Yes. Yes. Trump won. There is still a little shock left in the world, but for the most part liberals are finally falling in line and preparing to deal with the regime change. We have examined a number of impacts the election alone has had, noting some of the largest economic shifts of the year, despite the fact that absolutely no policy can change before mid-January.
Continuing that trend, this letter will focus on what the short-term impacts of the election has had on the global economy and use those numbers to predict where that will push everything over the next four years.
Currency
The USD is currently at a 13-year high. This run is built entirely on anticipation of new policies. As it becomes more likely that Trump will be able to push infrastructure spending and at least some tax cuts, expectations for a surge in U.S. GDP growth make the greenback a safe bet.
On top of those expectations, a stronger U.S. economy is sure to be accompanied by a Fed hike, and that only bolsters the value of U.S. treasuries farther. When value makes a large shift like this, the redirected money has to come from somewhere, and in this case, it is coming out of emerging markets. Malaysia, Indonesia and Mexico are all experiencing steep drops in the value of their currency. The Yuan continues to be floated by the People’s Bank, but the long-term outlook is the same.
Ultimately, emerging markets are quickly becoming risky investments. This will probably strengthen Trump’s position on repatriating U.S. cash and renegotiating trade deals, which we’ll look at in more detail in a minute.
The other important note is that even the most stable currencies, namely the Euro, are falling to the dollar. This isn’t inherently good or bad, but the trend will help frame the other shifts that have happened, and it will help us anticipate changes to come.
Emerging Markets
While you saw a brief mention of emerging market currencies, here is a closer inspection. The Malaysian Ringgit is at its lowest level since 2015, and it is flirting with record lows. In Indonesia, the Rupiah is down three percent, and the cumulative total of all emerging markets is down seven percent.
These losses make all of these markets even more dependent on U.S. investors, and it heavily weakens their positions right before Trump comes at them with new trade deals.
In the short term, the U.S. is the only market that will be able to sustain the value of exports these countries need, and that creates a feedback loop that further destabilizes their economies. While this sounds ominous, and it does shift the balance of power, it doesn’t ultimately change any positions as much as it emphasizes them. Emerging markets depend on a trade deficit with the U.S., and the Trump election is already highlighting that fact.
Major Predictions for the Next Two Years
You are going to hear a large range of predictions, depending on who you ask. Many media outlets are still determined to preach the doom of the Trump presidency, but analysts who aren’t pushing political agendas tend to agree on a few points.
Trump’s plans are effectively a stimulus package, and the boosted government spending, paired with deregulation and reduced taxes will unquestionably grow the U.S. economy. The OECD is currently quoting expectations of a 2.3 percent GDP increase in 2017 and a 3 percent rise in 2018. This will generate trillions of dollars in the global economy which will inevitably lead to global GDP increases.
The current expectation is for the GDP to grow by an additional 0.1 percent next year alone, up to 3.3 percent total. While this sounds small, even the U.S. economy is dwarfed by the global GDP, and that 0.1 percent represents at least $7 trillion.
The Easy Lessons
For the next three to six months, the USD is going to stay dominant. While there are no looming threats to crash its value, Trump’s goals include devaluing the USD to improve export ratios. Despite that, Fed hikes are almost guaranteed over the next two years. Combining those factors, U.S. bonds and treasuries are safer than any other currencies for now.
On the other end of the spectrum, emerging markets are in complete turmoil. Many of them, especially in Southeast Asia and North America, are likely to hit rock bottom over the next year. There is a chance to buy in low, but use the strategy with caution, especially before a clear picture of new trade deals emerges.
That said, emerging Asian markets are a potential place for fast turnover and big returns at some point in the next two years. If you prefer safer strategies, jump on the infrastructure bandwagon. The money and spending will be there, and it will be the cornerstone of growth through 2018 or longer.
Regards,
Ethan Warrick
Editor
Wealth Authority
