The new Donald Trump administration and the re-energized Republican Congress is looking like more of the same free markets fundamentalism that makes the rich richer and the middle class and poor poorer. If so, eventually these economic policies will fail, just as we saw after eight years of the George W. Bush administration.
Yet from a professional money management standpoint, in the short-term Wall Street and the stock market loves this type of economic steroidization. Of course it may take a few months or years, but eventually the extreme income inequality that is usually created by these economic policies will rear its ugly head - including the inevitable stock market bubble such policies foster.
Sure, we will take advantage of a rising stock market while we can, as that is our job as investment managers. But have no illusions as to the long run economic risks to average American workers and the US economy.
More "Trickle Up" Tax Policies
Typically, Trump says he is going to slash personal and corporate taxes in order to put more money into the economy to increase business investment, boost hiring, and rev up growth. Regrettably, as history clearly shows, his type of tax plan achieves none of these. Slashing taxes for the wealthy does not boost growth. We know that it doesn’t work. Voters, unfortunately, have savior amnesia every eight years.
Trump’s tax plan, which has been the uber-elite economic ideology of the modern Republican Party since the presidency of Saint Reagan, will certainly push up the stock market while simultaneously increase income inequality even more.
However, the Trump plan will most likely do little for the main street US economy, for our growing budget deficits, and for the same working people who voted for Mr. Trump. If that were not true, we would not be witnessing an early effort to compensate for the expected loss of tax revenues under the Trump tax plan by the Republican Congress: They now feel like they have the perfect excuse to implement more aggressive “privatization” attacks on Social Security and Medicare.
Retiring and retired Americans should be very afraid of this kleptocratic economic ideology we are seeing now from the emboldened but arrogantly cavalier Congressional Republicans.
Moreover, the huge tax break Trump intends to award to the tax dodging corporations that stash their money overseas will not be used to fire up growth or invest in future business ventures. Instead the money will once again be used to issue more dividends to shareholders or increase stock buybacks that pump up stock prices. This is the same outcome we saw with the massive interest free bailouts under Barack Obama.
Deep down Trump and his economic advisors must know his so called “corporate tax holiday” is a bunch of baloney. Experienced investors easily understand that companies are not going to expand their operations, hire more workers, and create more product when consumer demand is still in the outhouse over seven years after the Great Recession.
Instead, they’re going to do exactly what their shareholders expect them to do, pursue those areas of investment that promise the best possible return. In this case that means the same financial engineering tactics they have been using for the last eight years that will eventually create another stock market bubble.
Trump’s promise to bring jobs back to the U.S.
Back in the ’30s, we had massive public works spending and government spending, so we created the construction worker class. But on that front, we’re simply not going to compete anymore, as the Carrier CEO said recently. Mexican labor is $3 an hour. No amount of retraining for lower-skilled assembly jobs in the US is going to change that. The only thing that will replace that Mexican worker is a robot. And a robot is infinitely cheaper than even the cheapest American worker.
That’s where the resentment and discontent with Trump and the Republicans will come — when you’ve once again sold that dream and it doesn’t happen. In that scenario, Trump and the Republicans will have a pretty short honeymoon. But that won't matter to the Trump cabals. By that time they will have skimmed their premium milk from the government tax cow way before the economy falls apart under its own jubilent bubble.
China & Mexico - the bogeymen
China is increasingly a geostrategic rival. In the past, China looked toward protecting its own region, making claims on Taiwan and Tibet and ancillary areas. So the Chinese were really content not to compete in the global Cold War between the Soviet Union and the United States. Now we have this new multi-polar world, and China sees itself clearly as the prime actor in the Pacific, Africa, and southern Europe - willing to fill any vacuum that the United States and northern Europe pulls away from.
Trump, however, has decided that China and Mexico makes two convenient media punching bags. He claims that China and Mexico took our jobs. Hogwash! In fact, China and Mexico did not take our jobs. US corporations gave them our jobs - to increase company profits and push up their stock prices. However, the broader issue will be that foreign policy and national security events have a whole different and more complex dynamic than "tweet" beating up on a defense contractor or an air conditioning plant.
Corporate execs in the United States are quietly terrified by Trump's China and Mexico bashing. The business supply chain for U.S. manufacturing relies on parts from Mexico and China coming in. The US is very interconnected. If Trump insitgates a trade war against China and Mexico, lots of businesses, and workers, too, will get disrupted in ways we can’t even imagine. It would be very negative for US economic growth.
Watch out from above, it can be a long way down!