singaporeen
Trump’s macroeconomic poison cocktail

Trump’s macroeconomic poison cocktail

08-03-2018 | Monthly outlook

Donald Trump risks a poisonous macroeconomic cocktail by both stimulating and choking off a booming US economy, says Robeco’s Lukas Daalder.

  • Lukas Daalder
    Lukas
    Daalder
    Former CIO Robeco Investment Solutions. Daalder left Robeco in July 2018.

Speed read

  • Tax cuts set to raise US government and trade deficits higher
  • Tariff plans add a new flavor to an already toxic cocktail
  • Spare capacity will determine the fate of this experiment

Tax cuts implemented on top of full employment may cause a wage-inflation spiral, or an increased current account deficit, while plans for import tariffs can hardly be seen as helpful, says Daalder, Chief Investment Officer of Robeco Investment Solutions.

He says the old phrase that “the time to repair your roof is when the sun is shining” – using times of positive growth momentum to strengthen your financial position – does not seem to apply to President Trump. When the business cycle is booming, governments usually try to lower their deficits; all Eurozone members have cut them on the back of an improving economic outlook.

Instead, the US deficit has been rising, from 2.6% of GDP in 2015 at its lowest point during the current expansion phase, to 3.1% in 2016 and 3.4% in 2017. The effect of the tax cuts is now seen raising the deficit further to 4.5% in 2019, while some financial institutions are forecasting 5% or more.

Robeco Singapore Private Limited

12 Marina View 
#10-02, Asia Square Tower 2 
Singapore 018961 
Email: robecosg@robeco.com
Tel: +65 6909 6898

Contact
The US deficit is rising while unemployment is at a record low. Source: Robeco & Bloomberg

The difference is unemployment

Such a 5%+ level has been seen before: in 1983 under President Reagan; in 1992 under Bush (senior); and in 2009 during the Great Recession, when it reached double figures. “The striking difference, however, with the previous episodes of big deficits is the development of the unemployment rate,” says Daalder.

“In all previous periods, unemployment was high and rising at 9.6% in 1983, 7.5% in 1992, and 9.6% in 2009, while the unemployment rate is currently on the cusp of dropping below 4%. Those comparing the fiscal stimulus of Reagan to what Trump is currently doing clearly miss this point. Whereas Reagan conducted a classic Keynesian expansionary policy in a weak economic environment, Trump is doing the same thing in an upcycle.”

“Economists will tell you that stimulating an economy that is already running at a high speed is not a very sensible thing to do. The aim of the tax cuts is that it leads to increased demand for goods and services, and these need to be produced somewhere. If your economy is already near the max, it is clear that this can pose a serious challenge.”

Capacity utilization

Daalder says the current US industrial capacity utilization rate of 76% suggests that there is still enough spare capacity to be put to work, though this metric can be unreliable, given that the service sector has become much more dominant.

“The ability to ramp up services domestically depends much more crucially on the availability of skilled labor,” he says. “The unemployment rate is already pretty low, which raises the question whether there is enough flexibility to match the increased demand for these services. Put simply: stimulating an economy that is already running at a high speed introduces the risk of a wage-inflation spiral.”

“There is a less painful option as well. Goods and services can be produced outside the US and imported, thus lowering the risk of an overheating domestic economy. In fact, this is the situation that is often referred to as the ‘Twin Deficit’ by economists: high (and rising) government deficits tend to go hand in hand with high (and rising) trade deficits.”

“Put another way: if you stimulate the economy, part of it may indeed lead to higher domestic production, but part of it may ‘leak away’ to your trade partners. This amount of leakage will of course be higher if the domestic economy is already running at its max. Almost all experts agree that in the current situation, it is very likely that the higher government deficit will lead to a boost in the current account deficit, the only question being by how much. It makes you wonder whether this was what Trump had in mind when he was talking about ‘Making America Great Again’.”

Tariffs may be toxic

Daalder says Trump’s latest plans for tariffs on imported aluminum and steel add further fuel to the fire. “Economists will tell you that starting a trade war is a bad decision under all circumstances, but doing so while you are stimulating an economy that is already near full capacity is a macroeconomic poison cocktail,” he says.

“By cutting off the external sector as a potential ventilation point that can alleviate some of the pressures that are being built up in the domestic economy, you only increase the chances of an overheating system. Higher wages, which are already on the rise, and higher inflation, due in part to the tariff increase, will certainly cause the Fed to raise rates more aggressively, thereby countering the effect of the tax cuts. Additionally, higher interest rates and bond yields could in theory trigger a strong rise of the dollar, which would only hurt the US in international trade.”

It remains just theory

So, is the US heading for economic disaster? Not necessarily, says Daalder: “One potential positive is that no tariffs have been levied yet, and economic theory is by definition just that: theory. For example, one of the bigger puzzles that we currently see in financial markets is the continued weakening of the dollar, defying the ongoing rise of the interest rate differential in favor of the US. It indicates that higher rates do not automatically lead to a higher dollar.”

“Probably the most important uncertainty is the one that is linked to the US economy running at or near full capacity. If it is, then there is no doubt that the current policy mix is a mistake of historical proportions. In that case, roof fixing would have been the better option.”

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Subjects related to this article are:
Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.  The value of your investments may fluctuate.  Past performance is no indication of current or future performance.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree