In a remarkable change of heart, the market changed its mind on him so fast that the disconnect between the slump of Dow futures overnight on election night and the opening up the morning after is perhaps best characterized as a gigantic flash crash.
The puzzle was not just about what happened on that night. In the months prior, when the market-perceived probability of Trump shifted from infinitesimal to remote and back again, stocks, bonds, currencies (including the Mexican peso) all said so. Yet, bonds excluded, all was sweetness and light when the unthinkable happened.
One emollient awkwardly telepromptered almost ad-lib-free victory speech didn't do it. After all, the futures crash kept right on through his speech, and held and held as the minutes and hours passed, all the way past the early light of dawn, till opening.
Instead, for months prior, there was no interest among investors in dispassionate analysis of his economics because, unlike me (1/), they regarded its prospect as fanciful. Even need to understand the implications of probabilities apparently shuttling between infinitesimal and remote was insufficient. The market took its cue from the partisan stuff gushing out, including from Krugman, who, tellingly, withdrew his "global recession" call immediately the election result was called (2/). "Slap dash" is kind to the quality of prior market analysis of this core global matter.
In part, its casual approach reflects its proclivity to price such one-off events by what it wants rather than--with all due respect to the efficient markets and rational expectations hypotheses--any sensible judgment of probabilities. I first bumped into this phenomenon ahead of the initial fight between Mike Tyson, then at the height of his powers, and Frank Bruno. The British betting market, in a grand love-fest for its local lovable hero, made Bruno the overwhelming favorite. The result was the inevitable. I don't know what it will take to kill off the old trope that "market knows best", but its soft-cloistered advocates plainly know nothing of boxing. My best guess is that the market only began to look at his economics purposefully once the odds of the event it wanted had fallen to zero. A flash crash of sorts, if a global one.
And the market liked what it saw. Prior to, it had swallowed Trumpzilla-doomsday from the usual partisan suspects--Summers, the IMF, Krugman etc--unblinking. But those Very Very Serious Economists (VVSEs) had also all beaten the drum for a big public-investment-led fiscal stimulus at the lower bound, and policies to raise inflation. Well, in the light of day, darn it if a big inflationary fiscal stimulus wasn't exactly what he heralded, with Dodd-Frank to be scrapped to boot, so, "doomsday postponed guys!" Pity those VVSEs now all-a-twitter, also having to face that, as a developer, Trump is ideal to lead a public investment effort, not least as he knows better than any armchair Keynesian that if they know you're in a rush, developers will just stiff you on price and quality.
Some would counter, even now, that fiscal conservative Republicans in Congress will "just say no" to stimulus, with Evangelical, Roman Catholic, and Tea Party fervor. But of the government shut-down ringleaders, Newt Gingrich is tipped for Secretary of State and Ted Cruz is .. well .. what exactly has become of "Lyin' Ted"?
And I learned in my professional career that the most dangerous creatures on two legs are clever spineless people--who now crowd the Congressional Republican benches to overflowing and who are set to stay encamped there through the mid-terms. These folk have just weaseled their way through the presidential election to sort-of-not-really-oppose-and-maybe-even-quietly-ok-Trump-in-such-a-way-that-whatever-the-presidential-outcome-they-would-at-least-sort-of-be-on-the-winning-side. They have no backbone for a debt ceiling fight against him in them. And should any peep anytime, Democrats are liable to "just say yes" in their stead.
Trump, as many before, may get bogged down in the Corporate Tax reform special-interest swamp. But his personal income and inheritance tax proposals (Republican votes) and public investment program (Democrat votes, if necessary) look a shoe-in. The market is right, very very belatedly, to anticipate a big sustained fiscal boost.
With inflation--by measures that FOMC bellwether Stan Fischer favors--and unemployment both close to Federal Reserve targets, that means interest rates and dollar up.
That is where markets should now think more broadly.
To see how, first put aside the nonsense from our VVSE pals that Trumpzilla-doomsday would start immediately in anticipation of trade war with China--deja-vu on Smoot-Hawley all over again. Lest we forget, the US Great Depression resulted far more from pro-cyclical monetary and credit policies, compounding gross financial supervisory shortfalls, than ever it did from trade wars. And, further, acknowledge that, as was plainly evident to his voters, even if it went completely over the heads of our VVSEs, absolutely nothing he said, including the 45 percent tariff on imports from China, was to be understood literally.
Instead, with US interest rates and the dollar up, China gets even more precarious. A sustained appreciating dollar rules out Beijing's steady sizable RMB real effective depreciation against its basket to relieve domestic pressure because that now implies big bilateral RMB depreciation against the US$. "Them is fightin' words" in Trump-land, not least given his intent to label China officially as a currency manipulator. A strong dollar is the first Trump blow to China's gigantic bubble-cum-house-of-cards. And if you think Beijing is willing to call Trump's bluff on this by shifting to a fully free float, then I have priceless "I'm with Her" memorabilia to sell you.
