Trumpanomics Part I: Reganomics
Trump’s victory unleashed a surge in equity markets and a sell-off in bond markets. The consensus view is that his policies will reenergize growth in the US economy and push up corporate earnings but at the cost of deficit financing. The repricing of markets has been driven by the view that his policies are simply the return of Reaganomics: a fiscal policy of cutting taxes, increase spending on selective areas while holding down total spending, and a regulatory policy that will focus on reducing red tape that will result in increasing productivity and creating cheap domestic energy supplies. Returning to the economic growth of the Reagan years even at the cost of higher debt seems appealing given the current lower levels of economic activity. However, using the exact same game plan as Reagan is unlikely to produce the same results given the current headwinds of the US economy. As the saying goes “no man ever touches the same river twice, for it is not the same river and he is not the same man.’ So, in my view just implementing the same policies as Reagan did in the 1980s alone is unlikely to work as well as the market seems to be pricing in.
First, the levels of economic activity during the Reagan years looks spectacular versus the current levels of growth. However, from a longer perspective this growth looks pretty similar as the during Carter and during Clinton years. (Remember Clinton actually raised taxes).
Second, Reagan policies have reduced substantially the ability of the exact same policies to have the exact same impact on growth. Reagan was able to generate a significant fiscal stimulus from cutting taxes. Prior to 1980, the top marginal tax rate for personal income was 70% with 33 brackets, by 1986 he had cut it to 28% with only two brackets, almost a flat tax. The top corporate tax was at 45% and he cut it to 35%. The potential impact from a Trump tax cut will likely be less than for the Reagan tax cuts given that the current top personal income tax rate is only 40% with 7 brackets. The current top corporate tax is still at the 35% but with an effective federal tax burden of roughly 16% for profitable companies and even less for large multinationals. His lifting of the price caps on domestically produced oil set the stage for the growth of shale. His monetary policy working with Volcker brought inflation and rates down substantially. Reagan’s immigration policy of amnesty and strict enforcement clearly show a path that has not worked. Third, and most importantly, Reagan was confronted with headwinds to US economic growth that are different than they are today and accordingly, he would probably not implement his principals in the same way today as he did then. The US economy is faced a new set of headwinds to growth:
The problems of a winner take all new corporate economy that creates to few new business and rising income and wealth inequalities
Trade and tax policies that support off-shoring, which has gutted the manufacturing economies of the rust belt but with rising corporate profits.
The potential of cheap energy from shale to create a renaissance in US manufacturing is constrained by regulations on fracking, building the transportation infrastructure to deliver it to markets both domestically and around the world, and financing them through the banking system.
Inflation is too low not too high.
So, what would he do now?
My answer to that question is the core of my tradable macro theme of Trumpanomics. Over the next few days I will be releasing three pieces on this theme. In part I, which I am sending out today, I will revisit Reganonomics. In part II, I will discuss why the same policies would not be as effective today as they were in the 1980s. And in Part III, I will present my macro theme of Trumpanomics. In that piece I will use my SOM framework to illuminate the likely path that the new administration could take and set out the asymmetric trading strategies generated from this path.