President Trump: Now What?

November 16, 2016

Rumors of the death of oil may have been exaggerated, but not by much. Even so, the surprising presidential election results have stirred me from my hiatus. Disclaimer: I wish to make it clear that for the benefit of potential employers, I neither approve nor disapprove of the outcome of this election or any other. Still, though, Trump’s victory has potential implications for international trade and even interest rates.

The prevailing opinion is that Trump drew much his necessary supporters from the low-income, rural white populations, while Hillary failed to excite a sufficient turnout among former Obama supporters (and again, I am neither pleased nor displeased by this turn of events). Still, in this election there was much focus on the situation of former industrial workers in a post-industrial age. Hillary Clinton’s “basket of deplorables” line was much commented on, but little attention was paid to Hillary’s very next paragraph, which read

But the other basket — and I know this because I see friends from all over America here — I see friends from Florida and Georgia and South Carolina and Texas — as well as, you know, New York and California — but that other basket of people are people who feel that the government has let them down, the economy has let them down, nobody cares about them, nobody worries about what happens to their lives and their futures, and they’re just desperate for change. It doesn’t really even matter where it comes from. They don’t buy everything he says, but he seems to hold out some hope that their lives will be different. They won’t wake up and see their jobs disappear, lose a kid to heroin, feel like they’re in a dead-end. Those are people we have to understand and empathize with as well.”

Furthermore, Hillary, despite being a lawyer and a politician, was infected with the virus of intellectual consistency. During a leaked recording of a talk given to her supporters in February, she said “[I]t is difficult when you’re running to be president, and you understand how hard the job is —  I don’t want to overpromise. I don’t want to tell people things that I know we cannot do.” Apparently, despite three or four decades of political experience she hasn’t quite mastered the concept of campaign promises.

So, essentially, as one commentator from a forum I frequent put it, Hillary was acting from the perspective that many of those manufacturing and coal mining jobs were not coming back, which would require the regions that relied on them to undergo a potentially painful adjustment period involving government-subsidized retraining, infrastructure investment, and economic development packages. On the other side, Donald Trump told the voters that throwing out some of our trade agreements and imposing tariffs, and weakening environmental regulations, was all it would take to cause a renaissance of smokestack industries burning their plentiful freshly-mined coal.

irakxnpSo, who is right? Competition from cheap foreign labor in factories that don’t have to comply with OSHA or EPA requirements may produce some change at the margins, but the reason for many job losses is automation. Even if, for example, the entire auto industry of Mexico and China were to fall into a crack in the earth, US auto employment would not recover to its previous level because we have gotten better at building cars with more robots and fewer people. Manufacturing nowadays seems to have bifurcated whereby in developed countries factories are staffed largely by technicians and programmers who can tell robots what to do and make sure they’re doing it, while the low tech jobs overseas have become even more mind-numbing and tedious than before. High tech manufacturing positions, then, cannot be filled by going down to a local high school graduation ceremony with a butterfly net. The low tech jobs in China and elsewhere can be filled that way, but are only competitive because of the very low wages prevailing in those countries; if those workers demanded American salaries they might well find themselves replaced by machines as well. Manufacturing jobs that fall between these two poles seems to be endangered, and in my view are more likely to form just one part of a well-diversified regional economy than the backbone of it.

And as for coal, of course, the fracking boom has substantially increased the supply of natural gas and oil, which is undercutting the one reason we have to use coal despite the environmental damage it causes. Couple that with the interest in renewable energy, and we see that coal is simply being out-competed.

So, into this situation enters President-elect Trump, who vows to revive our manufacturing through tariffs and the coal industry by gutting the rules on carbon emissions. On the coal front, as I’ve stated, the problem is competition from natural gas and green energy (also, coal mining is also increasingly automated; it’s hard to perform mountaintop removal with pickaxes and wheelbarrows). Reviving the industry, then, would require more than changing the EPA rules; it would require laws outlawing or limiting fracking as well as outright subsidies to coal miners. It may happen, but given the unnecessary expense and damage to the environment this would involve, it would probably make more sense to go full Keynesian and pay half the coal miners to dig up the coal and the other half to bury it again.

The issue of renegotiating trade agreements and imposing tariffs, though, is more interesting and more plausible because both of these are within the power of the President to do. Even setting aside the possibility of retaliation by China and our other trade partners, the problem with tariffs and import restrictions is that it would lower the purchasing power of ordinary Americans, potentially by a significant amount. After all, if the point of the tariffs is to make foreign products uncompetitive with American-made products, they would have to be very high indeed, which would make consumer goods much more expensive. This would actually have a strong negative impact on the very working-class people the policy is intended to support, as well as the working-class people who have managed to join the post-industrial service based economy who, presumably, wouldn’t be helped by these proposed tariffs. At any rate, if the Trump tariff has any teeth, I would expect some weakness in the consumer luxuries sector, and certainly in the retail sector, with customers having less disposable income as a result of buying all of their precious American-made goods.

On the macro level, we must first consider the status quo. As I’ve said before, China has a trade surplus with the United States, and in order to avoid unleashing catastrophic inflation on its economy it has to recycle that money by purchasing dollar-denominated assets such as Treasury debt. Of course, they could also purchase American goods and services, but then obviously they wouldn’t have a trade surplus. The effect of this constant source of demand is to keep American interest rates low. The same phenomenon was observed in Japan during their bubble phase, as observed in The Weight of the Yen, which I highly recommend as it reveals the many parallels between Japan’s development and China’s).

However, if Trump alters this balance through tariffs and abandoning foreign trade, we should see rising interest rates in the United States. Combined with the deficit-expanding tax cuts that are also in the Republican agenda, and money might genuinely become scarce and expensive for the first time in nearly a decade. Rising interest rates, all things being equal, tend to make the dollar stronger as well.

For investment purposes, higher interest rates are somewhat concerning. Interest rates all along the yield curve have been depressed as a matter of Federal Reserve policy, which explains the historically high valuation of stocks, so if they were to rise, stock multiples would fall. Depending on how the yield curve is affected, banks may benefit from widening spreads or not, but the key takeaway of these proposals for investment purposes is to avoid long duration debt instruments and to be extra cautious of indebted companies.

Good luck, everyone.

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