After Midterms, Markets May Cast Trump’s Ghost By


By Geoffrey Smith — The U.S. midterm elections may not have brought financial markets all they hoped for, but they appear to have delivered undoubted long-term good.

The rejection of Donald Trump’s proteges and proxies looks likely to break the spell on the Republican Party of a man whose reckless fiscal and trade policies had already put the economy on an unsustainable path even before the pandemic.

If – as seems likely – the next Republican presidential nominee is Ron DeSantis (convincingly re-elected as Governor of Florida) or a like-minded conservative, then the party will be able to offer a compelling alternative to the Democratic tax and spending priorities in 2024, without the associated costs of erratic populism and self-defeating trade wars.

This may seem like a harsh judgment on a period that many remember as a period of rapid growth and falling unemployment. However, the truth is that Trump’s boom was a sugar rush based on a massive widening budget deficit that never even tried to pay for itself: between 2016 and 2019, the last year before the pandemic, the deficit was from $590 billion to $980 billion.

Covid-19 has covered up this fundamental truth. In 2020 he punched holes in the budget (as well as destroying any chance that China would meet its commitments under the infamous “Phase 1” trade deal), but in 2019, the last year before the pandemic , the Congressional Budget Office estimated that Trump’s tax cuts would add $1.9 trillion to the national deficit over 10 years, even after accounting for growth effects.

Any revival of this policy today would likely have catastrophic consequences, in a brave new world where inflation is alive and well and bond vigilantes deal vicious blows to leaders – like the UK’s hapless Liz Truss – who try to ignore it. Trump could force Federal Reserve Chairman Jerome Powell to ease monetary policy in 2019 as growth and inflation slow, but market reactions to the bullying of an independent central bank would be very different today. today.

But the budget is just one area — albeit huge — where Trump could cause long-term damage to US markets.

His adamant denial of the realities of climate change has undermined valid arguments about near-term risks to energy security. Its failure to implement meaningful health care reform has resulted in millions of Americans still having more difficult access to health care than their peers in other developed countries, with unquantifiable but undeniable costs. enormous for the American service-based economy.

His unseemly closeness to Russia’s Vladimir Putin, meanwhile, could all too easily create a situation in which Russia’s nuclear blackmail would be rewarded, setting a precedent that could have fateful codas in the Taiwan Strait or on the peninsula. Korean, with all that this implies for the United States and the global economy.

More importantly, a return of Trump and Trumpism would be a return to an America where the rule of law itself would be in serious doubt, given the ex-president’s blatant efforts to nullify legitimate election results. of 2020.

Most US investors do not invest in emerging markets. Those who understand that markets impose significant costs on economies where politicians unleash mobs to prevent the smooth transfer of power. Country risk exists as much for the United States as for Argentina or Zimbabwe, the only difference being that a slight increase in US country risk would be enough to significantly increase the cost of capital for the global economy.

None of this is to say that the outcome of the midterm elections is perfect – or even optimal – for the US or global markets.

But with Trump sidelined and control of the House of Representatives reverting to Republicans, there’s a chance — however slim — that bipartisanship will once again gain traction in Washington. Even if the most immediate risk is two years of drift and paralysis.

It’s unlikely to be pretty, but it’s also not the worst-case scenario imaginable.

Daniel K. Denny