Navigation Search

Select your location and role to view strategy and fund content

South Africa
  • Global homepage
  • Australia
  • Belgique
  • Botswana
  • Denmark
  • Deutschland
  • España
  • Finland (Suomi)
  • France
  • Hong Kong (香港)
  • Ireland
  • Italia
  • Luxembourg
  • Namibia
  • Nederland
  • Norway
  • Österreich
  • Portugal
  • Singapore
  • South Africa
  • Sweden (Sverige)
  • Switzerland
  • United Kingdom
  • United States
  • International
Professional Investor
  • Professional Investor
  • Individual Investor

Tailored for investment professionals this site provides information on our products, strategies and services. Please remember capital is at risk and past performance is not a guide to the future. We use cookies to ensure that we give you the best experience on our website. This includes cookies from third parties. Such third party cookies may track your use of our website. By continuing you are confirming that you are happy to receive all cookies on our website. Please refer to our Cookie Policy for further information, including steps to take to disable cookies.

By entering you agree to our Terms & Conditions

InPerspective Winter 2017

Michael Power, Strategist

"His tax cuts look like they are mostly favouring the rich"

Michael Power

Nightmare on Pennsylvania Avenue?

June 2017
By Michael Power, Strategist

29 April: a hundred days of Trump. Such an arbitrary time period. Yet it is so important in setting the tone of a presidency.

There must have been a hundred hundred commentaries on the topic of “How has Donald Trump done in his first hundred days?” And nearly all have concluded that he has done somewhere between atrociously on a personal level and disastrously on a professional one. His backlog of appointments is longer than the wall he wants to build along the Mexican border; Trump has made 58 nominations for 553 senior government jobs. Within his first hundred days, Barack Obama had made 190 nominations, Bill Clinton 176. Some of Trump’s highest profile appointees have lasted for periods shorter than his fabled attention span. Is Steve Bannon, White House Chief Strategist and someone whom Salon has called Trump’s Rasputin, the next to “leave the island”? Trump has steered no legislation of consequence through Congress, and this with both houses controlled by ‘his’ party, the Republicans. Both Obama and Bush achieved notable congressional victories inside a hundred days. Most of the actions Trump has taken have been via executive order: some of these have been stymied by the courts, others have reversed a few of Obama’s executive orders and others are more personal wishes of little real consequence.

Many of his high profile, populist, campaign promises have, like wet fireworks, fizzled and died. Some have been ignominiously reversed: on NAFTA, a ‘fair deal’ rather than an end to the trade pact is now sought. For all his campaign rhetoric against the establishment and the Wall Street elite, his current favourite courtiers are two former Goldman Sachs executives, Steve Mnuchin, Treasury Secretary, and Gary Cohn, head of the White House National Economic Council. And now his tax cuts look like they are mostly favouring the rich. And despite his campaign China-bashing and Russia-cuddling, he now treats Xi Jinping as his new best friend and Putin almost as a polecat. The symbol of his presidency has become something he recognises from the beach at Mar-a-Lago: the flip flop.

Nate Silver’s 538 website estimates Trump’s average approval rating has gone from 54% at his inauguration to 42% now. That is no mean achievement: at this landmark date, no other elected president since Roosevelt has had an approval rating of less than 53%.

The future of the Trump administration looks bleak. Failing to reform Obamacare risks becoming the rock upon which the Good Ship Donald ran aground. With no savings from this Treasure Island, are his much mooted tax cuts and infrastructure spending affordable? The fiscal hawks of the Republican Party seem reluctant to sanction any expenditure that would meaningfully raise the federal deficit. As a result, the bond markets are on the verge of calling Trump’s bluff and, were that to happen, the reflation trade that has driven equities since his November win risks deflating. Meanwhile – though this is actually good news for his presidency – the previously triumphant US dollar is in retreat.

The System (with a capital ‘S’) seems intent on thwarting Trump at every turn. He promised to “Drain the swamp” he dubbed Washington D.C. Instead, the swamp seems intent on drowning him.

"The bond markets are on the verge of calling Trump’s bluff"

Internationally, Trump’s record has been littered with gaffes and U-turns. The Muslim world is appalled by Trump’s ‘extreme vetting’ and thinly veiled biases against them. Relations with Latin America, home of ‘bad hombres’, are at an all-time low. Close allies from Australia to Singapore to Canada have been needlessly slighted. Britain’s MI6 was falsely accused of bugging Trump Tower. Germany’s Merkel has been virtually ignored whilst the strongmen – El-Sisi of Egypt, Duterte of the Philippines, Erdogan of Turkey – have been flattered. On defence, NATO wonders whether it is ‘obsolete’. On the environment, last year’s Paris climate accord is dead on arrival. On human rights, America is no longer their biggest champion but rather stands in the dock accused of having violated them. On trade, the Trans-Pacific Partnership is no more and the G20 and the IMF have been obliged to abandon their free trade mantras. To most of even America’s closest friends, it is as if Trump’s campaign slogan contains a spelling mistake: it should read “Make America Grate Again”. The net result is that the London Independent believes Angela Merkel is today’s leader of the free world.

Lines from W.B. Yeats’s “The Second Coming” spring to mind. First, there was the 2016 presidential election setting the tone where “The best lack[ed] all conviction, while the worst [were] full of passionate intensity.” During the campaign, the rest of the world looked on the United States with a mixture of bemusement and horror. Was this the best Roosevelt’s Arsenal of Democracy could do? Really? Was life imitating art? Would reality TV become reality? Well now it has. Every day, one waits to hear who in Donald Trump’s fluid entourage has been told: “You’re fired.”

Would reality TV become reality? Well now it has

So we have the Keystone Cop Trump presidency where the fear is growing, globally, that “Things [will] fall apart; the centre [will] not hold” and “Mere anarchy [will be] loosed upon the world”. The mother of all conventional bombs has been dropped on Afghanistan. Syria was Tomahawked whilst – channelling his inner Marie Antoinette – the president ate chocolate cake in America’s Versailles. The Korean Peninsula is on nuclear tenterhooks; Big Red Button jokes evoke nervous laughter and sleepless nights. But there is a bigger issue at stake here, one often lost in the desperate quest – led gleefully by America’s comedians, satirists, editors and news anchors – to land blows on an all-too soft target that is Donald Trump. Beyond Kellyanne Conway’s ‘alternative facts’ and Sean Spicer’s “even Hitler did not stoop that low” logic, aside from the post-truth early morning tweets and the guessing games as to who now has Jared and Ivanka’s ear in the White House, the soap opera that is the Trump presidency speaks to a far larger spectre that is now beginning to haunt the United States: as a nation, it is becoming increasingly ungovernable and unruly.

Congress has never been so divided. The chasm between the Republicans and the Democrats has not, in the modern era, been wider. Even the most minor of presidential appointment hearings bring out a full court filibuster from the Democrats: of Trump’s 58 appointments requiring Senate approval, only 25 have received it. Neil Gorsuch’s nomination to the Supreme Court was only achieved after adopting the simple majority ‘nuclear option’ waiving the normal supermajority requirement of 60/40. And then there is the fragmentation of the supposedly ruling Republican Party which is not just highly visible inside the Senate and inside the House of Representatives, it is almost worse between the two houses on Capitol Hill with each pursuing their own very different agenda on every issue of importance, from healthcare to tax reform, from immigration to infrastructure spending.

Then there are the states and districts – from Oregon to Florida – enacting their own particular biases without regard for national policy, if indeed that can be defined. Then there are the great metropolises – from New York to Los Angeles and San Francisco to Chicago – declaring themselves to be liberal cause-cherishing ‘sanctuary cities’ distancing themselves from rural, conservative America.

For the majority of its citizens, the American Dream is dead

In 2017, we surely are witnessing at every level of government – federal, state, city – the multiple and varied disunited states of America. This house has not been this divided since Lincoln debated Douglas in 1858 and back then civil war broke out three years later. Not that one should expect this to happen in the 21st century!

What then has made America so ungovernable? The hard answer is that, for the majority of its citizens, the American Dream is dead. If you were born in the 1940s, you would be 90% likely to earn more than your parents. If you were born after 1980, that ratio would have fallen to 50% and lower. Thus Millennials are the first group of Americans ever to face the depressing prospect of intergenerational decline. Real incomes for the average family have not risen since 2000. Apologists may claim that the numbers do not capture the truth, that goods prices have fallen and that the ‘wonders’ of Facebook and Snapchat are impossible to capture. Be that as it may, that is not what the populace feels. And beneath the surface, national debt has tripled from under US$6 trillion in 2000 to US$20 trillion in 2017. Off-balance sheet liabilities – most notably underfunded pension schemes and Medicare obligations – have ballooned to over US$100 trillion. Sixty-six percent of Americans have less than US$50 000 in retirement savings; 33% have none. Tomorrow’s generation of workers are burdened with US$1.3 trillion of student debt and, confronted by automation and Amazonization at home and supercharged wage competition from abroad, face increasingly uncertain employment prospects. One in three adult Americans under the age of 34 still lives with their parents.

The reasons for the above are many and varied, but one macro data point stands out above all: trend GDP Growth – by definition a compound of the number of hours worked (derived from demographics) and how well those hours are rewarded (derived from productivity) – is relentlessly gravitating towards zero. In this, at least the US is still ahead of Europe and is a long way ahead of Japan; in the latter country, negative demographic trends are all but cancelling out their positive – albeit meagre – productivity improvements. Similar writing is clearly legible on the American wall. Unless a productivity revolution arrives soon, American economic growth will also stall. From 1991 to 2001, the potential GDP growth rate averaged 3.3%; recently, the US Federal Reserve downgraded its future forecast of potential GDP growth to 1.75%. First quarter 2017 annualised GDP growth again disappointed: it was only an annualised 0.7%, down from 2.1% in the fourth quarter of 2016.

Now add in a massive increase in US inequality – one estimate has it that the top 0.4% of citizens today own 90% of the nation’s wealth – and it is understandable why America has become so divided a nation and why so many sub-groups are erecting protective barriers to defend their threatened patches. Loss aversion is said to be ten times more powerful in conditioning human behaviour than chancing the prospect of a gain. Ungovernability and unruliness are only to be expected in such strained circumstances. No wonder lobby groups are stymying legislation on Capitol Hill and cross-party cooperation is at an all-time low.

Even Barack Obama experienced legislative gridlock for the last six years of his presidency after the Democrats lost all control of Congress during the 2010 midterms. What progress he did make was largely achieved by well-drafted executive orders, a skill Donald Trump’s administration has yet to master.

Even Barack Obama experienced legislative gridlock for the last six years of his presidency

So for all the criticism that can be levelled at Donald Trump after his chaotic and unproductive first hundred days – and surely most of it is valid – it would have taken a Franklin Roosevelt and a George Washington rolled into one, probably with the bull-headed assistance of a General Sherman, to have achieved much more. These are not easy times for any president trying to deal with the challenges facing 21st century America.

Paraphrasing Yeats again: “And what rough beast, its hour come round at last, Slouches towards [Washington] to be born?”

Revisiting the active versus passive debate

Important information

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only. This is the copyright of Investec and its contents may not be re-used without Investec’s prior permission.
Investec Asset Management is an authorised financial services provider. Issued by Investec Asset Management, June 2017.