The Trump bomb

Should you fear November 5th? Get ready for it? Or shrug and ignore the weird, historic, histrionic American election?

There’s lots of news here.

The Washington-based Peterson Institute is warning of a Trump win. The impacts on Canada would be palpable, it says, as a new age of Yankee protectionism emerges. Economic growth would be shaved immediately. The unemployment rate would rise three-quarters of a point (it’s now 6.6%). And about $60 US billion in trade would be lost through new Trump tariffs.

Scotia economists are more dire. They predict a recession in Canada as a result of the Republican victory, with a spike in inflation at the same time leading to a reversal in interest rates. Instead of falling four or five more times in 2025 (now the prediction), the Bank of Canada would be forced to raise them by almost 2% to deal with a new surge in inflation.

The American dollar would rise with protectionist measures, lower US corporate taxes, increased inflation and higher wages caused in part by mass deportations. That would result in a weakening of the Canadian dollar, again putting upward rate pressure on our central bank.

There’s more.

TD’s major new report on the American White House slugfest concludes a Harris win would mean more of what we have now, while Trump in the Oval Office again would bring a boatload of change – good for Musk and Zukerberg, not so hot for the economy. And both candidates are ignoring the pachyderm in the closet, which is a completely unsustainable path to borrowing oblivion.

Trump wants to reduce corporate taxes and has promised no personal hit on tips, social security or overtime. This giant revenue hole ($4 trillion), he says, will be made up by tariffs on imported goods (Canada included). But tariffs raise domestic prices, so inflation is the inevitable result. Meanwhile deporting 11 million workers will disrupt the labour market, cause shortages and increase wages. More inflation. TD says the American economy will take a hit as a result – as much as 1.5% (or half the current rate of expansion).

“Our analysis assumes that all countries retaliate with a similar increase in tariffs,” says TD, “leading to a pronounced “risk-off” response to the tit-for-tat tariffs, resulting in a widening in credit spreads, spike in the VIX and roughly 20% sell-off in U.S. equities – all happening over a short two-quarter timeframe. This feeds though the confidence channel and is the primary source of economic drag.”

Hmm. And meanwhile most Trumpers are saying the opposite – that he will lead the S&P to a new plateau. “The market response to a Republican sweep is likely to be quite cautious given the potential policy uncertainties,” counters the bank.

But wait. Kamala’s kinda scary, too.

“But the same is likely true under a Democrat sweep,” the report warns. “A combination of tax increases, more regulation and a pro-labor bent, would also likely be a net negative for equities, given the impact on corporate profits. One potential offsetting influence could stem from a more predictable and business-friendly path on geopolitical matters and trade policy. Another positive for markets would be a less meddlesome approach to the Federal Reserve. Like Biden, Harris supports an independent Fed and would be unlikely to criticize the Fed in public or nominate unconventional candidates for board positions.”

So, the Harris plan is higher taxes on corps and the rich, more social spending, middle-class tax breaks and no diddling with the Fed. The Trump plan is lower taxes, fewer regs, less green, more protectionism, a retreat from global politics and deportation of the dog-and-cat munchers.

With Trump, Canada gets sideswiped and our dollar whacked. With Harris, we get ignored. How markets react is wildly hard to predict – but history shows it usually doesn’t matter who’s running the place. If corporations are making money and people are spending it, stocks are happy.

What should you do to prepare?

A survey by UBS finds almost 80% of wealthy investors are thinking about changing their asset allocations because of Trump v Harris. Half think he would be better for the economy. The other half believe she will be best.

“Healthcare, materials, sustainable investing and technology companies could benefit from potential Harris policies, according to most investors surveyed. The industries that would benefit more from a new Trump presidency would be defense, energy, financials and industrials, they said.”

Trump implies inflation. Harris represents big government. Both, say TD’s economists, are putting American on the road to an inevitable date with debt.

“A more serious fiscal adjustment that includes some combination of higher taxes, cuts to major entitlement programs and/or deep cuts to discretionary spending will eventually be required to put the U.S. on more sustainable fiscal path,” we are warned. “This is unlikely to happen over the near-term. But at some point, over the coming decade, the music will stop, and whoever is in power will be forced to make some hard decisions. Until then, both the Democrats and Republicans will be left playing a game of “hot potato”, never addressing the root causes required to put America back on a more sustainable fiscal trajectory.”

So, there you go. Party now. Crisis later. Just vote for me.

Sound familiar?

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Source: https://www.greaterfool.ca/2024/09/26/the-trump-bomb/