Wed | Aug 23, 2017

Walter Molano | Looking for common ground

Published:Friday | November 18, 2016 | 11:00 AM
US president-elect Donald Trump

As the dust settles and the aftershocks fade, the Monday-morning quarter-backs will be out in force.

They will slice, dice and dissect the entire United States presidential campaign in order to understand how most of them got it completely wrong.

Current polling techniques are seriously flawed. Moreover, Trump supporters were highly committed. Meanwhile, Hillary's were not as convinced. Part of it was due to her credibility problem. It was also due to her husband's record of slashing welfare benefits and making it easier to incarcerate criminal offenders - even if they committed petty misdemeanours. Many of her supporters just stayed away.

Therefore, the naughts ruled the day. Last of all, a sizeable part of the electorate despised the Clintons. In other words, the outcome was not so much a vote for Trump, but a vote against Hillary.

Now, the market's focus is on what lies ahead. The initial sell-off of the equity and currency markets said a lot. But their rapid recovery also spoke volumes.

President-elect Donald Trump never gave many details on his economic policies. He was more focused on sound bites, most of them derogatory, but there are some things that will be on the legislative agenda, though they will have a domestic bent.

The Republicans have the unique luxury of winning control of the White House, Senate and House of Representatives. Although they do not have the 60 Senate seats that could give them full command of the legislative process, they will still be able to push through several important initiatives without much resistance. It is only logical that the new president will first concentrate on policy initiatives where he shares a common ground with the Congress.

Fortunately, there are several areas where there is a lot of commonality, such as ObamaCare. The president-elect does not want to totally eliminate the programme, but soften some of its more onerous features, such as the heavy burden on small and medium-size businesses.

Of course, this will mean that some of the benefits for poorer individuals will also be reduced. This reform will provide an important boost to some parts of the economy, allowing smaller firms to boost payrolls and investment.

What of Dodd-Frank?

Dodd-Frank is another regulatory area that the new president and the Congress will probably address. The much-hated Consumer Financial Protection Bureau is probably destined for the dustbin of history.

The government will also try to raise the threshold for tougher bank regulation above its current US$50-billion asset level. Not only would this provide relief to the financial sector, but it will probably align Wall Street with the new administration.

The environment is another area that will come under attack. At one extreme, the Environmental Protection Agency may disappear, but most likely the US will withdraw from the Paris Climate Agreement. This will be welcomed by heavy industry, which will no longer be forced to reduce its carbon emissions. Faced with lower costs, firms won't be forced to relocate abroad, thus allowing them to hire more employees and spur the level of output.

Last of all, the Republicans will implement an extensive set of tax reforms. They will include a reduction in corporate tax rates, the simplification of the tax code and inducing corporations to repatriate cash. All of these measures will be launched in his first 100 days in office, and they should begin to produce results by the midterm elections of 2018.

Areas where there is not a great deal of overlap, such as trade, will probably be saved for later. The Republican Party is staunchly pro-free trade. They rely heavily on the patronage and support of traditional multinational corporations. Therefore, they will not be keen on making major modifications to the North American Free Trade Agreement.

Some of the pending treaties such as the Trans-Pacific Partnership, or TPP and the Transatlantic Trade and Investment Partnership, or TTIP, will most likely be shelved.

We will also see a much more aggressive United States Trade Representative bring disputes to the World Trade Organization, but hopefully, the stimulus policies produced by the deregulation will ameliorate the electoral base's repudiation of the existing free trade agreements. This means that some of the concerns about the future of the Mexican economy and the MXN may be overblown.

Given the demographic changes and reshoring trends of many industries, employment conditions have already been on the mend.

The looming deregulation will only improve labour conditions further. Therefore, many multinationals will need to maintain their foreign operations in order to meet their production targets.

The electoral results were initially disturbing for many investors and market participants, but a close examination suggests that the deregulatory process may provide a much-needed boost to the US economy.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com