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Article / 11 January 2017 at 9:55 GMT

Macro Digest: Goodbye, Mr. President — #SaxoStrats

Chief Economist & CIO / Saxo Bank
Denmark
  • Trump presidency promises volatility and a mixed bag of economic policies
  • Geopolitical difficulties, central bank weakness to animate coming era
  • Banner equity rallies, 'Trump trade' strength hiding real risk of recession

Donald Trump
"Democracy is the theory that the common people know what they want, 
and deserve to get it good and hard." — H.L. Mencken / Photo: iStock

By Steen Jakobsen

President Barack Obama's final speech was classic Barack – excellent, but thin on “progress to report”. Now, we move on to president-elect Donald Trump’s press conference (1700 CET), which considering the new Russian link allegations is sure to see massive exposure.

Trump has somehow both embodied and animated the “free spirit” of the US; even the seasoned economists and hedge funds I talk to have been “won over” by the momentum of Trump's populist campaign and big promises. Maybe, however it’s time to remind everyone that: 

  • Yes, economics matters.
  • No, it’s not entirely about psychology. 

Economics and its underlying incentive structure is what creates the future; tweets do not (although as Twitter shareholder, I wish they did). 

In the short term, both market and (clearly) political forces can go off-course from trend and wander from the mean, but last time I checked the US was in a massive slowdown relative to its historical long-term growth (sub-2% growth versus 3.5% since the 1950s).

Most of the jobs created have been temporary ones (close to 50%), and we have also to consider the demographics discount afoot, as an aging population means a 0.50-0.75% subtraction in top line growth under unchanged-to-slow productivity.

Getting back to “long-term” growth of 3.0-3.5% can only be achieved by boosting productivity – not by forcing jobs to stay in the US. In the short-term, perhaps, such measures can “boost” growth but it will always come at the expense of future (credit-financed) growth.

Trump's policy mix has some growth-supportive elements and some negatives. In the long-term, and from an economics perspective, it’s net-negative: building walls (both figuratively and practically) has never done any good for growth and prosperity.

The US' new foreign policy will be random and opportunistic and will ultimately lead to another drawback from the country's position of international leadership. The G7 is now de facto led by Germany and chancellor Angela Merkel by virtue of Trump's having vacated the position.

This is a position, of course, that she does not want – especially in an election year.

Angela Merkel
After all, the German chancellor faces enough challenges
without Trump entering the mix. Photo: iStock 

Given this, the US "home front" will be the main arena for Trump as he is 100% domestically driven in his focus in a manner similar to his hero, former president Richard Nixon. The Trump presidency will also mean immense pressure on the Federal Reserve which, again, is similar to the status of the Fed under Nixon and then-chair Arthur Burns.

In the bigger picture, Trump is the final part of the cycle that started either with Nixon taking the US off the gold standard in 1971, or with Reagan introducing supply-side economics (and running massive fiscal deficits) and reintroducing laissez-faire policies in 1981.

(Then, of course, we had the 30-year “nightmare” of more and more central bank intervention not only in rate-setting, but also in increasingly less freely traded markets...)

We may get some insight into Trump's agenda today, but ultimately I doubt it…I have over the last few weeks tried to “get my head around Trump”, but sadly I have reached the conclusion that the Trump presidency will be at best chaotic and experimental, and at worst it will provide a 21st century mirror of Nixon’s few years in office.

Sadly, president Trump will be exactly the same as Trump-the-candidate, despite whatever creative spin is provided by his advisors.

A disbelief in the free press, the targeting insulting of opponents, and non-factual claims will prevail. I hope political activists and the press will be up for the job; as Obama rightly said yesterday, democracy is under pressure, and that’s the real crisis. 

Make no mistake, change is good, and Trump – as I said constantly throughout 2016 – was the necessary antidote to the dynastic Clinton/Bush era and its profound elitism. Remember: Trump didn't win the election, Clinton lost it. What is now unfolding is driven by a social and economic need for change. 

Sometimes we need to fully experience – to feel, smell, and touch – those things that we don't want in order to move forward again... and I think 2017-2020 could be such a period.

Here are some of my observations including a kind retweet of my Macro 2017 Outlook by Mike “Mish” Shedlock, who has included my full client presentation online: 

Mish on Steen Jakobsen
 
 And as for Trump? Well, headlines such as this are concerning and certainly imply a less-than-inclusive president:

Trump declares war






Also, and only furthering my belief in the "Nixonian Trump" hypothesis, is the fact (pointed out by my good friend Kasper Elbjørn) that Trump plans to hang the following letter from former president Nixon on his wall:

Nixon
 
Finally, read this Bloomberg piece by Barry Ritholtz and most importantly click on the link behind the corporate name – what does this remind you of? 

Kindergarten, maybe?

POTUS indices















Trump's inauguration will in my opinion be the catalyst for a new reality – a time where hope is replaced by doubt and a dramatic wake-up call for the increased risk of recession based on extremely negative global liquidity, a too-strong US dollar, political uncertainty, and a year where geopolitical risk will take centre stage as central banks' ability to cushion fallout is limited.

Welcome to the beginning of the end of pretend-and-extent, but also to a year of volatility.

My full investment view is included in the online presentation linked by Mish above.

Changing course
We have gone off-piste... are you ready? Photo: iStock 
 

— Edited by Michael McKenna

Steen Jakobsen is chief economist and CIO at Saxo Bank

11 January
Mekong Mekong
Deeply worrying stuff....
11 January
Franksg Franksg
Hej Steen, as usual you are genius . Thanks for this mind Breaking analysis. Regards Ole japan
11 January
ka26 ka26
Thanks
11 January
fxtime fxtime
Hmmm...what can you say about the press conference other than Trump seems to have a low threshold to adverse questioning and that he seems to accept his security advisors that perhaps there was undue influence to what-ever degree during the election period. But nothing hard and fast to consider. The jawboning continues that mexico should pay for a wall and Obhama health care will change. Nothing new or any clarity sadly.
12 January
Rogan Rogan
Depressing predictable press conference, it will be like having Eric Cartman in the White House
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