So, the market says, China still has a bunch of other tools to handle its domestic problems--including submissive central bankers and financial regulators, home grown fiscal stimulus, and SOEs, national accounts, and a media who will all do as they are told. Watch the Chinese handle it!
Think again. Trump will not only (or even primarily) think in terms of what he can do in the US, given China, to fix the problems of his constituencies--rust-belt, small town, and white uneducated male 50-year-to-date-median-real-wage-secular-stagnation. Instead, he will also (or primarily) think about what he can strong-arm China to do to itself to fix his constituencies' problems. So China's house of cards now has considerable additional Trump-burdens to bear. And he will see all these "additional" Chinese tools in that light. Thus, whereas, in the Great Depression, the underlying global policy and structural shortfalls were located in the US, this time around, they are (and if Trump has his way, will be even more-so) located primarily in China, even if the market (now) takes comfort from these things as "other tools for China to handle its problems."
And he will have considerable sway on all this, not least, because popular vote or no, thanks to his grip on all branches of government, he can pursue his goals free of constitutional checks and balances. In this, he is akin to LBJ 1964 after his electoral sweep post-JFK alongside an unexpectedly liberal Supreme Court; and akin to Reagan, thanks to his mobilization of rust-belt Reagan Democrats, which buckled Democrat Speaker, Tip O'Neill.
And where did that kind of unchecked Presidential power lead? LBJ's great society and Vietnam spending eventually scuppered the Bretton Woods system (even if it was Nixon who officially took the US$ off gold), and Reagan (and Volcker) blew up international debt. Neither intended these outcomes. But that was the upshot of things they were trying to do. Unchecked Presidents are consequential.
That is Trump. He personally does not want or intend to blow China up as an end in itself. But like these two others, pursuit of his goals puts that on the cards. Exactly how and when a trade war plays into that is to be seen--with TPP and TTIP already corpses, options range from simple anti-dumping duties on steel all the way to 45 percent duties on all Chinese imports, sometime. Sneering that none of this will work is beside the point. If things don't improve for rust-belt, small town, and white uneducated males, then the prospect is that Trump, like his unchecked comparators, will double-down both on them and on things he can get China to do to itself. If so, the probabilities shift from token towards sweeping trade steps, fast, as does pressure on China to self-harm. And heaven help the Euro and Japanese houses of cards if so.
That is where the market needs to rethink. Having sleep-walked on Trump prior to the elections, it then had a change of heart in a flash, now punting heavily that his fiscal stimulus will keep those trade probabilities pointing firmly towards the token stuff, with China and other fragilities holding. Good luck with that.
And to underscore all this, notwithstanding resistance from loyalists like James Baker III (3/), there are three further parallels with Reagan for market optimists to ponder.
First, Reagan was also considered short-attention-span, with reason. Yet no matter; As Reagan heralded in his own way and time, 140 characters can pack a big punch.
Second, Reagan also faced a heavily-armed house of cards; the Soviet Union. And whether he originally intended it or not, his administration attracted a raft of those shadowy DC National Security types only too happy to hitch his economic goals to knocking the USSR over. Trump is drawing those same people out of the woodwork again, this time on China. So whereas VVSE's see a possible trade war with China through Smoot-Hawley-cum-Global-Great-Depression spectacles and thus as totally unthinkable, these shadowy folk see it through Berlin Wall spectacles and will be only too happy to think it, despite China's order of magnitude deeper integration into the international economy than was the case for the USSR. If they get heard at all, VVSEs will certainly not have the debate in Trump's White House on macro and China to themselves.
And last, notwithstanding the blessings of sundry religious types and the seismic global gains he eventually won by undoing the Soviet Union, Reagan also pursued a "war on drugs", his acceleration of the Republican "Southern Strategy", with dire social and racial consequences that are being played out to this day, not least in mass incarceration. Trump, even less checked than Reagan, has reaffirmed this path. But this time, resistance will not be hemmed into the ghettos, and he will double-down on all that too. Heated as social and international debate became under Reagan, the national context for any debate on economic and strategic policy under Trump will be uniquely poisoned. Not an environment conducive to cool heads prevailing on any matter, even one as globally precarious as China.
Van Jones, US Liberal political commentator, jested at the latter stage of the election that banana-skin-prone Trump had morphed from Trumpzilla into Humpty Trumpty (4/). He now bitterly rues his optimism. Markets are set to do likewise.
1. http://www.huffingtonpost.com/peter-doyle/memo-to-democrats-learn-f_b_10809330.html
2. https://twitter.com/paulkrugman/status/796345564808019968
3. http://on.ft.com/1O6E0Q
4. http://www.cnn.com/videos/politics/2016/10/24/van-jones-trumpzilla-trumpty-dumpty-newday.cnn