Is the Trump effect a real phenomenon? Shortly after his presidential victory, various developments occurred: Companies announced plans to bolster their insourcing plans, terrorist organizations proposed peace agreements, and politicians and media on the other side of the aisle waved the white flag of surrender and pledged to work with the president-elect. With a little more than one month until Inauguration Day, will Donald Trump continue to pile up victories like the 2018 Boston Red Sox?
The Trump Economic Effect
Trump’s use of tariffs would make former President William McKinley blush. While this was a popular trade weapon in 45’s first term, the incoming administration appears to be preparing to enhance its utilization of the measure: case in point, Canada, Mexico, and China – and maybe the BRICS bloc.
Out of nowhere, Trump took to Truth Social and vowed to slap 25% tariffs on America’s bordering nations and 10% levies on Chinese imports in addition to the ones already in place. The objective was to secure the border, stop the flow of illegal immigration, and resolve the drug problem. So be it if the world’s second-largest economy was collateral damage. The president-elect’s social media posts started the ball rolling.
First, Canadian Prime Minister Justin Trudeau held an emergency meeting with premiers across the Great White North. Second, Trudeau flew to Mar-a-Lago for a quick powwow with Trump. Finally, reports indicate that Ottawa is getting ready to beef up border security by purchasing new helicopters and drones for increased patrol efforts and expanding the use of equipment and technology. Whether this will persuade Trump to abandon his tariff threat remains to be seen.
Different messaging comes from the southern border. While Trump has said Mexican President Claudia Sheinbaum Pardo vowed to close the border, the newly elected leader said that she prefers to "build bridges between governments and between peoples." Sheinbaum also suggested she could retaliate with her own tit-for-tat levies. Considering that most of Mexico’s exports go to the United States, this might not be a trade war she could afford.
According to Deutsche Bank economists, it might not be good news for inflation-bit consumers. The financial institution forecasts renewed price pressures from tariffs on Canadian and Mexican imports, writing in a recent research note: “Using the same methods to ballpark the inflation impact of other tariffs in our recent outlook update, we find that adding the tariffs on Canada and Mexico would likely lift core PCE [personal consumption expenditure] inflation above 3% in 2025, with more marginal effects beyond."
China has stated that it is prepared for battle. However, it is in a different economic position than it was during Trump’s first trade war. The world’s second-largest economy has registered worse-than-expected growth, and polls of economists anticipate slower growth prospects in 2024 and 2025, falling short of the government’s targets. The Chinese yuan recently slumped to a four-month low against the US dollar, and various investment banks and research firms forecast the currency will weaken to record lows against the greenback. China’s deterioration has been an ongoing saga for the last few years, but Trump’s tariff weapon could add to its “Japanification” fears.
The coalition of emerging markets, better known as BRICS, is also in Trump’s line of vision. The group of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates has embarked upon a de-dollarization crusade. The current administration has largely ignored the institution’s anti-dollar initiative. A second Trump term might adopt a different approach and instead place a bullseye on the bloc of nations. Whether this is premature is up for debate among economic observers, but it is clear the president-elect would deploy tariffs to stop any shift away from the buck.
Fergus Hodgson, an economist and author of the new book The Latin America Red Pill, suggests this is an unhealthy form of populism. "It's basically deferring blame," Hodgson said in an interview with Liberty Nation News. "The US dollar is weakening as a currency because of a declining US economy and because of a precarious fiscal situation for the United States. So, to lash out at other countries is deflecting the blame. It's scapegoating."
That said, Hodgson agreed that there are few realistic alternatives to the greenback, especially considering that the dollar represents 88% of all global financial transactions. "There is not a natural successor to the US dollar, and I don't think that BRICS really have the wherewithal to challenge the US dollar," Hodgson added.
Unlike Canada, however, Russia is not backing down on its anti-dollar pursuits. Kremlin spokesman Dmitry Peskov told reporters that Trump's tariff plans would backfire by strengthening the de-dollarization efforts. "More and more countries are switching to the use of national currencies in their trade and foreign economic activities," Peskov said. Of course, a nation that has seen its ruble crater below a penny and a government that has placed all its eggs in a Made-in-China basket would have little incentive to cave to the incoming administration.
Consumer Sentiment
Consumer confidence has yet to return to pre-pandemic levels, and market watchers will pay close attention to incoming surveys. Economists can now digest The Conference Board's November Consumer Confidence Index, which reflects a positive short-term outlook for business, income, and labor market conditions.
Last month's reading was above the range seen for the past two years, says Dana M. Peterson, the chief economist at The Conference Board.
"November’s increase was mainly driven by more positive consumer assessments of the present situation, particularly regarding the labor market. Compared to October, consumers were also substantially more optimistic about future job availability, which reached its highest level in almost three years. Meanwhile, consumers’ expectations about future business conditions were unchanged and they were slightly less positive about future income.”
Despite inflation eating away at their wallets and purchasing power over the last few years, consumers continued to spend during the five-day holiday shopping period. Mastercard data suggest that Black Friday spending in stores and online surged 3.4% year over year. Adobe Analytics estimates consumers spent a record $10.8 billion on Black Friday. Salesforce projected $17.5 billion worth of sales. Whatever metric is used, shoppers will help boost the fourth-quarter GDP.
Still, reports suggest that consumers relied on credit cards and buy-now-pay-later loans to cover a sizable portion of their purchases. If this persists over the next four years, will this be an indictment against Trumponomics as it was for Bidenomics?
What About Wall Street?
Wall Street was ebullient over Trump’s second-term victory amid optimism of a deregulatory approach and business-friendly policies.
The leading stock market indexes keep posting record finishes. US Treasury yields appear to have stabilized since skyrocketing after the Nov. 5 presidential election. Bitcoin is still trying to cross the $100,000 threshold. Oil is struggling to hold $70, while natural gas is slightly above $3. The US Dollar Index (DXY), a metric of the greenback against a weighted basket of currencies, is still up 5% year-to-date.
Have investors baked Trump’s policies into the cake, or are more gains ahead for institutional and retail traders?
One Month to Go …
It has been a month since Election Day, and Trump has another month and change to go until he is officially sworn in for a return to the White House. And yet, Trump is behaving as if he is already the president. He is wielding trade weapons, meeting with foreign leaders, and traveling to France to attend the reopening of Notre Dame in Paris. What else could he possibly get done by Jan. 20?
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