The vast majority of analyst seem to believe that Trumpanomics will fail, and likely fail spectacularly. Given this view, they argue that there is a significant downside to markets, particularly the equity markets, after the market moves post-election.
Ok. So what if it fails. It will take years to determine the success or failure of his polices. What should matter now for markets, and more importantly for trading strategies for Trumpanomics, is not the probability of success of the policies but rather the likelihood of these policies actually being implement. On that basis, I believe that markets are actually being too pessimistic about the about the probability of his policies being implemented. I base this on the same framework I used for identifying potential asymmetric trades with Abenomics:
Abe like Trump won an election to reverse the decline of their economy and taking it back to the growth rates in the 80s and early 90s. (sound familiar?)
Their economies slowed from historical levels due in large part to demographics and a fall in investment. Again, these are the same issues I have highlighted in my 5-part series on Trumpanomics. Yes, on the surface demographics issues for Japan are worse than for the US by virtue of our historical immigration policy. Having said that, the problems in the rust belt are as bad both demographically as people leave, and the fall in investment.
Abe mandate gave him the ability to implement massive changes in policy, e.g. QE, pension reform, etc. In addition, he could implement another round of policy every time their economy crept back to its old dynamic. The key here is that the likely success of Abenomics is low, but as long as Abe in in office, the likelihood of further policies to reverse the decline will be high. Potentially, Trump has that same mandate for massive change. Unlike Abe, his probability of success is higher because US demographics are better and there are ways to substantially increase both productivity and capital that could create a higher trajectory of economic growth. That means higher probability of implementation both now and if the policy starts to fail. This creates attractive asymmetries because implementation of economic policy is the key ingredient in my strategies for it provides the catalyst for the performance of a trade.
Just as now with Trumpanomics, back in late 2012/early 2013 analysists focused on the likely failure of Abenomics, while markets were too pessimistic about the likelihood of policy moves, given Abe did nothing his firm time around. What both missed then and are missing now with Trump is that people in Japan did not elect the persons of Abe or nor did the US elect the person of Trump, both countries elected a government that was willing to risk a lot for the potential of reigniting economic growth back to its historical levels. They gave each the mandate of change, and change now.
So, Trumpanomics. Trump is ticking off the items on his list for which he was elected, e.g. read my commentary on the “China Card”. Now he is turning to implementation through law. The republicans have recently released their version of the repeal of “Obama Care”, and are now turning to tax reform, and most importantly, the corporate reform (reform will be a topic of another commentary). So, in terms of trades, consider this: you wake up a few weeks and see that Congress has passed every part of Trump/House republican corporate tax reform. What do you think happens to the equity market? Just to give you a perspective the graph below shows the performance of the Nikkei and S&P after the elections of Abe and Trump. Month 4/5 for Abenomics is the when he named a new chairman of the BOJ and they started the first round of QE.
Source, Yahoo Finance