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A corporate revival and labour-reducing capex is the key Mr. Trump has to fight the cause not the effect, focus on productivity rather than spending, on solutions for today and tomorrow. He has already taken a huge step towards a corporate revival by arousing dormant animal spirits. If truly aroused, they could well secure the future of the US economy, and a second term for Mr. Trump.

His other plans need to be moderated (or better still abandoned) Helicopter-money-financed infrastructure is a (slow) disaster-in-waiting, personal tax cuts are mildly deflationary, and 4% annual growth could create a relentless global recession. Protectionism is half a decade too late to have a huge impact, and addresses only the symptoms. Socio-economic policies that exacerbate the social and political rifts that his arrival have deepened would need to be moderated as well.

But Mr. Trump is not a man who tolerates moderation. Whether he wins his battles depends on how much he does of the former (corporate revival) and how little of the latter (everything else).

Top Trump Trades: Long USD, banks and those with capex potential; Long Russia; Look out for Mr. Trump to try and smooth the way for Brexit; Long Mex peso isn’t for the faint-hearted but Short peso Vol will work (NAFTA will be harder to disband, a lot is priced in, Banxico is vigilant)

I’ll tip my hat to the new constitution, take a bow to the new revolution, … then I’ll get on my knees and pray, we don’t get fooled again – The Who, 1971

People have not voted for change – quite the contrary. It is a desperate rebellion by those who don’t want change against all that has been wrought upon them, a change that they now want reversed. Far from being new or unique, rebellion against change is as old a social phenomenon as change itself. The dereliction or folly of those who promise a path back to the way things used to be is to fight the effect or symptom, not the cause.

So what is Mr. Trump Fighting?

– Is he fighting the cause or the effect?

– Is he fighting secular stagnation or structural stagnation, i.e., the demand side of the problem or the supply side, spending or productivity?

– Is he fighting today’s problems or tomorrow’s challenges?

Productivity, we will argue, lies at the heart of every single one of these questions but we’re not sure which policies Mr. Trump will favour more, and hence which battles he intends to fight.

If there is so little clarity, why are markets so positive? For now, its economic serendipity Markets wouldn’t have been as positive a year or two ago. But Mr. Trump’s timing couldn’t be better – his fiscal expansion plans arrive when helicopter money is (for not very good reasons) in vogue, domestic reflation is here, and deflationary shocks outside the US are nowhere to be seen (at the moment at least). Would his election have had the same impact on markets a year or two ago? We doubt it.

Regardless, he has the market’s backing and strong economic tailwinds – what use will he put those to?


1.1 Fighting the cause or the effect?

Globalization and inequality are symptoms, not the cause The demise of local manufacturing, falling real wages, rising inequality and weak growth – all very important, but they are all symptoms.

The cause is much deeper Structurally, demographics drove real interest rates, wages and inflation lower, and growth but also inequality higher over the last 35 years. A demographic reversal over the next few decades will raise real interest rates, inflation and wages. Growth has fallen, and inequality will follow suit.

Good luck fighting that structural change – but we do have a historical opportunity to soothe the pain if a corporate revival happens (not just in the US but globally) as we explain below. Cyclically too, corporates have saved rather than spent for years so that the return on fixed asset investment is unlikely to be low.

1.2 Fighting Mr. Summers’s Secular Stagnation or what we call ‘Structural Stagnation’?

Fighting secular stagnation needs an injection of demand Mr. Summers describes a demand-deficient world in which the output gap in the economy never closes. Excess capacity creates a disinflationary impulse that raises the real interest rate so that demand can never recover – which is why a fiscal boost is needed.

We’ve been sceptical of this argument and its prescription Even if it was worth considering some time back, a closed output gap and rising inflation means it isn’t anymore. Then why should its policy prescription – fiscal spending – make sense? Surprisingly, even Fed Chair Yellen agreed with us last week… it doesn’t.

‘Structural stagnation’, though, is a supply-side story that needs higher productivity We define structural stagnation as the decline in potential output growth and the stagnation on the supply side of the economy, particularly where per capita incomes are falling (i.e., the stagnation exceeds the loss of the demographic dividend). Most would agree that this is the problem that confronts the US.

If so, then the problem is not one of demand but supply, and not of low spending but low productivity growth!

1.3 Fighting Today’s Problems or Tomorrow’s Challenges?

Today’s problems There are two really serious economic problems today that the US economy hasn’t yet found a solution to: (i) Low productivity growth and a falling capital-labour ratio, thanks to a corporate sector that would rather save or retire equity, (ii) The stock of debt in the rest of the world still has the ability to derail US fundamentals. Though the debt lies mostly outside the US, it could well be US rates and the USD that trigger a debt shock that then flows back to the US – i.e., an external shock, but not an exogenous one.

But tomorrow’s challenges will look nothing like today’s.

Tomorrow’s challenges Rather than being centered around debt and cyclical issues, tomorrow’s challenges (i.e., 5-10 years or further down the line) will be increasingly focused on demographic issues. Specifically: (i) Will there be enough of an increase in productivity via the ‘right’ type of corporate capital to compensate for future shortages of labour? (Ii) Will weak pension and healthcare systems be able to cope with the ageing that is inevitable? (iii) How will economies cope with the higher real rates and inflation that ageing will bring?


We wouldn’t be economists if we gave you a yes or a no. But we can get some clues by looking at the set of policies Mr. Trump has chosen: (i) Animal spirits (ii) Fiscal expansion (iii) Protectionism and external relations.

