Expect a risk rally, after a long pause
In the past couple of months, since the completion of the US presidential elections, most of the global analysis (financial, geopolitical, economic, international relations, etc.) has been revolving around the likely policy stance of the Trump 2.0 administration. Various scenarios have been built based on extrapolating his election speeches and other utterances made during Trump’s election campaign.
Most of these analyses could be speculative, since (i) these is not based on the policy actions pursued during the first presidential term of Trump, assuming this time it is entirely different; (ii) these assume a significant delivery on the election promises, with no substantive evidence to support such assumptions; and (iii) these not only ignore the relatively recent experiences of India (Achee Din-2014), the UK (New Deal – Brexit), but also overlook the notable failed promises of the past US presidents. To name a few, Woodrow Wilson (1916) - “He kept us out of war”; Jimmy Carter (1977) - “End energy crisis” (installed solar panels on white house); George Bush Sr. (1988) - “Read my lips, No new Taxes”; Bill Clinton (1993) - ‘Hillarycare”; George Bush Jr., (2001) - “Change in tone” (first version of DOGE).
A plethora of executive orders have been issued immediately after the inauguration. Contrary to the speculations, most of these orders have domestic implications and do not touch the global economic, financial or geopolitical spheres. I only find withdrawal from the WHO & Paris Accord, and National Energy Emergency (commonly seen as a move to bypass environmental concerns for mining and explorations), noteworthy.
Notwithstanding the past precedence and current rhetoric, if we assume a clear BlueSky scenario, reasonable level of execution and delivery on promises by the Trump 2.0 administration, it would be fair to expect, inter alia, the following outcome:
· 3-3-3 plan – Treasury Secretary, Scott Bessent aspires to execute a 3-3-3 plan to strengthen the US economy. The plan involves – achieving an average 3% GDP growth; bringing the budget deficit to 3% of GDP; and increasing the domestic US oil production by 3 million barrels per day (mbpd). This plan if executed well could results in:
(i) Materially lower global energy prices, as the US becomes a net crude exporter.
(ii) Inflationary expectations collapse, allowing the Fed to cut rates below the present forecast of 3.75%; resulting in lower mortgage rates and a rise in housing demand.
(iii) Lower trade deficit, stronger USD.
(iv) Diminished role of the infamous US Deep State in domestic and global affairs, as the budget, size and role of the bureaucracy is curtailed.
(v) Eventually, more fiscal leverage for the US Federal Government to initiate critical infrastructure projects and provide incentives for onshoring of industries.
Notes: It might not be practically possible to execute 3-3-3 plan in the next four years. For reference, the US GDP grew at an average rate of 2.4% in the past one decade; the present fiscal deficit is 7% of GDP (cutting it by 4% would mean a USD one trillion cut); and the US currently produces about 13.5 mbpd of oil.
Presently, the US contributes approximately 10% of the US$6.8 billion annual budget of the WHO. The US withdrawing from the agency may hamper the WHO projects, especially in the underdeveloped countries in Africa, and war-torn middle east Asia. Geopolitically, it affords China an opportunity to gain even higher acceptance in these countries by extending much needed humanitarian aid.
Withdrawal of the largest polluter, the US, from the Paris Climate Accord, could jeopardize the future of the current global climate change framework. I am not sure about the long-time repercussions of this. Maybe, this affords an opportunity to all stakeholders to look at the climate issue afresh and a new more effective framework develops. Or maybe, many underdeveloped countries are crushed by starvation & disease, ushering in a new era of colonialism.
· Immigration reforms – President Trump has signed an executive order (EO) to end the absolute right to US citizenship by birth. Before this EO, the US, Canada, Brazil, Argentina and Pakistan were the only countries in the world, which afforded full unconditional citizenship to all the children (except for children of diplomats) born on their land. However, many would like to see this EO as a major setback for the “prospective” immigrants planning to give birth to US citizens.
Otherwise, Trump has made it clear that “the US needs skilled workers to grow”; thus, checking the speculations about the changes in the H1B (skilled worker) visa program.
Initial impression about the immigration reforms of the Trump 2.0 is that it is more aimed at illegal immigrants, drug peddlers, and crime control, rather than hindering skilled workers’ entry into the US.
From whatever I have read, heard, seen and understood, I see the following conditions emerging in the next four years.
· Marginally positive real rates in the US and a stable USD
· A virtuous investment cycle unfolding in the US
· Gradual decline in the US fiscal deficit, and trajectory of growth in public debt
· Prudent trade renegotiation between the US and its trade partners
· Reforms in multilateral agencies to allow rightful place to emerging forces
· A more balanced global climate change agenda taking shape
· A conspicuous rise in the Chinese influence over the smaller underdeveloped countries
· New charter of global relations evolving
· Price stability and central bankers preferring growth over inflation
· Global fiscal correction taking shape to end decades of fiscal profligacy in the developed countries
· More inward-looking development agenda for India and thaw in Indo-China and Indo-Pak relationships
· A strong risk rally likely from 2027 onward
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