Key take outs:
- Politics and policy out of Washington will continue to drive - and in some cases, weigh on markets, much like they did in 2018
- Investigations and manufactured crises are likely to contribute to uncertainty
- Trade tensions will persist, though on a more positive note, relations between the U.S. and China seem to be improving.
Libby Cantrill, head of public policy affairs and government affairs at PIMCO, shares some unique insights into the good, the bad and the ugly sides to US public policy issues that have shaped market trends during the Trump presidency in the recent BT Open webinar.
The good: pro-growth policies
Cantrill explained that despite the headlines and the tweets, President Trump has delivered on a number of pro-growth and pro-market policies in his first 18 months of power. The growth positive aspects include the Tax Cuts Bill of December 2017, the 2018-2019 spending bill, the beginnings of deregulation in the US and stability at the Federal Reserve Board.
The bad: the US deficit
While in terms of the bad, the US deficit may be the largest casualty, potentially limiting future counter stimulus. Cantrill said that fiscal stimulus, in the tenth year of an economic expansion is quite unusual. For 2018, about 800 billion dollars of deficit, for both 2019 and 2020 we may see one trillion dollars of deficit or about 4.5 or 5 per cent of GDP.
Cantrill confirmed it’s unusual in Washington to see so much deficit spending when times are good because “Usually deficits go down when the economy is expanding.” Such a large deficit has two important implications. Firstly, any future stimulus over the next two years such as an infrastructure bill which has been discussed broadly in Washington, seems very unlikely. Secondly, if and when the US goes into recession, the ability to combat that from a government spending perspective is going to be much more limited. And this will depress interest rates over the longer term.
Another bad: White House staff turnover
Cantrill also cities personnel turnover in the White House as a negative. So why does this matter? Firstly there is a turn of phrase in Washington “Personnel is policy” which highlights the influence personnel have over policy outcomes.
Sixty-five per cent of senior staff turnover in a two year period means it’s difficult to get a lot of policy continuity and lead with institutional stability and continuity. This trend also means it’s more challenging to attract a high calibre of staff.
“If there’s a perception that the ship is sinking, people are going to be less inclined to join,” explains Cantrill. From an investment market perspective, this makes the US government more fragile, particularly during a crisis, when the government is less inclined to have employees with experience, tenure and institutional knowledge.
Also bad: increasing polarisation and partisanship
“There’s a really dramatic polarisation and partisanship that we’ve seen in the US.”
Cantrill explains that President Trump’s approval rating really breaks down on partisan lines. So Republicans typically support the President around 88 per cent – 90 per cent approval rating among his own party. This is actually the second highest approval rating among his own party for any Republican president in history, which may be surprising for some.
In terms of implications, this theme makes bipartisan legislation really difficult, such as infrastructure and again just highlights the fragile nature of the government due to less co-operation and less political courage to battle the bigger problems facing the US in a bipartisan way.
The final bad: Trade policy
Cantrill warned that the President’s long standing views on trade policy shouldn’t be underestimated. Speaking about US-China tensions, Cantrill believes that while the President wants a political victory, particularly after the recent government shutdown, he also doesn’t want to be embarrassed on the international stage by being ‘duped’ by the Chinese.
“Our base case at PIMCO is that the 10 per cent tariffs remain after 1 March but doesn’t necessarily escalate to 25 per cent,” Cantrill confirmed.
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