Don’t expect the Trump rally to last

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Thursday January 12, 2017

Once upon a time, circa late 1900s in a land just south of here, it was the epoch of the “Robber Baron.” These men included many of the gents whose names are synonymous with American capitalism. Some of the most famous are Andrew Carnegie, J.P. Morgan, John D. Rockefeller and Cornelius Vanderbilt.

As we move to the crowning of US president-elect Donald Trump and his appointed group of millionaires and billionaires, time harkens back to those dudes, financial magnates who often gained their wealth by unscrupulous methods. Certainly, it is easy to question how the president-elect has gathered his fortune.

What will a Trump presidency mean for the American economy? If the government spends the way he is proposing, it will be necessary to raise the debt ceiling again. This happened twice under President Barack Obama and was a tortuous affair that led to a downgrade of American debt.

The process should be easier for Mr. Trump because the Republican Congress will likely side with him. However, this is akin to a person who has maxed out their credit cards finding a company naive enough to offer additional credit. While this can be positive in the short-term, it just delays the day of financial reckoning. Ultimately, America will be in a more troublesome financial position.

The president-elect also aims to either expel or incarcerate people who are in the United States illegally. Ignoring the moral issue and focusing solely on the economics, if the country had high unemployment, that would be one thing. But in a nation where the jobless rate has careened downward to its lowest level since 2007, the resulting labour shortage would make replacing this work force both difficult and inflationary. Quite simply, if someone wished to expel illegals in America, it would have been far wiser to do so when the last recession hit and many Americans were starving for work.

Mr. Trump’s threats are already being felt in the auto industry. Ford has cancelled a $1.6 billion (US) plant in Mexico that was estimated to create almost 13,000 jobs in that country. That is a huge economic jolt.

Mr. Trump has also threatened Toyota with high tarriffs if it builds a plant in Mexico. Would that help the US much? Americans would be paying more for cars and, after two years of record auto sales, many people might delay future purchases, negatively impacting the economy. Plus, given the integrated nature of the automaking industry today, it will create huge negative disruptions.

The totality of Mr. Trump’s decisions likely mean higher interest rates in the United States, which will make it harder for many Americans who are tapped out and could again lead to problems in the housing sector.

Uncle Sam’s borrowing costs will also increase, which will likely spell more trouble. Canada is not immune from this. If Americans face higher interest rates, Canadians could too, to keep the dollar from plunging further. Given how our per capita debt is at the highest level ever, many of us will find it difficult to pay bills and make ends meet.

Plus, if Mr. Trump engages Canada in a trade battle, jobs will be lost here. That dramatically increases the possibility of a recession in both countries. Worth noting, too, is that a higher US dollar would make Mr. Trump’s pledge of bringing home manufacturing jobs more difficult.

If American interest rates move up, all things being equal, that could cause the Chinese yuan to drop. Best estimates are that about half of Chinese debt is in US dollars. This would make it harder to pay, hurting the Chinese economy while causing bankruptcies. That would lead to a global ripple effect.

One idea that Mr. Trump and his cronies might float if they really want to push the envelope is a “flat tax.” This will be a huge benefit — for those who are very rich. Not so good for the rest of the population.

Another option, one which is very likely, would be to “simplify” the tax system. It is not difficult to see this creating more advantages for the affluent. As we have stated before, one of the best ways to keep an economy moving is to have more money reach the poor, who will spend it. More money in the hands of the fabulously wealthy does not have the same impact.

At the other end of the spectrum, Mr. Trump might try to place a lid on increases in the minimum wage. This will be couched as helping the poor so that their jobs will not be replaced by technology. While that does happen to a minor degree, the overall benefit of giving people a living wage is important. Unfortunately Mr. Trump’s government will not be concerned about capitalism with a human face.

Changes to the corporate tax code could be coming, too. Mr. Trump has proposed a cut in corporate taxes from 35 percent to 15 percent, allowing companies to expense capital investments, and lowering the tax on repatriation of foreign earnings from 35 percent to 10 percent.

While this would spur some investment, larger deficits and growing debt would almost assuredly result. This action, if it occurs, will make Canada a less competitive place. That is a danger, especially given the deficits that the government will continue to rack up, true long-term folly given that the economic climate here currently is not harsh.

It is very unlikely that the Trump story will have a happy finish. While stock markets have been on a great run, at some stage reality will set in and they will be in for a major beatdown. From this angle, one should measure carefully any additions to investments and not get carried away with the current optimism and apparent upside potential. Taking some money off the table on stocks that have had big runs could prove very wise.

One virtual certainty is that Mr. Trump and his cronies will end up richer. Welcome back to the world of the robber barons.