Countless words have been written about the U.S. election. Hillary Clinton looked like the sure winner, and the capital markets knew what to expect: more of the same. Only a few sectors would be affected: for example, the drugs pharmaceutical industry, which explains the underperformance of recent months.
Now the tension is mounting. Donald Trump has been gaining ground in recent polls, and although it still seems unlikely, he might win. The Brexit vote showed how unreliable opinion polls can be.
Just like in Britain, many people in the United States have lost out from globalization and been forgotten by the political elites. The Internet billionaire Peter Thiel, who is of German origin, described their miserable situation succinctly in a speech: stagnant income, exploding costs for health and education, meager retirement provisions, high indebtedness and economic policies that encourage bubbles – first stocks, then real estate – to create the illusion that prosperity is being created. Those are plenty of reasons to call for a fundamental change of policy.
American economists are deeply skeptical whether Mr. Trump is the right person for the job. His fundamental rejection of conventional policy approaches fits in with a wider trend of mistrust of free trade, of the European Union and of the established media – in short, of the mainstream.
Tensions in the single currency area would increase, as would fears of a collapse of the euro.
As investors, we are obliged for better or worse to seriously consider the scenario “Trump Wins the U.S. Election.”
First of all, like many observers I assume that the global stock market would react negatively to the news. Mr. Trump has made enough statements during the campaign to make him look like a political adventurer. The widespread media echo after his election would be correspondingly negative and would increase uncertainty.
Stock markets could slump by 20 to 30 percent in the coming months. Mr. Trump’s election would only be a trigger — the underlying cause would be the money-printing by central banks around the world, a move that has driven up asset prices without reviving the real economy. But the much more exciting question is: what will happen then? Would a Trump victory be the start of a global downturn or would it just precipitate a brief drop that would open up buying opportunities?
When he was asked how he proposed to deal with America’s debt mountain, his answer was simple: “you print the money.”
In historical terms, this would not be the first time, by the way. In order to finance the Civil War, the North under President Abraham Lincoln issued zero-interest, non-redeemable treasury notes in order to finance state expenditures. At their peak, the greenbacks totaled $450 million, which would be around $500 billion today. The advantage, both then and now, is that in addition to an interest-free, long-term financing of state expenditure, the amount of money in circulation is increased without being dependent on the banking system.
Another look back into history – to the era of the Great Depression as well as the final years of the nineteenth century – shows that those countries do best economically that are most successful in bring about reinflation, because a significant rise in prices helps to devalue the debt burden. The more protectionist a country was and the quicker it managed to devalue its own currency, the greater was the success. A President Trump would probably embark upon this very path.
Limiting immigration would probably cause wages to rise. Protectionist measures – however they might be justified – would shift production into the U.S. and would tend to raise prices. Debt-financed stimulus programs would lead to higher growth and – probably – to a significant weakening of the dollar, which would promote exports and reduce imports. If Mr. Trump made good on his threat to force allies to increase their defense outlays and scaled back foreign military activities, this would also have a stimulating impact on the U.S. economy.
Europe, hamstrung by the structure of its central banking system, would only be able to react very slowly to this aggressive policy shift.The euro would appreciate and inflation would fall. Tensions in the single currency area would increase, as would fears of a collapse of the euro. Given that a Trump victory is still the less likely scenario, I don’t recommend a complete withdrawal from the markets, but a tactical reduction of equity, which is warranted in any case because of current high valuations.
If Mr. Trump wins, the strategy is clear: sell dollars, buy shares of U.S. companies that will profit from stimulus programs and protectionism, and buy gold because inflation will likely increase.
And last but not least: brace for a return of the euro crisis.
This article first appeared in WirtschaftsWoche. To contact the author: email@example.com