Business

Trumponomics... or trumpery?

If you were to look up "Trumponomics" in online investment website Investopedia, this is what you'd find: "Trumponomics describes the economic policies of US President Donald Trump, who won the Nov 8, 2016 presidential election on the back of bold economic promises to cut personal and corporate taxes, restructure trade deals and introduce large fiscal stimulus measures focused on infrastructure and defence".

It goes on to say "Trump was not always clear and consistent about his policies, and when he was, they were often unorthodox enough to have unpredictable consequences... A lack of consistency, coupled with an oratorical style that often leaves room for multiple interpretations, has made putting numbers on Trumponomics challenging."

For now, Wall Street seems able to look beyond these challenges, choosing to ignore the multiple interpretations in favour of donning rose-tinted spectacles and focus on only the most bullish, if as-yet unproven, scenarios.

For most of last month, US investors were also able to cast aside strong signals from the US Federal Reserve that interest rates would have to be raised soon -just a week ago the probability of a rate hike at the 14-15 Federal Open Markets Committee (FOMC) meeting hovered below 40 per cent.

In the middle of last week, this shot up to 78 per cent and on Friday, it rose to 90 per cent.

The federal funds futures market's huge rush to re-price the probability of a rate hike is arguably puzzling, given that signals from the Fed couldn't have been more plain for several weeks now.

The fact that the options volatility index, the VIX, had sunk to nearly an all-time low possibly helps explain this, as a low VIX is often taken to indicate high complacency.

Our take on Trumponomics is that it is not that much different from the "Greenspan put" or its successor, the "Bernanke put" though these came from monetary policy and not Trumponomics' fiscal origins.

The Trump put seeks to achieve the same outcomes but because the Fed has exhausted its monetary policy options and because Mr Trump is not a fan of Fed chair Janet Yellen, it approaches the issue using fiscal tools.

A lack of consistency... has made putting numbers on Trumponomics challenging.An entry on Trumponomics in online investment website Investopedia

Stated differently, it's money printing all over again, albeit this time things may not work out as Wall Street is betting it will.

Since unemployment is low, a large fiscal push means interest rates will have to climb to combat rising inflation. Since part of the Trump plan is to beggar America's neighbours, there is no assurance that an insular US will thrive.

Moreover, at least on the Trumponomics tax front, past experience offers some clue on its effectiveness - offering US companies a tax break if they repatriate their profits back home to invest in R&D and create jobs.

This was done in 2004 by the Bush administration when it passed the American Jobs Creation Act that offered a concessionary 5.25 per cent tax on repatriated profits instead of the normal 35 per cent.

In 2011, the Senate's Permanent Subcommittee on Investigations published its findings on the effectiveness of this 2004 law, stating that more US jobs were lost than gained, money repatriated went instead to higher executive pay, dividends and share buybacks (despite express provisions prohibiting these uses) and recommended that the initiative is not repeated in the future.

Hopefully for the bulls then, "Trumpnomics" won't turn into a case of "trumpery'', a word derived from the French "tromperie''.

The meaning? "Something without use or value, rubbish, trash; nonsense, twaddle."

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts

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