Market Insights: Nightmare on Pennsylvania Avenue?

By Michael Power, Strategist, Investec Asset Management


29 April: a hundred days of Trump. Such an arbitrary time period. Yet it is so important in setting the tone of a presidency.

Trump has made 58 nominations for 553 senior government jobs. Within his first hundred days, Barack Obama had made 190 nominations, Bill Clinton 176.

Trump has steered no legislation of consequence through Congress, and this with both houses controlled by ‘his’ party, the Republicans. Both Obama and Bush achieved notable congressional victories inside a hundred days.

Many of his high profile, populist, campaign promises have, like wet fireworks, fizzled and died. For all his campaign rhetoric against the establishment and the Wall Street elite, his current favourite courtiers are two former Goldman Sachs executives, Steve Mnuchin, Treasury Secretary, and Gary Cohn, head of the White House National Economic Council.

And now his tax cuts look like they are mostly favouring the rich. Despite his campaign China-bashing and Russia-cuddling, he now treats Xi Jinping as his new best friend and Putin almost as a polecat. The symbol of his presidency has become something he recognises from the beach at Mar-a-Lago: the flip flop.

Meanwhile – though this is actually good news for his presidency – the previously triumphant US dollar is in retreat. The bond markets are on the verge of calling Trump’s bluff

The System (with a capital ‘S’) seems intent on thwarting Trump at every turn.

Internationally, Trump’s record has been littered with gaffes and U-turns. The Muslim world is appalled by Trump’s ‘extreme vetting’ and thinly veiled biases against them. Relations with Latin America, home of ‘bad hombres’, are at an all-time low. Close allies from Australia to Singapore to Canada have been needlessly slighted. Britain’s MI6 was falsely accused of bugging Trump Tower. It is as if Trump’s campaign slogan contains a spelling mistake: it should read “Make America Grate Again”. The net result is that the London Independent believes Angela Merkel is today’s leader of the free world.

But there is a bigger issue at stake here, one often lost in the desperate quest – led gleefully by America’s comedians, satirists, editors and news anchors – to land blows on an all-too soft target that is Donald Trump. Aside from the post-truth early morning tweets and the guessing games as to who now has Jared and Ivanka’s ear in the White House, the soap opera that is the Trump presidency speaks to a far larger spectre that is now beginning to haunt the United States: as a nation, it is becoming increasingly ungovernable and unruly.

Congress has never been so divided. Even the most minor of presidential appointment hearings bring out a full court filibuster from the Democrats: of Trump’s 58 appointments requiring Senate approval, only 25 have received it.

And then there is the fragmentation of the supposedly ruling Republican Party which is not just highly visible inside the Senate and inside the House of Representatives, it is almost worse between the two houses on Capitol Hill.

In 2017, we surely are witnessing at every level of government – federal, state, city – the multiple and varied disunited states of America.

What then has made America so ungovernable? The hard answer is that, for the majority of its citizens, the American Dream is dead. If you were born in the 1940s, you would be 90% likely to earn more than your parents. If you were born after 1980, that ratio would have fallen to 50% and lower. Millennials are the first group of Americans ever to face the depressing prospect of intergenerational decline. Real incomes for the average family have not risen since 2000.

Off-balance sheet liabilities – most notably underfunded pension schemes and Medicare obligations – have ballooned to over US$100 trillion. Sixty-six percent of Americans have less than US$50 000 in retirement savings; 33% have none. Tomorrow’s generation of workers are burdened with US$1.3 trillion of student debt. One in three adult Americans under the age of 34 still lives with their parents.

The reasons for the above are many and varied, but one macro data point stands out above all: trend GDP Growth – by definition a compound of the number of hours worked (derived from demographics) and how well those hours are rewarded (derived from productivity) – is relentlessly gravitating towards zero. In this, at least the US is still ahead of Europe and is a long way ahead of Japan.

Unless a productivity revolution arrives soon, American economic growth will also stall. From 1991 to 2001, the potential GDP growth rate averaged 3.3%; recently, the US Federal Reserve downgraded its future forecast of potential GDP growth to 1.75%. First quarter 2017 annualised GDP growth again disappointed: it was only an annualised 0.7%, down from 2.1% in the fourth quarter of 2016. Now add in a massive increase in US inequality – one estimate has it that the top 0.4% of citizens today own 90% of the nation’s wealth – and it is understandable why America has become so divided a nation and why so many sub-groups are erecting protective barriers to defend their threatened patches. Loss aversion is said to be ten times more powerful in conditioning human behaviour than chancing the prospect of a gain.

Ungovernability and unruliness are only to be expected in such strained circumstances.

Even Barack Obama experienced legislative gridlock for the last six years of his presidency after the Democrats lost all control of Congress during the 2010 midterms. What progress he did make was largely achieved by well-drafted executive orders, a skill Donald Trump’s administration has yet to master.

So for all the criticism that can be levelled at Donald Trump after his chaotic and unproductive first hundred days – and surely most of it is valid – it would have taken a Franklin Roosevelt and a George Washington rolled into one, probably with the bull-headed assistance of a General Sherman, to have achieved much more. These are not easy times for any president trying to deal with the challenges facing 21st century America.

Nothing contained in this article should be construed as financial advice and is meant for information purposes only.

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