27 Jan 2017 The ‘New Anything But Normal’
Following the financial crisis of 2007-2008, in 2010, PIMCO CEO Mohamed A. El-Erian delivered a lecture entitled “Navigating the New Normal in Industrial Countries.” The thrust of his talk was to warn investors, economists, and policy makers not to expect, as many did, economic growth to return to pre-crisis levels. The extent of damage done to the economy through an increasing drag of reactionary regulations and skyrocketing government debt, not to mention distrust of the system would take years, or decades to reverse.
We are now seven years into the ‘New Normal.’ Despite a generously accommodating Federal Reserve, record low interest rates, and a relatively stable global economy, our GDP never managed to grow more than 2% for a sustained period. Historical norms for US economic growth have been north of 3%, with 5% characterizing much of the mid- to late 90’s. That timespan represents one of the most distinctive periods of economic disruption mankind has yet experienced: That is until now.
Our 45th president, Donald Trump is proving to be as disruptive or more so than any president before him. From day one, he has been, by all accounts, a one-man change-agent of virtually everything normal or expected from Washington DC. He is not constrained, as were his predecessors by politics, ideology, proper channels, social norms, diplomacy, or timing. Nothing it seems will be as it was. Many are dismayed, and just as many are elated.
Since the election, the Dow Jones Industrials are up 7.32%, the Total US Stock Market is up 7.27% and the the S&P has climbed 6.61%. The 7-10 Year US Treasury index is down 2.92% on signs of accelerating economic growth and potential inflation.
These significant moves are not irrational or emotional. Rather they are the logical response to an unprecedented number of business-friendly directives coming from a president with unprecedented clarity and specificity, and one who enjoys a Republican majority in both houses of Comgress
However, there is not as much harmony between them as Mr. Trump would like. The Wall Street Journal described yesterday’s meeting between Republicans on retreat and Mr. Trump this way: “Less than a week into the new administration, GOP lawmakers grappled with how to respond to a Republican president capable of signing their policy proposals into law but also of igniting public feuds and showing little deference to Capitol Hill’s traditions.” House Speaker Paul Ryan put a finer point on it saying, “This is going to be an unconventional presidency. That’s something we’re just all going to have to get used to.”
Diplomacy also seems to have entered a new ‘anything-but normal’ era under this new president. Just days into this new administration, there’s already been a rift forming between us and our southern neighbor. Mexico’s president Enrique Peña Nieto cancelled his meeting with Mr. Trump over the latter’s continued insistence that Mexico pay for the border wall. “We need to be a bit more measured in dealing with Mexico,” Rep. Charlie Dent (R., Pa.) said “I do not want to do anything here that would raise up anti-American voices in Mexico and other parts of Latin America.” While Rep. Tom Reed (R., N.Y.) took the other perspective saying “What you’re seeing on display here is just a leader who knows how to get things done. It may be a little more direct than we’re accustomed to.” Congressman Reed is no novice at understatement.
Trade will be a major question for investors going forward. The WSJ points out that Mr. Trump and the GOP may be moving closer to agreement on a ‘border adjustment’ plan to overhaul the tax code by taxing imports and exempting exports. In a divergence from tradition and GOP preference, Mr. Trump wants to negotiate bilaterally with countries on trade agreements, instead of maintaining the broad regional trade agreements of the past, like NAFTA and the TPP.
In what is viewed as a gamble by many, Mr. Trump believes the US holds most of the cards as the largest consumer economy (customer) and most prolific innovators in the world. In the meantime, China is forging ahead with Asian countries in the void created the Trans-Pacific. And bilateral talks with European countries within the EU, if Germany is an indication, will be difficult.
The world will be watching as Mr. Trump renegotiates NAFTA with Mexico as he aims to reverse the trend that resulted in a $61 billion US trade deficit with that country. Today’s GDP report provides a stark reminder of the importance of fair trade to our economy: trade imbalances with the world reduced fourth quarter GDP by a whopping 1.7%.
Trade tops today’s agenda in the meeting between Mr. Trump and the British Prime Minister Theresa May. It is the first first meeting with a foreign leader since taking office a week ago. According to the WSJ the two want to define a relationship as Britain prepares to exit the European Union. “Mrs. May will seek to lay the groundwork for a new trade deal with the US, and she is expected to receive a warm reception from a president who is seeking to reshape America’s global economic engagement by forging [bilateral] trade deals instead of broad regional agreements.” “Mr. Trump quipped yesterday that he will be negotiating a deal himself, given much of his cabinet hasn’t yet been confirmed.”
There are, of course, major differences between Mrs. May and Mr. Trump on other major issues that may come up, including the Iran nuclear deal and relations with Russia. Britain, along with the EU support the Iran deal, while Mr. Trump is considering scrapping it. The two leaders also see relations with Vladimir Putin differently. Mrs. May is extremely wary of him, while Mr. Trump says “I don’t know Putin, but if we can get along with Russia, that’s a great thing. It’s good for Russia, it’s good for us.”
But Putin’s actions are anything but friendly toward the US. Today’s Journal reports that “Russia is making fresh inroads into Afghanistan that could complicate US efforts to strengthen the fragile Kabul government, stamp out the resilient Taliban insurgency and end America’s longest war.” The country’s president, Mr. Karzai, said Mr. Trump’s pledge for improved ties with Russian President Vladimir Putin is encouraging. “I am glad he and Putin are on good terms,” he said. “I hope the two of them will remain friends and work issues out, especially on Afghanistan.”
And finally there’s China – arguably representing the US’s greatest economic challenges ahead. In a great op-ed piece in today’s WSJ, Greg Ip opens by saying “Chinese President Xi Jinping went to Davos to praise globalization. Newly elected U.S. President Donald Trump went to Washington to bury it.” But his title suggests “On Globalization, China and the US Are Closer Than They Appear.”
He says that “China never bought into the liberal Western model of globalization, that market forces should operate across borders largely free of national government interference. China subordinates market forces and trade relations to the state’s overarching view of the national interest. Mr. Trump displays a similarly nationalistic approach to the world: He withdrew the U.S. from the 12-nation Trans-Pacific Partnership this week and imposed new restrictions on foreign entrants; and plans to build a wall along the Mexican border and tax companies that outsource production.”
Trade is just one of a myriad of topics where Mr. Trump is poised to disrupt and rattle the elite and political status quo to their foundations. As today’s GDP report reminds us how serious are our trade imbalances with the rest of the world and the damage those imbalances do to our economy, perhaps a shake up is called for. Just how far and deep it goes and how much good or harm it will do remains to be seen.
Donald Trump is a one-man force of ‘creative destruction.’ Creative Destruction acutely characterizes products and services produced by the last twenty years of the Information Age, but the concept is not new. In a paper by Ricardo J. Caballero of MIT Economics, describes creative destruction as “the incessant product and process innovation mechanism by which new production units replace outdated ones. It was coined by Joseph Schumpeter (1942), who considered it ‘the essential fact about capitalism.'” Our politics may just be catching up with our capitalism. Before our eyes, Mr. Trump is replacing political and diplomatic ‘mechanisms’ with his own. Whether the ‘mechanisms’ he replaces are ‘outdated’ and whether his ‘innovations’ are ‘creative’ will be proven in the weeks, months, and years ahead.