It’s Brexit all over again. The surge in anti-establishment sentiment is definitively global. Brexit can no longer be dismissed as a freak event. It is a trend. Donald Trump looks almost certain to win, by defying his party, the media, and conventional politics. Populism is coming to power. The critical issue now is what this mean in practice.
The immediate market reaction is predictable. Risk assets have fallen sharply, safe assets are rallying, and the dollar is falling. It’s deja vu all over again. Like Brexit, will we see a reversal in asset prices in the next weeks or months?
Although at this stage it looks likely that the Republicans will retain the House and the Senate, a President Trump will be far more constrained in practice than he has sounded campaigning. Even though both houses are likely to controlled by Republicans, this is no guarantee of agreement on his more outlandish policies (building walls and initiating trade wars). He will be pushing on an open door repealing Obamacare and cutting taxes, which are arguably market-friendly, although both are likely harder in practice.
The critical unknown is whether a Trump presidency pursues the policies of Trump the candidate, in particular his anti-trade, anti-China and anti-Mexico policies. Reason suggests that Congress and financial markets will regulate his ability to act. It is equally possible that these campaign rally cries are abandoned with the responsibility of power. But the real concern is that he will do what he says.
The initial market reaction is consistent with the behaviour we have seen in responses to poll trends. Over subsequent weeks and months, these moves may well reverse. On domestic economic policy, the only policies where Trump is likely to secure Congressional support would be on tax-cutting and deregulation – which are likely capital-friendly. We might also witness pro-cyclical fiscal policy for the first time since Reagan, which would profoundly undermine bond markets. I would discount Trump’s anti-Fed rhetoric. Ironically, looser fiscal policy suits the Fed, because they want to normalise interest rates. The greatest irony of this latest outpouring of populism may well be a set of policies which favour capital over labour, and look more Keynesian than neo-liberal.