2.1 Animal Spirits – A Great Start to a Worthy End

Corporate revival? Even before he occupies the Oval office, Mr. Trump has already launched what might become his most important contribution – reviving Corporate America’s animal spirits from its deep and somewhat incomprehensible slumber. Mr. Trump’s key appointments (all quite far to the Right), his disdain for Dodd-Frank and regulations in general and the emphasis on reviving domestic manufacturing all point to a corporate sector revival. If all else fails, Mr. Trump won’t hesitate to name-and-shame those who fall foul.

2.2 Fiscal Options: The Awesome, the Blah and the Dangerous

Fiscal Option 1: Infrastructure – the Dangerous

How can we be petrified about demographic trends, or that technology will change the way we work, and then demand more physical infrastructure? Let’s say we go all-in for infrastructure. The first projects start early – in 2018. While the money is being spent, the fiscal impulse begins to lift demand and all is well. Then the fiscal delta flattens and growth goes back to trend. As the bigger projects that hold so much promise are completed, say in 2028, will we wonder why we spent all that money? Population growth will have slowed down, and driverless cars and telecommuting may have reduced the pressing demand for traditional infrastructure.

A more traditional argument – incremental return vs the stock of debt There is clearly a gross benefit to most infrastructure projects, but does that mean they all have a high net economic return? Is the gross rate of return from infrastructure high enough to be economically viable in a period of rising interest rates? It is, and easily so, in the case in EM, but that’s not necessarily true in DM economies. Think of it another way, would you rather have a deficit that financed infrastructure, or gave corporates an incentive to generate capex?

Cheekily, we would argue that JFK airport, the one most people complain about, can provide a much better travel experience if we had more politeness and automation rather than a large fiscal, physical overhaul.

Tongue even more firmly in cheek, we argue that there is one thing that the infrastructure discussion has achieved It has given the secular stagnation camp a way out – without the fiscal package, they would have to admit their pessimistic view was misplaced – that it was the world’s burden on the shoulders of the US rather than a domestic malaise that was weighing on growth. Now they can say it is because of helicopter money that they’re changing their view – who said Mr. Trump isn’t magnanimous! To her great credit, Fed Chair Yellen did not take that get-out-of-jail card, arguing in her Q&A that a fiscal expansion was not needed, while speaking hawkishly. This despite her past espousal of many aspects of the secular stagnation thesis.

Fiscal Option 2: Personal Income Tax Cuts – the Blah

These are likely to favour the rich, resulting in less spending and more savings. Sure, some of that savings will prop up the stock market, but if the package is big enough, increasing savings will also at the margin push the equilibrium interest rate lower, making any Fed policy more restrictive. Seen another way, the deficit will rise for no good reason, implying that the Fed will have keep rates lower to finance it.

Fiscal Option 3: Corporate Revival – the Awesome

US corporates (and others across the world) have refused to spend on capex. Instead, US corporates have raised debt to retire equity in the past – that was based on the expectation (an incorrect one we argued), that interest rates would remain low for longer. Even though their coverage ratios are adequate and debt maturities long, Corporate America’s path to maintain solvency is to raise capex, productivity and its return on its assets.

Structurally, demographics could raise the return on capital that saves on labour. Corporates invest for the next decade (or more) and there’s little doubt that the next wave of capital deployed will be labour-saving. The incremental capex will change the nature of the entire stock of the country’s capital only very slowly, even though some sectors will transform rapidly. As the capital stock slowly transforms to a type that is designed to work with less labour, a falling workforce could raise productivity and the return on such capital over time.

2.3 Protectionism and Foreign Relations

Protectionism – too late to have much of an impact

Economies endogenously try to protect themselves after severe imbalances. The nature of the recovery in the advanced economies (more low-end manufacturing and services in the US, a current account surplus for the euro area) has crushed global trade, doing endogenously what Messrs Smoot and Hawley did in the 1930s.

Reviving manufacturing and reversing globalization will certainly protect the domestic economy, but Mr. Trump is half a decade too late to make much more than a marginal impact

Revival of low-end manufacturing started 5 years ago:We have worried for a while that the US was less a consumer and more a competitor for EM thanks to this revival. This is not a new trend he seeks to create.

Global trade volumes have collapsed after the crisis: Sure, breaking trade deals will protect the domestic economy and hurt some, but the collapse of global trade after the crisis means the downside is limited. Cancelling TPP was easy, but cancelling NAFTA will be much harder thanks to supply-chains, like Brexit.

Immigration has already peaked Immigration into the advanced economies peaked around the time of the financial crisis. And so has the inward immigration from Mexico. Again, this is not a new trend!

Foreign Relations will favour some, hurt some, and ignore most of the others

Russia, unless something goes horribly wrong in the electoral hacking scandal, has significant upside.

The UK: Mr. Trump will have a particular interest in making sure that Brexit moves through smoothly so that he has a stronger rationale for arguing that withdrawing from trade agreements doesn’t hurt.

China has clearly been singled out for rough treatment with the ‘currency manipulator’ tag the most likely threat, ironically at a time when China is trying its best to keep its currency from a sharp fall. China has very little to retaliate with, and its loss of market share in the US has traditionally been Mexico’s gain.

OUR VERDICT? Corporate labour-reducing capex is the singular dynamic that fights the good fight It addresses the cause, reduces structural stagnation by raising productivity, and addresses today’s imbalance (falling capital-labour ratio) as well as tomorrow’s demographic challenge. Neither infrastructure spending nor personal income tax cuts come anywhere close. Protectionism sounds like it will help the domestic economy, but most of the trends that the market is betting on have started five or more years ago – where’s the surprise or the impulse? But Mr. Trump has two tailwinds that no one has had for a while – an economy that is close to full employment, and the animal spirits that he has revived himself. What will he do with those?


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