Political Risks
Pfäffikon SZ, Switzerland – It is not excluded that the political course of 2016 will provide the financial markets with the necessary surprises. A Grexit might be addressed even before a Brexit though it seems a Grexit disappeared from the radar. However, the greatest impact may have the U.S. election. When Trump or Sanders are elected, this can be destructive to the stock markets and can entail political risks.
One-liners
Donald Trump sprinkles with hard one-liners and is cleverly anticipating to the disgruntled American citizen who is sick of the establishment. What many people could not have imagined seems to unfold slowly; Trump is suddenly a serious presidential candidate. Many belief that the soup will not be eaten that hot as Trump has to deal with the U.S. Congress, should he be elected. The authority of an American president is nevertheless underestimated.
The relatively strong dollar has long been a thorn in Trump’s sight. The brand new president could use the Exchange Stabilization Fund (ESF) to put pressure on the dollar. After all, the Treasury Secretary has a broad mandate to deploy ESF, especially when he is put under pressure by the President. Additionally, Trump could clean up the Fed, and even might affect its independence. If such an operation will take place, Janet Yellen would no longer be sure of her job. Under Jeb Bush or Hillary Clinton, all this is unthinkable, but not under Trump.
Trade War
Trump also could provoke a trade war. This week, Trump was again upset about the fact that Ford will build a new plant in Mexico; He called it an “absolute disgrace.” According to Trump, the NAFTA trade agreement is not in the interest of the U.S., and, therefore, it needs to be overhauled. The new government may take direct action to undermine NAFTA since it does not need the Congress’ approval. The International Emergency Economic Powers Act (IEEPA) gives the president a broad mandate to block trade when deemed necessary in the interest of the U.S.
Less known is that Trump has financed his empire with the help of small banks. The largest banks in the U.S. simply do not want to do business with Trump anymore. Coincidence or not, but this could cost these powerful banks dearly. At present, banks simply pay a fine for misconduct and that is the end of the story. But Trump could go much further by suing directors of these banks. Also, the president may eventually –after some reappointments– exert influence by the Financial Stability Oversight Council (FSOC). That way, he could chop up these big banks.
History tells us that the transfer of power in the White House can provide the necessary turbulence on the financial markets. Whether or not Trump is a bluffer, we can only learn if he is President. When Trump comes to power, the political risks will increase. According to Trump, the stock market is strongly overvalued. If the White House gets a resident who is named Trump, investors will downwardly revise their general computational models. In this way, the price decrease that Trump envisions will become a self-fulfilling prophecy.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
