Top of the agenda for conceptualizing political risk in the year ahead is the great unknown represented by President Trump. Having begun his first hundred days and with his cabinet in place, his legislative agenda is now expected to take shape beyond the populist but often unrealistic policy promises made during his campaign. Whether he will be able to enact this agenda, despite the Republican sweep of congress – particularly in terms of foreign policy realities, the global economic repercussions of an isolationist United States, and the domestic protectionist framework in which he has couched his proposals – is the question that will dominate the risk forecast this year.
Buy Low, Sell High
As if the campaign had not sufficed to vent his inner id, Mr Trump’s penchant for reckless statements is unlikely to be tempered by the decorum of the office he has assumed. At least, initially. An indication of the risk associated with his sheer temperament was a story late last year that vigilant Wall Street traders and hedge funds are developing trade algorithms to parse through his tweeting. This followed tweets he had issued on slashing funding for the Lockheed Martin F-35 fighter jet program (a central component in the planned overhaul of America’s nuclear triad) – causing the company to lose $4 billion in value – and Boeing’s stock taking a dive after he announced that the cost of Air Force One was too high. This was either instinctively rash or disingenuously populist, but it was a portent of things to come in the ‘Twitter presidency’ (Lockheed Martin CIO Christopher Li promised to re-negotiate costs).
Markets tend to self-correct, as they did in the case of Boeing, but such is the unpredictability of what Mr Trump might say or do that it remains difficult to chart a clear, consistent outline for either his domestic or foreign policy – despite, or rather because, of what he says – and not least in light of previous norms and rules of engagement for an American president. Buy low, sell high for eight years, was the tongue-in-cheek comment among traders following the aforementioned twitter incident. The fundamental question, though, is what can happen when Mr Trump’s unguarded personal vision collides with international, domestic and social realities, a legislative procedure to which he is not accustomed, or the conflicting personalities appointed to his Cabinet. Traders will likely have their hands full keeping up, not least due to the immediacy of social media and his addiction to communicating personally on it, where what he says may not reflect policy – or inadvertently change it. “The whole age of computers has made it where nobody knows exactly what’s going on,” he said recently, addressing Russian cyber-attacks his own intelligence services have concluded helped get him elected.
U.S. markets traded at record levels following Mr Trump’s victory (with some hedge funds reacting ebulliently, quickly spotting opportunities), showering him with prematurepraise despite the uncertainty and previous broadpreference on Wall Street for the more likely market and other stability offered by Mrs Clinton. For now, the market is anticipating the lower corporate tax rates and regulatory easing promised by Mr Trump, and thus better profits. The immediate concern for investors will be the reaction of the U.S. Federal Reserve, which was expected to increase interest rates throughout 2017 as a reaction to the stronger dollar, but is now likely to try to accommodate monetary policy to a more bullish market and higher inflation in consequence of Mr Trump’s anticipated economic policies (see pp. 7-8). Despite being critical of Fed Chair Janet Yellen during the election, Mr Trump’s opportunity to shape the Fed in 2018 when Mrs Yellen steps down may encourage him to respect its independence in the meanwhile.
When it comes to the U.S., its interest rates, stock markets and currency traditionally set the pace for the rest of the world. Over the longer run, however, all bets are off, underscoring, as Dominic Rossi, global equities CIO with Fidelity International, suggests, how “known financial risks have been displaced by an unprecedented level of unknown political risks.”
Known and UnKnown UnKnowns
Former U.S. Secretary of Defence Donald Rumsfeld famously quipped that, alongside known knowns, known unknowns, and unknown knowns, there are unknown unknowns. The latter category most accurately describes the political risk assessment of this young presidency, which, according to its considerable detractors, stands to undermine the very foundations of the post-WWII global order, based on Mr Trump’s wild pronouncements of upending the international order and his seemingly limited grasp of global complexities.
Mr Trump’s vagueness on the structuring and refinancing of his economic package may well have done much to fuel investor imaginations, but the euphoria may prove short lived: “should the new administration take longer than anticipated to accept the realities of governing,” says Stefan Kreuzkamp, CIO of Deutsche Asset Management, “the market’s enthusiasm may come to an abrupt end.” Investors, particularly those who are not U.S.-based, will have to sit tight while the implementation of his policy agenda unfolds, but a glance at the known unknowns should provide a sense of just how uncertain the unknowns loom on the horizon.
First, while Republican control of both houses of Congress offers an opportunity to break years of political gridlock on Capitol Hill, this is no guarantee of either party unity or the ability to force through aspects of Mr Trump’s agenda that remain unpalatable to members of both parties, such as his impulse to lift sanctions on Russia. President Obama similarly enjoyed control of both chambers in his first two years, and while that proved the opportunity to sign into law his signature Affordable Care Act (“Obamacare”), it was portrayed as ideological overreach and redoubled Republican efforts to stymie the rest of his presidency, which was subsequently often bereft of direction.
The GOP itself was of course further radicalized via the tea party, resulting, in many ways, in Mr Trump. It is conceivable Democrats may now too be radicalized, first, in opposition to Mr Trump, but also amid recriminations within the party itself that could see it split into a ‘Sanders’-type and ‘establishment’ wings, much as the GOP did before it. Though there are areas where Democrats may conceivably back Mr Trump, such as on infrastructure spending, the overall picture suggests a further fragmentation of politics, and therefore more potential for social and other unrest, and a continuing erosion of trust in the system and its institutions.
