Episode Transcript
David: What we're seeing now is that president-elect Trump is really on track of winning the majority in the Electoral College, and the popular vote. Does this come as a surprise to you?
Tina: Well, it's funny because, obviously we've been tracking elections all this year, historic year for elections. And one of the curious things about the U.S. elections was how stable the polls have been, despite the momentous changes, you know, interruptions, whether it was the assassination attempt on Trump, to Joe Biden withdrawing, Harris's kind of compressed candidacy. And yet, in the final six weeks, the polls were entirely stable, almost no movement. And I looked back at what I wrote, the last thing I wrote before elections took place. And I said, with a 1% margin, the way the Electoral College works, you could have a landslide in either direction. And what did we get? Trump winning the popular vote, something a Republican hasn't done for a long time, and the Electoral College majority, which he needed to win. But not only that, both chambers of Congress. So he's in a very different position heading into his second term than he was in Trump 1.0 in 2016 in terms of his sheer political power, and markets are loving that. Markets are loving that.
David: We saw the Russell 2000, which is, of course, a key bellwether for equity markets go up 5.8% in just a one day move after the elections, which is almost double from what we saw back in 2016. We saw, the dollar goes up. What's happening in this surge in optimism?
Tina: Well, so remember in 2016 we talked about this a little bit in our first conversation. You know we went into that election with Hillary Clinton as the favourite. And despite the fact that markets always have a bias for the Republican candidate, when Trump ended up being the winner, it was a surprise and it registered as a surprise. And it took markets a few days to recover. Heading into this election, investors were positioned very differently. I remember one conversation with a CIO, a U.S. CIO, who said, “If Trump wins, we're not going to miss out on the bonanza this time.” And I think that's exactly what we've seen. It's animal spirits all the way, not only in the equity markets but also in the deal pipeline picking up. You've told me, though, that that's pretty typical historically.
David: Historically, indeed, what we see when you look at elections, is that we experience positive returns after the election result. So I think it's also an element of uncertainty taken out of the market. And that's actually irrespective of whether the Republican or Democrat.
Tina: Yeah, we've got a signal now.
David: You've got the signal. Indeed. And I think it's interesting to understand now, what is the market really pricing in? Is it tarrifs? What’s your take?
Tina: I'm not sure markets are pricing in tariffs. So, I mean we've kind of seen this movie before in terms of markets focusing on, you know, the obvious positives. I would say a bit of amnesia or selective attention to some of the other signals, like some of the more unorthodox policy choices. Whether it’s extending the tax cuts, which president-elect Trump can clearly do with the control of both houses of Congress, not controversial. The lower corporate tax rate compared to what has been the case under the Biden administration. Those are two obvious net positives. Are markets pricing in the inflationary impact of possible mass deportations? I don't think so. I don't know. I don't know where we would see that at this point. And I don't think market participants are really going to start looking at that, because it'll take quite a while for that to pass through. But you know who will be, it's the Fed Chairman, because they've already signalled that there might not be a rate cut in December as markets had been anticipating.
David: So the, reduction in taxes is maybe a clear signal initially. And then we need to get more clarity on some of the other policies. Obviously, we are seeing some appointments. I think that perhaps gives a sketch of what we can expect with Secretary of State, we have a...
Tina: A China hawk as Secretary of State, Marco Rubio, very competent, well known in foreign policy, clearly a China hawk. One observer in the foreign policy establishment said when looking at the slate of people in the Trump cabinet, is that this is a war on Iran collection of people. Now, you know, you ask if markets are paying attention to that. No, because I think your average market participant says ending the war in Ukraine on day one, as Trump has promised, is going to be a net positive, especially heading into winter. The impact especially for us in Europe on electricity and gas and everything else, that won't be the case. He won't be able to end the war on day one. And I have a lot of questions about the kind of second and third order effects of making U.S. policy more transactional. Yes, that can be positive for certain industries, for manufacturing, etc. Friendshoring, Re-onshoring, that sort of thing. But there are risks to that as well.
David: You discussed Secretary of State, there are other appointments. How are you looking at the formation of the cabinet and especially the pace?
Tina: It seems to be going very fast at the moment. Yes. Trump is signalling that he intends to enact his agenda. And remember, he campaigned on a platform of radical policy change. Hence all of the day one pronouncements. They intend to move forward on the mass deportations, although that will take months or longer to do what they are talking about. Robert F Kennedy Jr, as health secretary, is a dramatic move. Loyalty appears to be the most valued quality in the appointees. There's another element though, and that is that Trump may be setting up a kind of a litmus test, a loyalty test for Congress, because Congress has to confirm cabinet appointments. And it only takes, you know, four defections, potentially, for some of these nominees not to make it, but Trump's kind of daring people to not approve his chosen warriors, as he's calling them.
David: Understood. You're also a student of history, and I love how you can connect the dots between, different regions, different developments politically in the U.S., Europe. Can we go back to your Pax Americana? What is that about? How should we think about it and put it in a historical context?
Tina: Well I think a lot of people have forgotten what the idea behind the Pax Americana was, and that refers to the period where we had a, you know, sustained era of reduced conflict and also U.S. primacy and stability of a sort following the Cold War and that bipolar order, the, you know, the motivation that followed it. And this was something that Ronald Reagan espoused. George W Bush, you know, it wasn't only for Democrats. It was U.S. policy to promote free trade, human rights and democracy around the world. Hence NATO, and AUKUS and other kinds of networks. In order to, you know, allow for goods, services, but also prosperity. And the idea that global prosperity was also good for U.S. business. Trump's ideas are challenging that by suggesting that we need to review on a case by case basis. So 25% tariffs threatened against Mexico, NAFTA coming up for renegotiation next year. Trump probably will be able to negotiate better terms. But we're about to find out what that means in terms of global political stability, especially given that we're in a period of heightened conflict. And that means more refugee flows. We also have more climate change events, which are also driving people. And there is a very real risk that a highly personalised regime allows more corruption to take place. And that, to me, talking like the emerging markets expert that I started out being, but applying it to the U.S. But for now it's go, go, go. And you know me as the geopolitical risk analyst, I'm asking whether, all of the animal spirits that have been unleashed might eventually turn into roadkill at some point, but not yet.
David: Okay, so we will keep track of the animal spirits to our indices. But for now, I'd like to thank you, Tina, for sharing your insight and yet for another fantastic discussion. Thank you.
Tina: Thank you David.
