The victory by Donald Trump in last week’s Presidential Election has, yet again, proved that the wisdom of crowds is probably highly questionable. Financial markets sold off aggressively in the immediate aftermath of the result, as opinion polls repeatedly pointed to a Hillary Clinton victory. Meanwhile, critics of Mr Trump claim that his economic policies are inward-looking and this ultimately threatens the stability of the global economy. There were similar dire warnings expressed in the aftermath of the Brexit vote. The subsequent outcome for the UK economy has, however, been very different. Sterling’s sharp depreciation has been a useful economic safety valve, but one negative consequence has been imported inflation. The outcomes to the US Presidential Election and Brexit referendum have been made possible by the failure of workers’ compensation to rise in tandem with their productivity growth. Consequently, this has resulted in the benefits of economic activity being highly skewed in favour of the corporate sector. Since the end of the Great Recession, US labour productivity has risen by a cumulative +7.5%, but real workers’ compensation has risen only +4.5%. The current experience of labour underpayment reflects a continuation of the same dynamic during President Bush’s two Administrations. During the previous economic expansion, between 2001 and 2007, real compensation rose just +5.1%, while productivity rose +16.1%. Although the labour underpayment gap has narrowed significantly under President Obama, it is easy to appreciate why many workers felt the US economic system was rigged heavily against them. The Obama Administration promised change, but it could not era...
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...ent for their plight.
The Trump Administration seeks to attract capital deployment back to the US with an aggressive cut in corporate taxes which could potentially reduce the willingness of companies to commit financial resources to emerging markets.
The incoming Trump Administration’s economic policies suggest an upward bias to inflation which means the Fed’s 2% target could be easily breached.
The current terms of Fed Chair Yellen and Vice Chairman Fischer will expire during the Trump Administration which, along with two vacant Board of Governors seats, provides a backdrop for a significant number of Fed personnel changes.
The prospect of fiscal stimulus and rising inflation should produce a reversion to the negative correlation between equity prices and bond yields that prevailed in the 1980s, as well as potentially testing the Fed’s anti-inflation credibility.
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