Australian (ASX) Stock Market Forum

Policy implications of a Clinton/Trump presidency

3 September 2016
"The laws of political life cannot be discovered by an analysis which takes men's words and beliefs, spoken or written at their face value." [The Machiavellians: Defenders of Freedom by James Burnham]

Lets cut through the election Hogwash and look at the likely policy outcomes for each Presidential outcome.

Expectations for a Clinton presidency do not require changing of the outlook of growth, policy, earnings and inflation. An upset win by Trump, however, would prompt major reassessment.

Clinton Presidency:

1. House of Representatives will be controlled by the Republicans, who will oppose any signature legislation Clinton proposes. Republicans now hold their largest house majority since 1928.

2. In combat to this; Clinton will likely decide to continue President Obama’s practice of using Rulings and Executive Orders of the President that have the force of law but can be superseded by the courts.

3. Distinguishing what policy Clinton can likely implement
a. (Unlikely) - Tax hikes on high income earners to fund spending proposals; estate tax and capital gains (requires Congress)
b. (likely) - Bolstering Dodd-Frank, Affordable-Care Act, Industry Regulations and Environmental protection.

4. Growth-Support - $275bn infrastructure spending plan and immigration reform. Clinton will meet opposition in the Republican House of Representatives but is likely to be able to negotiate by putting her ‘political capital’ to use.

5. Foreign policy is the clear domain of Clinton. This will likely be an area of greater change than domestic policy under her presidency. Contrasting to Obama and Trump's breaking of the norms of US-foreign policy, Clinton is likely to attempt to bolster the world’s confidence that the US is willing to respond to threats to global world order as well as vigorously back its allies. It is therefore likely that Clinton would take a hard line on perceived provocations by China, Russia or others.

6. On trade - Clinton has openly changed her mind on the Trans-Pacifict Partnership Agreement, explaining that she is now and will always be opposed. However, it is likely she will revert to support the TPP after minor changes.

7. A subtle change in monetary policy is likely to occur if Clinton wins and the Democrats can gain four senate seats (achieving majority). If the senate becomes democratic, likely with Clinton’s political capital, the balance of power might be tilted away from regional Federal Reserve presidents toward Washington-Based Governors who’s policies are most likely to be in-line with Clinton’s.

Trump Presidency:

1. A victorious trump would have the power to change legislation with a majority Republican House Of Representatives. Significant legislation would beckon, with republican controlling both houses of Congress.

2. Trump’s signature policy of immigration. Deportation will be public but not at the scale that is currently expected, concentration around illegal immigrants with criminal records to increase support and publicity. US is likely to build a Physical Border in some places. Covering the entire border is unlikely. It is expected that deportations and the wall will not have a material affect on economic or population growth but the policies should send a direct message that may impact future net migration.

3. Tax Policy - Likely to have tax legislation passed relatively quickly. Projections of future debt would balloon, lower taxes would likely boost growth forecasts in the short term.

4. Foreign policy - Intensified attacks on Syria and Iraq. withdrawing from other conflict zones. A more realistic foreign policy, expectations of making difficult deals to settle disputes.

5. Regulatory agenda - Trump is likely to cut regulation in the energy, financial sector and other industries. Arbitrary reductions would be good for short-term growth. Bureaucratic complexities can sometimes block a president’s regulatory agenda.

6. Press for changes in Business Models of US companies including those who invest overseas, undertake tax inversions and grow jobs outside of the US. This is likely to have a chilling effect on business activity and formation in the US.

7. Replacement of Janet Yellen. Trump will likely blame the Fed for negative developments in the US economy. The Fed is a convenient target because most don’t understand what it does. The Fed will continue to respond to the data, inflation from Trump’s policies would be met with tightening. Uncertainty resulting from Trump’s policies would be met with easing.

Bottom Line

Clinton represents the status Quo, Trump represents drastic change amid increased uncertainty. Trump’s policies of easier fiscal policy and decreased regulation could drive growth and induce the tightening of monetary policy or cause uncertainty and weigh on growth.

Trump’s short-term policies are likely to be inflationary unless uncertainty causes a slowdown from reduced sentiment. Trump’s long-term policies also seem to be inflationary but more supply-side and policy reasons than a positive jolt to aggregate demand.

Significant fiscal easing would likely raise projected national debt, if inflation does not rise this could cause concerns about future interest costs. The replacement of Yellen could be seen as an attack on the Fed’s independence, which is argued to be a major factor in keeping inflation and inflation volatility low.

Ricardian behaviour (demand remaining unchanged despite increasing debt-financed government spending, because of increased savings).

Trump’s trade and immigration policies could also be potentially inflationary, but through negative impact on the supply-side in the long-term. Driving up of labour costs, reduced trade deals preventing tariff reductions and attacks on firms exporting jobs and investment could push forms towards higher cost business strategies.

The most market-relevant conclusion seems to be that Clinton will allow recent economic dynamics to remain in place, a Trump victory would change things profoundly. Specifically inflationary in the short term for demand side reasons and inflationary in the long term for supply side and policy reasons.

The Policy Platforms -

Fiscal Policy - Taxes and Infrastructure

Clinton -
Raise taxes for High Earners, Estate Tax: 45%, $3.5M threshold
Higher rates for Capital Gains
$230bn Direct Investment
Government Owned Bank
Restoration of Build American Bonds

Trump -
Three Income Tax Brackets (12%, 25%, 33%)
Corporate Tax Rate: 15%
One time repatriation tax: 10%
Repeal the Estate Tax
Increased Infrastructure Investment (No Specific Amount Proposed)

Globalisation - Trade and Immigration

Clinton -
Reject TPP in “its current form”
Help illegal aliens remain Lawfully
Work to ease paths to citizenship

Trump -
Reject TPP
Renegotiate NAFTA
Peg China as Currency Manipulator
Border wall with Mexico
Deportation of Criminal Aliens
Put American workers first

Entitlements - Education and Health

Free, four year in-state tuition
Loan payments Capped at 10% of Income
Debt Forgiveness
Maintain ACA
Pressure Drug Companies to lower Costs

Eliminate Department of Education
Remove “Common Core”
Repeal ACA
Encourage Imports of Cheaper Drugs

Regulation - Finance and Energy

Clinton -
“Risk-Free” on Commercial Banks
Strengthen Volker Rule (US Banks making speculative investments)
Reinforce Leverage Restrictions
Invest in Renewable Sources

Trump -
Over-haul Dodd-Frank
Rescind Climate Action Plan and Waters of The US Rule
Support Coal Industry
Reengage with Keystone Pipeline

[Sources: Credit Suisse]