Saturday, February 11, 2017

Analyst Roubini predicts Trump rally may soon be over

After Donald Trump's surprise election as president, U.S. stock markets rallied as Trump promised a large infrastructure program, together with deregulation in several sectors including health care, energy, and financial services.

As well, he promised cuts in corporate, personal, estate and capital-gains taxes all of which appeared to investors positive for business and corporations. Although Trump uses strong populist anti-establishment rhetoric according to the Tax Policy Center almost half of the benefits of the Trump tax cuts will go to the top one percent of earners.
Back on January 25th the Trump rally drove the Dow Jones Industrial Index (DJI) above the historic 20,000 mark. The DJI stayed above this level until this week. As I write this, the DJI is 19,853 still not far below the 2,000 level. The U.S. economist and chair of Roubini Global Economics, consultancy firm Nouriel Roubini believes that the "honeymoon" between Trump and U.S. stock markets is ending and there will be continuing market declines in the future. Roubini was among the few economists who predicted the crash of 2007-2008. He had warned about the crash in an IMF position paper as long ago as 2006. His predictions earned him the name "Dr, Doom" and "permabear" in the media.
Roubini argues that anticipation of the Trump fiscal stimulus led stock markets higher, but it will also lead to higher interest rates, and that this could dampen capital spending and slow sales in sectors such as real estate. The dollar is strengthening and could destroy many manufacturing jobs as exports become more expensive. Roubini also suggests that Trump's fiscal stimulus may be larger than expected, while he has no way of making up revenue lost when he cuts corporate, income, and other taxes. He claims that this will further inflate interest rates and raise the value of the dollar even more. In the longer term this will hurt the economy. Roubini feels that with the U.S. economy already close to full employment Trump's fiscal stimulus could fuel inflation more than it increases growth. The Federal Reserve will feel forced to raise interest rates and increase the value of the dollar even more.
Financial conditions will tighten, with the result that blue-collar workers' incomes and employment prospects will suffer. In order to retain the support of workers Trump will need to introduce further protectionist policies that will dampen economic growth and also reduce corporate profits. Trump's protectionist policies could start trade wars. This will hinder global economic growth, increase costs for consumers and hurt markets.
Roubini sees Trump policies as extending beyond traditional protectionism. Immigration restrictions will make it hard to attract talent from targeted foreign countries. Trump has already threatened foreign operations such as those of Ford in Mexico with import levies. Finally Trump is antagonizing important global economic powers such as China. Most recently he appears to have shouted at the Australian Prime Minister during a phone call and questioned a deal worked out with the U.S. to take in some immigrants from Australia. As Roubini puts it: His erratic foreign policies are spooking world leaders, multinational corporations and global markets generally.
Roubini admits that expectations of stimulus and lower taxes, plus deregulation could in the short term boost market performance but Roubini concludes: "But, as the vacillation in financial markets since Trump’s inauguration indicates, the president’s inconsistent, erratic, and destructive policies will take their toll on domestic and global economic growth in the long run."
As it is now markets have been mostly positive about Trump policies, in spite of the fact that he has withdrawn from a key trade deal the Trans-Pacific Partnership and is demanding re-negotiation of the North American Free Trade Act. Investors must feel that on balance Trump policies favor business and corporations. Many of Trump's appointees are connected to Wall Street. Policies such as his executive orders on regulations and the move in Congress to remove Obama-era regulations will lift market sentiment and perhaps offset his other moves that create protests and threaten relations with key allies. We could see a coming period with more volatility but perhaps in the longer run Nourini's prediction will turn out to be correct.


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