At first glance the Trump victory seems completely bizarre. Here is a man who doesn’t pay his taxes, apparently hates Mexicans, disrespects women, routinely engages in sexual harassment, and is widely viewed as a narcissist…… And then, 81% of Evangelicals, 53% of white women, vote for Trump. How is this possible!#@?
To make sense of this, we need to refocus on the soil of discontent in which the Trump seed was planted. America has changed dramatically over the past thirty years and the level of discontent with the political establishment has never been higher. Today, more than 70% of Americans feel that their country is heading in the wrong direction. Put simply, something had to give.
In Donald Trump, the people believe they have found their Champion. The fact that he has never held elected office and has no political experience has worked in his favour. On the other hand, Hilary is seen as “the establishment” and represents all that has gone before over the past thirty years.
The following facts are ones you’re likely aware of already, but it is worth revising in order to frame the context of how a Trump win were possible:
Working Class Wages: the white working class in America haven’t received a pay rise for 30 years. By comparison, over the same period in Australia the working class have seen their real wages rise by a factor of 2.5.
CEO Wages: over the same 30 year period, CEO remuneration in America has expanded at pace. In 1965 CEO remuneration equated to 24x the average production worker. By 2009 this had risen to 185x.
Wall Street Wages: the amount of money that was given out in bonuses only on Wall Street last year is twice the amount all minimum-wage workers earned in America combined.
Inequality: in 1983 the top 10% of households controlled 68.2% of total wealth and by 2007 this had grown to 73.1%. Today, the poorest half of America owns 2.5% of the country’s wealth. The top 1% owns 35% of it. The average wealth of an American adult is in the range of $250,000-$300,000. However, the median per adult number is only about $39,000, placing the U.S. about 27th among the world’s nations, behind Australia, most of Europe and even small countries like New Zealand, Ireland and Kuwait.
Wealth Demographics: the median wealth of people under 35 has dropped 68% since 1984. The median wealth of older Americans has increased 42%.
Decline of the Middle Class: the 1970s saw the beginning of the halt to the expansion of the American middle class. Cuts in corporate taxes, stagnant worker wage growth, the right-wing war on unions, and corporate outsourcing of work overseas greased the wheels of the middle-class decline and the upper-class elevation. Cuts in taxes on the wealthy, under the guise of trickle-down economics, have resulted in lower government revenue and cuts to all kinds of services. All of which has led to today, an era of national and international inequality unparalleled since the days of the Roaring ’20s.
Tax Rates: tax rates for the middle class have remained essentially unchanged since 1960 while tax rates on the highest earning Americans have plunged from an almost 70% tax rate in 1945 down to around 35% today.
Poverty: 21% of America’s children are born into poverty. This American poverty rate is higher than what prevails in virtually all other wealthy nations. By comparison Australia’s rate is 11%, while in Denmark it is 4%.
Incarceration: rates of incarceration in the US have grown dramatically since 1970. If you are a black male who did not finish high school in America, there is a 37% chance that you are in jail. This rate is three times higher than it was in 1980.
Wars: for twenty two out of the last twenty five years the Americans have been at war. The average American believes the associated pain and cost of these conflicts has created no tangible benefit for their country.
Media: there has been a profound change in the media landscape over the past thirty years. Prior to social and other forms of online media, people tended to be influenced by traditional print media (newspapers). They read comprehensive, balanced and well informed articles. And those that didn’t read, tended to fall in behind the views of the people in their sphere who they respected and who did read.
Today, the average uneducated American believes he has a right to an opinion, even if that opinion is based simply on a “sound bite” that resonated with him or her. We live in the ‘age of the individual’, where the pimple faced 18 year old has just as much right to be heard as the emphatically well-educated and experienced. Today, to write about a particular issue you don’t need credibility, you Tweet away, or join a chat room.
This makes for a much more difficult environment for the political elite. It is an environment where the policy detail matters less and candidates need to skilfully navigate the art of slogan politics, and the 24 hour news cycle.
What does it mean?
I must admit I have found this last 24 hours emotionally draining. For the first time in my life the result of a political campaign has made me feel physically ill.
However, as my emotions have simmered I have forced myself to refocus on the events in a more scientific way, separating my disdain for the human being that is Donald Trump, from the likely reality of his likely policy direction – that latter of which will matter more for all of us.
In the immediate aftermath of the election result, equity markets have behaved in precisely the opposite fashion to what most pundits predicted. The accepted wisdom was that the US market would experience a severe decline on a Trump win and a relief rally on a Clinton victory. However, with confirmation of the Trump victory last night, the US market rallied hard, perhaps spurred by Trump’s unifying victory speech. Australian markets have since followed suit (up >3% as I write).
These events again confirm the folly of attempting to forecast short term market movements. Some picked Trump would win, but did anyone predict he would win and markets would go up?
Whilst we have gleaned the basics of ‘Trumpism’ from his speeches and Tweets, precious little policy detail has been printed. Consequently markets will hang on Trump’s every word as they try to translate his riddles into comprehensible policy positions. During this period uncertainty will remain high, and markets jittery.
Nevertheless, as the recent Philippines election has shown, what the campaigner says and does can be very different to what the elected official says and does. Once elected the President will be necessarily immersed in a sea of advisers. The complexity of US government is almost infinite and far too great for one person to navigate alone. Instinctive policy creation on the run should therefore give way to more considered positions. The resulting outcomes are therefore likely to be manifestly more benign than Trump’s pre-election rhetoric.
It is also worth remembering that the President, whilst heavily influential, is not all powerful. Most major reforms require the passing of legislation, and the President can’t do this alone. New law must pass through both Congress and Senate, and whilst the Republicans will have the numbers in both houses, the president has both friend and foe within his own party. Moreover, each elected official is required to vote on law based on his or her own conscience, not simply rubber stamp the President’s will.
The areas of policy of most interest to us are foreign policy, trade, and national alliances. Interestingly, the US/Australian alliance is one of the very few which the Trump Administration unreservedly approves of. This will however make for tricky diplomacy for Australia, as our trading partners seek American influence through us.
America’s pivot to the Asia Pacific under Obama may be gradually withdrawn, leaving greater uncertainty and instability in our region.
Trump has campaigned on the basis that America has been too soft in its negotiations on trade deals and has been too quick to give away access to the greatest consumer market in the World. He has talked about “tearing up” trade deals and starting again. He has also said he will slap tariffs on Chinese imports. This protectionist agenda will likely be advanced, however these are complex, long lead time deals that can take years to reform. A danger here is that the Administration’s position leads to a reduction in global trade, which in turn can have unintended recessionary effects.
Military alliances are in some doubt on the basis of Trump’s “what-have-you-done-for-me-lately” rhetoric. The Japanese, South Koreans, Europeans and Arab States appear to be on shaky ground and there are real question marks regarding the NATO alliance.
More broadly, one senses the US may shift to a more isolationist platform with greater reluctance to continue its role as the World’s policeman.
Whilst this election has made us all feel uneasy, in time – this too will pass. Wounds will heal and markets will go on to reach new highs.
Countries represent far more than just the elected officials that represent them. Leaders will come and go, but a nation’s values and allegiances tend to endure.
From an investment point of view, uncertain periods such as this often through up the best and worst single day performances on financial markets (as we have seen today), but sadly you won’t be able to predict which days to be in and which days to be out. Investors are therefore best served by remaining patient and steady.