedly criticized Fed Chair Janet Yellen for the Fed’s accommodative stance. Trump has claimed Yellen was acting at the behest of the Obama administration in leaving rates low. He has also said he would not reappoint Yellen for a second term. He will not be able to fire her outright and she is not expected to leave before the end of her term in January 2018. The Federal Reserve Act only permits the President to remove a Governor “for cause” and historically this authority has never been abused by the President. For example, Nixon did not try to remove Chairman Martin in the 1968-1970 period, even though he believed Martin’s monetary policy may have cost him the 1960 Presidential election. Trump’s has also repeatedly criticized Fed Chair Janet Yellen for the Fed’s accommodative stance: Trump has claimed Yellen was acting at the behest of the Obama administration in leaving rates low. He has also said he would not reappoint Yellen for a second term. He will not be able to fire her outright and she is not expected to leave before the end of her term in January 2018. The Federal Reserve Act only permits the President to remove a Governor “for cause” and historically this authority has never been abused by the President. For example, Nixon did not try to remove Chairman Martin in the 1968-1970 period, even though he believed Martin’s monetary policy may have cost him the 1960 Presidential election.

[37] Currently, there are two vacant spots on the Fed board. As of February 1, 2018, Trump will get to appoint a new chair and vice-chair. Possibly, in early 2017 Trump will fill the two vacant spots with the professionals he plans to elevate to the two top spots a year later. The Board of Governors of the Federal Reserve System is composed of seven members, appointed by the US President – by and with the advice and consent of the Senate – for terms of 14 years. The president also chooses the chair and vice-chair of the Board, who – also upon Senate confirmation – serve for four years. Source: Federal Reserve Act, 2016.

[38] The Federal Open Market Committee (FOMC) – the body who decides on interest rates – consists of 12 members: the seven members of the Board of Governors of the Fed; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Non-voting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options.

[39] To fund the stimulus plan, The Trump administration might create a bank or an infrastructure fund supported by government bonds that investors and citizens could purchase. The Fed is likely to support these bonds, either by reinvesting assets as they mature or by expanding its balance sheet via further quantitative easing (QE).

[40] As initial results started to point to Trump’s victory, most markets suffered a sharp correction. Volatility increased, and Asian and European stocks – with US stocks futures – witnessed strong declines. By 6.30am EST (US Eastern coast Standard Time) on November 9, compared to the previous day, the VIX volatility index had risen 8.8 percent, and the S&P500 mini-futures index had lost 2.5 percent percent. Japanese stocks had lost 5.4 percent, South Korean shares had decreased by 2.3 percent, Chinese stocks had lost 0.6 percent, the Eurostoxx 600 had gone down 1.1 percent and the FTSE 100 had lost 0.7 percent. In the GCC, the reaction was milder: Saudi stocks had gone up 0.9 percent and Kuwait’s down 0.3 percent. The USD index, the MXN, some emerging markets (EM) currencies and oil prices also fell.

[41] On November 9, the MXN weakened from 18.3 to 20.7, a 13 percent decline, to reach its weakest level ever against the USD, but closed the day at 19.8, reducing the total decline to 8.2 percent. Brent lost 3.3 percent, to USD/bbl 44.5 per barrel, but then rebounded to USD/bbl 46.3 (+0.7 percent). The USD index (DXY) registered initial declines (2.3 percent) due to the elections’ result, but it soon recovered as flight to safety kicked in, and closed the day up 0.7 percent day-on-day (d-o-d). Volatility also affected emerging market currencies: the TRY depreciated from 3.16 to 3.26 and then recovered to 3.21 (-1.6 percent). The South African ZAR witnessed an almost identical pattern (i.e.: sharp depreciation followed by appreciation), depreciating 2.0 percent d-o-d.

[42] By 11am EST, the DJIA was down 0.12 percent, the DXY dollar index up 0.4 percent, and the volatility index, VIX, was down 10 percent from the previous day.

[43] The 10-year UST yields declined from 1.88 to 1.71 (-7.5 percent) to later increase to 1.954 (+5.3 percent). The JPY strengthened by 4 percent to 101.2 but then lost ground to 103.1. The Swiss CHF followed the same pattern. Gold gained 4.9 percent to a high of USD 1,337.4 a troy ounce, its highest level since September, and then declined to USD 1,88.6, 1.1 percent up from the day before.

[44] On November 15, the DJIA reached a record level, closing at 18,923.06 (up 3.2 percent since November 8).

[45] On November 15, the S&P500 reached a level of 2,180.39, just 0.2 percent short of its record level.

[46] After Trump’s election, the USD – lifted by concrete prospects of rising growth and rates – reached its highest levels in 2016 on a DXY basis, with gains against most major currencies.

[47] Since Trump’s victory, and as of November 16, 2016, the Brazilian Real depreciated by 8.1 percent, the South African Rand depreciated by 8.5 percent and the TRY by 5.3 percent.

[48] The construction sector will benefit from infrastructure spending, while banking, pharmaceuticals and healthcare will enjoy a more favourable regulatory environment. Renewable energies, however, are bound to suffer. If trade-restrictions are adopted, technology and automotive (with large parts of their supply chains in China and Mexico) will see their costs increase.

[49] The details and timing of policy implementation will define direction and size of the impact on stocks. In the (unlikely) case of a global trade war, most corporates will suffer earning declines.

[50] In line with an increased expectation for a Fed hike, the US 10-y benchmark yields rose from 1.8 percent on October 31, 2016 to 2.22 percent as November 16, 2016. Higher yields in the US makes carry trade less attractive, resulting in outflows from high yield EM.

[51] The requirements of a global reserve currency are: a) sound fundamentals – i.e.: a large economy, sustainable growth, low inflation, open and deep financial markets; and b) confidence in its long-term worth. With these attributes, such a currency can play at the international level the three essential roles of money: 1) unit of account; 2) medium of exchange; and 3) store of value.