Mr Trump is, therefore, as unlikely to be able to change the tone in Washington as his predecessor was, or to, as he puts it, “drain the swamp,” also considering the long list of personal conflicts of interest that make him unlikely to become a unifying figure (and more likely a target of endless investigation and partisan fighting). While Republicans may currently themselves be unified in wanting to repeal the ACA, the political reality that it may prove politically impossible to repeal health care to the around 20 million people who have now bought into it may also undermine the first issue on Mr Trump’s legislative agenda. Considering that much of the rest of his agenda is not especially well defined at the policy level (or indeed, in relation to conservative orthodoxy on many issues, creating the potential for internal dissent), much of the tenor of his presidency may be defined by whether he succeeds or fails on the one issue that unites him most with the rest of the GOP.
An even more central danger to Mr Trump’s presidency will be whether he can maintain his base of political support while inevitably breaking the more infeasible among his campaign promises, such as the pledge to build a wall between the U.S. and Mexico (to be paid for by Mexico – Mr Trump recently announced the American taxpayer would pay for it in the first instance, to be reimbursed by Mexico “later”). In addition, while his protectionist instincts and vow to kill America’s trade deals, such as NAFTA, may have won the hearts of his supporters in the most hard-pressed manufacturing regions of the country, he appears to have misunderstood that the greatest threat to the manufacturing sector is not as much trade as it is technological automation, something even he is powerless to stop.
Consequently, closing the U.S. to free trade while manufacturing jobs continue to disappear would potentially hurt all layers of American society and possibly deprive him of his political base, no matter how many jobs he personally intervenes to save (if, for example, the makeshift deal to stop a few hundred jobs from leaving Carrier in Indiana is an indication of his governing intentions going forward). Mr Trump will find protectionism to be infinitely harder while managing the globalizing world than it is to promise manufacturing jobs at his campaign rallies, just as the revelation that protectionism is not the solution to America’s economic woes may severely undercut him in the longer run.
“A Very Considerable President”?
All presidents experience a learning curve, however.Mr Trump needs to have a steep one to overcome manyof the obstacles of his own making. Some of his cabinet choices, such as Vice President Mike Pence and Secretary of Defense James Mattis, have been wise selections as experienced and knowledgeable hands to help smooth the transition between the president’s mercurial predilections and the requirements of the job.
Others, such as national security advisor Mike Flynn and political director Steve Bannon, are deeply problematic in the sense that they nurture and encourage Mr Trump’s already radical and conspiratorial worldview. The former will be necessary to counterbalance the latter, and it is to be hoped that, as in most administrations historically, the more radical elements are weeded out by necessity as the demands of the job intensify once the Rubicon from ideology to governing realities has been crossed.
Nowhere is this reliance on more experienced hands to be desired than in the realm of foreign policy. Even beyond his worrying admiration of Russian autocratic method, praise for Russia’s campaign in Syria and consideration of Vladimir Putin as potentially his closest ally, or his deliberate provocation of China with the likely intention to start a trade war, the grand Weltanschauung of Mr Trump appears to be to undermine every extant pillar of the liberal Western order.
Thomas Wright of the Brookings Institution suggests that Mr Trump’s view of the world has hardened since his business heyday in the 1980’s, believing that since then “the U.S. has been taken for a sucker by other countries because of trade deals and security commitments.” This accounts for his unorthodox views that America has no strategic interest in military engagement in Asia, has no need to maintain troops in Europe or lead NATO as a counterbalance to a militarily resurgent Russia, or prop up allies in the Middle East such as Kuwait or Saudi Arabia without being compensated in oil as the proverbial pound of flesh to be extracted for American beneficence.
Mr Trump believes the negotiating skills honed over his long, successful – and often equally unsuccessful – career in real estate and other ventures would suffice in safeguarding America’s geostrategic interests and bringing its enemies to heel. While his predecessor’s foreign policy has often been justly criticised as being perhaps too cerebral and, therefore, timid, Mr Trump would nevertheless do well in heeding the advice of security and foreign policy experts and institutions that every bilateral alliance and security challenge America faces is a question of diplomatic balance and tactical advantage of a different order than what usually accompanies business negotiation.
Nevertheless, no less an expert on diplomacy than former Secretary of State Henry Kissinger sees “extraordinary opportunity,” with there being a possibility of Mr Trump going down in history as “a very considerable president” on foreign policy. According to Dr Kissinger’s thinking, Mr Trump’s rapprochement with President Putin makes possible a greater balance of global power between the U.S. and Russia, which could in turn promote more global stability.
Geostrategic implications and risk are considered in this report, but suffice it to say at present that if anything is certain, it’s that a period of great upheaval lays ahead.
This editorial began with the premise that Mr Trump is unlikely to change, with a caveat – “initially.” Any realistic assessment of the political risk of his presidency will hinge on his potential to do so over the mid- to longer term as he finds himself compelled to accommodate the realities of governance. Conversely, should he refuse to do so, political risk for the U.S., its allies, on the geopolitical chessboard and in financial markets remains higher than at any point since at least the end of the Cold War.
But is Mr Trump, after all, predictable in his unpredictability? Could there be patterns of discernment that over time allow a better understanding and pricing in of his motivations, and thus, their more seamless integration into geostrategic and financial frameworks, while these in turn moderate his outlook? It seems unlikely at the time of writing, but in fairness, the jury is still out. For Mr Trump, nevertheless, the key to perseverance and success in governance may well be to supress, to some extent, the very brash force that sustains him and gives him power.
One thing that appears certain is that, in 2017, political risk is set to eclipse economics by dint of the unprecedented challenges presented by the unique personality of President Donald Trump.