The ECB crisis is a much more serious risk than Trump for #investors

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This report has been written by Christopher Dembik, economist at Saxo Bank The Trump effect is a speculative bubble. Does not really need Trump Obama and Yellen have left the economy in good health Mexico is the excuse, Trump’s true objective is China China has two options to act against the United States Strong tension between the Fed and Trump could damage the bank’s communication Central to markets The United States will have no choice but to allow its country to depreciate to export inflation to its trading partners Trump’s consequences in the eurozone: new cycle of interest rates, stronger euro and rising inflation, penalizing The purchasing power of families, especially in low-growth countries such as France The Trump effect is a speculative bubble, and like all bubbles, will finally explode when investors realize that the new president is unable to keep his promises . So far, the most visible immediate effect of its history has been the rise in interest rates (50 basis points increase in US bond yields to 10 years since November 8). Investors have anticipated that Trump’s economic policy will be inflationary. However, market complacency is not justified in view of protectionist policies reaffirmed by the new president in his inaugural address (“We must protect our borders from the ravages of other countries that make our products, steal our businesses and destroy our jobs. Work “…” Buy American products and hire Americans “). The return to reality could be brutal for investors, given that in a globalized world, protectionism will have a large economic cost. The US Economy Does not really need Trump. The economic record of Obama’s years is quite positive. Economic indicators are solid: Barack Obama and Janet Yellen have left the economy in good health, and in many ways much stronger than before 2008, especially in the financial sector. The labor market is close to full employment. During the last two years, the labor market has created 4.9 million jobs, to a unemployment rate of 4.7%. The number of initial petitions for unemployment benefits is the lowest since 1973, as shown in the chart below. Even in the most disadvantaged classes due to the precariousness, a clear movement has been seen in recent months. As a result, the number of Americans between the ages of 25 and 34 without work has fallen below 22% by the end of 2016 for the first time since September 2008.

However, despite recent improvements, the labor market participation rate remains low (62.7% in December), which means that the United States economy has not yet reached full employment, although not is far.


In addition, the “good” inflation is back. Contrary to the euro zone, the rise in inflation is not only caused by energy prices, but also by an increase in average wages (plus 0.4% in December) as a result of the difficulty of employers in The search for qualified employees.


The balance of power between employers and employees is gradually shifting in favor of employees, a very positive sign. We can consider that the highest inflation (a forecast of 2% in 2017) could reduce the debt burden of US households (about 12.29 trillion dollars) and limit the risks related to the US education bubble ( Which represents more than $ 1.23 trillion, according to the Fed).


However, not all of Obama’s record is brilliant. Its main economic failure lies in its inability to fight against the increase in inequality, which is undoubtedly the key factor that explains the victory of Trump. In fact, the income ratio in the hands of the richest 1% has once again reached the highest level seen in the late 1930s (around 17%), while it had stopped declining since the mid-1920s Until the mid 70’s.


The economic measures proposed by Trump are not clearly able to address the issue of inequality, which could quickly create resentment of its electoral base. In reality, only two economic measures make economic sense: the infrastructure spending plan, and to a lesser extent, the tax cuts.


The $ 1.5 trillion infrastructure investment plan was based on the recommendations of the American Society of Civil Engineers, the state would need to invest $ 3.6 trillion by 2020 to maintain existing infrastructure (some of which goes back To the time of Eisenhower).


This program could help boost productivity, which is a long-term challenge for US growth, and could lengthen the economic cycle – but not in ensuring its implementation. This is based on the goodwill of Congress and the Republican party. President Trump had initially considered the financing of infrastructure investments entirely by the private sector, but recently it has changed its tone by advocating complex borrowing by issuing state bonds to 50 and 100 years.


Mexico is the excuse, the real goal of Trump is China


The second point is to consider the relationships that Trump will have with its main partners. It is almost certain that the Trump presidency will herald a new era of conflict both at home and abroad.


The American president is, above all, a businessman, an opportunist who will favor opportunistic alliances, much as China does, which could initially confuse European partners in the United States.


The trade aspect is a major concern: Trump portrays himself as a defender of protectionism, but in a globalized world, this approach is no longer viable. Protectionism amounts to a tax that households have to pay because imported goods will be more expensive. It is an illusion to believe that it is possible to produce a good from beginning to end in a developed country like the United States without increasing costs.


At the moment, Trump is targeting Mexico, its easiest target since 80% of the country’s exports go to the United States. But the real purpose of the new president is China.


This will be a much tougher opponent. One figure demonstrates the economic cost of a trade war between Beijing and Washington: China and countries that export to China account for 40% of GDP (3.1 trillion). If necessary, China has two options to act against the United States:


The decision to buy less bonds in US dollars, which would lead to an increase in interest rates and would make Trump’s infrastructure program more difficult.

Referring to the Dispute Settlement Body of the World Trade Organization in case of trade dispute (for example, an increase in customs tariffs). This would be a long and laborious legal process, but whose decision would be binding on the United States, and in case of non-compliance, could lead to the departure of that international organization. This would be an economically dangerous option because the WTO protects US exporters.


As for monetary policy, Trump’s infrastructure policy needs relatively low rates to ensure a competitive exchange rate and attractive borrowing costs. However, the Fed’s view is clearly favorable to the rise in interest rates, perhaps even faster than the market predicts.


Janet Yellen’s inevitable replacement at the end of her term in February 2008 by no means guarantees that her successor will be more receptive to the wishes of the White House.


Strong tensions, issued publicly between the Fed and President Trump, should be feared during his term, which could damage the central bank’s communication to markets and potentially have a negative impact on the transmission of monetary policy.


The impact on the euro zone


The market consensus considers that the divergence of monetary policy between the European Central Bank and the Fed will lead to a strengthening of the dollar and a weakening of the euro. In the short term, it is very difficult to see what could prevent a stronger dollar, but in the medium term it is doubtful whether this trend will last. In fact, Trump’s economic policy should lead to an increase in sovereign interest rates, coupled with mounting inflationary pressures.


To overcome this, the United States will have no choice but to allow its country to depreciate to export inflation to its trading partners. For the euro zone, this should mean a new cycle of interest rates, a stronger euro and an increase in inflation, which will directly penalize the purchasing power of households, especially in low-growth countries such as France.


Under these conditions, the ECB will be forced to maintain its accommodative position for longer than expected, which could lead to mounting tensions between supporters of Draghi and Germany and their allies, who are calling for exit measures.


Trump’s risk is real in 2017, but the biggest risk, ignored by investors, is that of an open crisis in the ECB with respect to monetary policy.

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