All Hail The King

 

‘Twas election night in America, when all through the house

Not a creature was stirring, not even a mouse;

My ballot was cast in the box with great care,

In hopes that President Clinton soon would be there;

The children were nestled all snug in their beds;

While visions of sugar-plums danced in their heads;

And mamma in her ‘kerchief, and I in my cap,

Had just settled our brains for a long winter’s nap,

When out on the lawn there arose such a clatter,

I sprang from my bed to see what was the matter.

Away to the window I flew like a flash,

Tore open the shutters and threw up the sash.

The moon on the breast of the new-fallen snow,

Gave a lustre of midday to objects below,

When what to my wondering eyes did appear,

But a cantankerous billionaire, his eyes all full of cheer

That’s right folks, Donald Trump is President. To be sure, no one really thought this was possible. I mean sure, he’s always had a rabid support base, but the idea that a foul-mouthed billionaire reality TV show host would actually best one of the most experienced politicians in the history of statecraft for the presidency seemed laughable.

Well, who’s laughing now? Me, actually, because I was up posting updates an a new cocktail recipe of the week at 2:30. So was on Bloody Mary number 2 (pace yourself Walter). Here’s Goldman:

Polls, political prognosticators, and investors all underestimated the magnitude of dissatisfaction of the US electorate. Watching the election returns, we were reminded of the quote attributed to the American writer Mark Twain (Samuel Clemens): “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Market participants were nearly unanimous in the view that Hillary Clinton would win the general election convincingly. Indeed, on Monday, the day before the election, S&P 500 rallied by more than 2% as forecasters raised the likelihood of a Clinton victory. Prediction markets actually assigned a 90% probability that Clinton would win the Presidency as late as 7:00 pm on election night. However, when it became evident that Trump would win, US equity futures fell by 5% in overnight trading before partially reversing the sell-off to close down 2% from the previous day’s close.

Now clearly this is the most ridiculous outcome imaginable, but I can’t say I’m completely surprised. America is largely a nation of people who, if they follow the news at all, they get it from their local NBC affiliate which is generally more concerned with covering things like “fireman pulls cat out of tree” than “Iraqi army advances on Mosul.” I mean hell, the Libertarian candidate didn’t even know Aleppo was a city in Syria.

“Make America great again” betrayed Trump’s ignorance and guile all at the same time. He pandered to a starving audience. His message was directed at an electorate that felt as though they had been stripped of their rights; silenced; alienated; estranged. That of course wasn’t the case. There’s a minimal amount of effort that’s required to participate intelligently in America’s democracy. It’s not fair to say you’re alienated when you refuse to expend the energy necessary to understand the issues.

These voters waited for a pre-packaged prosperity money back guarantee. And they got it with Trump. “Make America great again” is an amorphous promise – a meaningless mantra.

But through it all, trade we must and trade we will. As Bloomberg’s Richard Breslow put Wednesday morning:

I see it, and I still don’t believe it. But that’s a poor excuse to shirk one’s responsibility to figure out what this means for the markets. Now and going forward. It’s not as simple as it would seem from the headlines. Traders have to compartmentalize their personal views from their professional responsibilities.

And traders seem to be doing just that – or at least at the open. Stocks were mixed Wednesday morning after futures initially plunged on Trump’s surprise win.

But let’s accept it for what it is and move on. Here’s Goldman’s take on what comes next:

The most important implications for the economy are likely to come through fiscal policy and international trade. On the fiscal front, we assume that the Trump Administration will pursue looser fiscal policy. Our preliminary view is that this could be worth around 0.75% of GDP, with roughly 0.5% of that amount coming through tax cuts and 0.25% through additional spending on infrastructure and defense. Control of Congress will allow the Republicans to use the “reconciliation” process to pass fiscal legislation with a simple majority. However, they will still face some constraints, namely the need to secure the support of nearly all Republicans in the Senate, some of whom may have qualms about raising the deficit, and the juxtaposition of passing deficit-increasing legislation shortly before a vote to raise the debt limit, which will be necessary by Q4 2017. We note that whatever fiscal policy changes are enacted would probably not take effect until at least mid-2017.

The key negative risk for markets is likely to be uncertainty regarding trade policy. President-elect Trump will have authority, without congressional approval, to unilaterally raise tariffs on goods from certain countries, in certain product categories, or both; he has proposed a 45% tariff on goods from China, for example. He could also withdraw from bilateral and multilateral trade agreements, such as NAFTA. We do not expect these policies to be implemented immediately, but it should be expected that the Trump Administration will be under significant pressure to move policy in this direction, even if changes do not go as far as Mr. Trump proposed as a candidate.

And how about the dollar and financial conditions in general? Here’s Goldman again:

Donald Trump has won the US Presidential election, defeating Hillary Clinton in key swing states. Financial markets are treating this outcome as a “riskoff” shock, buying safe haven currencies like the Yen and Swiss Franc, while US interest rates may also head lower, in line with our characterization of this outcome as a potential negative growth shock to the US economy, as we had flagged in our recent Global Markets Daily. It is early to draw firm conclusions, but policy uncertainty will likely stay elevated for some time as a result of this outcome. That uncertainty may translate into a more cautious Fed, where previously our US economists had expected a December hike with a large probability, and may also translate into increased tensions with key trading partners. In FX space, we think this uncertainty could translate into Dollar weakness in the near term, as markets digest the implications of the election outcome and translate this into a more cautious path for the Fed.

And on trade:

Trade will certainly be a major area of focus for the new Trump Administration. Stocks with high US sales exposure have outperformed firms with high foreign sales since 2010 as the trade-weighted US Dollar (TWD) strengthened. However, the opposite has occurred this year as stocks with high US sales rose by 2% compared with a 13% rally for firms with high foreign sales . An interest rate hike in December should strengthen the USD and benefit firms with high US revenues. Domestic-facing stocks have faster expected sales and earnings growth but trade at a nearly two point P/E multiple valuation discount relative to stocks with high international sales. The median stock in our high US sales basket generates 100% of its revenues domestically while our non-US basket generates 70% of its sales abroad.

sales

(Chart: Goldman)

Yeah, yeah. In my mind this should have been an absolute landslide (for Clinton). It may very well be the case that this proves she wasn’t fit to be president. Can you imagine Donald Trump beating her husband?

Oh well, it’s over. Let’s get back to making money.

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