By Charlie Morris – Fleet Street Letter (Great Britain) –
Now the dust has started to settle following the US election, some trends have started to emerge. What’s noticeable is how the financial markets have adapted to every snippet of the new world they see ahead. One striking feature is the shift in the narrative from zero interest rates to a surge in growth as the US becomes great again. There’s also a belief that the dollar will remain strong.
The problem with popular narratives is that they often get ahead of themselves. It’s true that Donald Trump is a pro-growth president. His entrepreneurial team knows far more about business than politics. In some ways, this as a welcome development – or at least if it’s not, it’ll be fun to watch. Something had to change because living on zero rates until eternity would have been death by a thousand cuts. That’s why I support the new world.
Trump wants regressive tax cuts for the populous – that is an easing of the burden on the poor. In the UK, VAT and council tax are regressive because the worse-off pay more taxes as a percentage of their income. This will lead to a trickle-down effect that will increase consumer spending. He wants to slash corporation tax to 15% that will attract foreign investment and boost the S&P 500. The stockmarket reflects future profits. With lower taxes, those profits just rose. He wants to reduce regulation, which will make the economy more dynamic and flexible. He wants to boost infrastructure via public-private partnerships – an effective way to achieve more for less. And he’ll meet these goals because the Republican Party is firmly in control.
Another change is a 10% special rate of tax for US companies willing to repatriate their overseas profits. This is seen as positive for the dollar as the money comes home. However, on this point I disagree with the widely held view as those US companies already hold dollars; they just happen to be held offshore. Some point to George W Bush’s 2004 Homeland Investment Act that led to $300 billion being repatriated. The dollar rose 10% in 2005 and the two events are often connected. But US rates also surged from 2.25% to 4.25% over the course of that year. So what would be more likely to boost the dollar, a transfer of dollars from offshore to onshore (without an FX trade) or foreign demand for dollars as rates soar? I vote the latter.