All bets are off.
Donald Trump is a black swan, an outlier of such a gigantic proportions that making predictions now has never seemed so futile.
Yet old habits die hard. We all like to look for answers, even if we know in our heart of hearts they won’t come easily (or at all) for some time to come.
This is why my inbox became flooded with “expert comment” from financial institutions, economists, fund managers and advisers in the last two days. The main gist of the comment was around the concept of uncertainty. We are not new to this idea following Brexit, but I am minded to think about Donald Rumsfeld’s famous speech about knowns and unknowns when dealing with uncertainty.
Brexit was a known unknown – we were dealing with a binary choice between membership and non-membership. Trump is an unknown unknown. Mr Unknown. Unknown plus plus plus, to paraphrase the tangerine man himself.
That’s one possible reason why stock markets have been more resilient in the aftermath of Trump’s victory than perhaps commentators would have expected. The initial wobble in the FTSE 100 was more or less regained by end of trade on Wednesday, with an unexpected flip upwards when yesterday’s market opened.
Now we have seen a slight slide but I’m not sure that the FTSE 100 will necessarily be in for a period of suppression (at least in the short term). Instead, expect that old chestnut of volatility, with markets reacting in a kneejerk way to Trump’s true sentiments and policies as they become clear.
So markets rose when Trump made soothing noises in his acceptance speech, in keeping with the idea that they think his bark may be far worse than his bite.
The problem at the moment for markets is that they don’t know whether to take Trump at face value. None of us know whether to do that. Previous interviews have indicated he may privately be straight down the line of politics and actually quite centrist in his economic policies. Other titbits reveal he’s actually more of a pragmatist than an idealist, saying whatever outrageous and incendiary things he could get away with so he could get into the Oval Office and make deals.
So it might be premature for us to focus on his soundbites about protectionism, cancelling free trade agreements and mega spending on infrastructure projects (although the last of those policies is probably the one to bet on most heavily, since he mentioned it right away in his victory speech).
Far from me to suggest that we don’t take Trump seriously (we’ve already made that mistake before) but we shall be just as foolish for spilling ink and wearing down our keyboards with serious, thoughtful analysis of economic policies that may never come to fruition for all manner of reasons.
I won’t attempt to deal with the personal, political or humanitarian dimensions of this result, for others will do it better and with more lucidity. But if you want an indication of what could happen economically, and how it might affect your finances, consider the following from someone who has studied a bunch of fairly dry, technical articles on the subject and tried to de-yawn them so you can get some idea of what will happen to your money. Also, please don’t forget your industrial quantities of salt and keep pinching it at all times.
Trump looks fairly likely to try and kick-start jobs in America’s rust belt with large scale infrastructure projects (although we don’t know if that includes building the Mexican wall). This will mean a spending spree, taking the country’s eye-watering public debts even higher, creating inflation and possibly prompting the Federal Reserve (America’s central bank) to raise interest rates. Could this have a knock-on effect in Britain? We’ve talked about a lost era of returns for Britain’s savers, but could a base rate of 0.25 per cent soon rise?
This could help many more young people recognise that saving isn’t a waste of time (not true but anyway) and who may finally have greater reason to save whatever they can whenever they can if they’re getting a better rate. It also means trouble ahead for first-time buyers who have leveraged loans through Help to Buy and other schemes to get on the housing ladder, only to face higher-than-expected mortgage costs. Now more than ever, it really pays to have the highest possible deposit rather than to count on high loan-to-value mortgages to carry you over the line but if course, I may as well tell lower earners in highly priced areas to buy the best possible unicorn they can and feed it with golden hummus.
Nonetheless, if you can wait that bit longer – or beg, steal or borrow a better deposit from family members – you’ll be doing yourself a massive favour so long as house prices don’t collapse in the medium to long term. I hate to be definitive now but a continuing political reluctance to address the causes of our housing shortage in this country means we will continue to see supply outstrip demand in areas where there is job creation and improving infrastructure. That will continue to be the case even if Donald the Duck was in the White House. While there are those that profoundly disagree with housing solely as an investment, its continuing ability to deliver on that front is just an aside to the solidity, security and comfort it offers many young people. This is why people will continue to want housing and try hard to get it.
Another thing to note about Trump’s victory is that it no way diminishes the attractiveness of investing; if anything it increases it. Yes many investors will flee to safe assets like cash, gold and government bonds but following the investment crowd in times of uncertainty is rarely a good idea.
Inflation would come with the huge sting of prices continuing to increase, as they have done disproportionately for young people in recent times. This not only makes the cost of living higher but erodes the value of our savings, so that even if interest rates rise, young people would have to be canny and get the highest possible interest rate to make their cash beat the effects of inflation. Better still to recognise that long-term “reckless conservatism” means that young people will be deprived of the better returns and greater long-term prosperity available through investing in the stock market. It doesn’t have to be immoral or difficult; the rise of ethical funds and do-it-yourself platforms which provide sage guidance on which investment positions to take in difficult times is democratising the art of investing.
However, these changes are in no way imminent. In fact, central banks might hunker down for the foreseeable future and do nothing while they wait to see how The Donald will behave.
So while it sounds pat and ridiculous to say keep calm and carry on…what choice do we have?