Unless you have been living in a cave over the last 18 months, you will know all about the incredible U.S. political campaign and Presidential victory of Donald J. Trump. He proved to be one of the most divisive and controversial characters ever to run, let alone win the Presidency of the most powerful country on our planet.
His campaign, which seemed perpetually on a massive rollercoaster ride, ultimately proved incredibly insightful – he appealed to the people who have felt left out of the economic prosperity and to those who felt marginalised by globalisation. And he tapped in to the dissent of the voters with the political hierarchy – the system and the people pulling the strings – the lingering dissatisfaction with the lying, corruption and lack of leadership demonstrated by some career politicians.
You no doubt will have formed strong opinions of the man and his capability to be the President – he is simply that polarising. Some say brilliant, successful, some say racist, misogynistic and dangerous.
But why should you care?
In February, he will have his hands now on the levers of the world’s biggest economy – he will control both Houses of Congress and Senate, which means that unless his own party revolt, he will actually be able to get legislation passed. It has been said that “when America sneezes the world catches a cold” – which simply means that love or hate Mr Trump, we must take note of the man, his policies and how they affect the American economy. They could dramatically affect Australia’s economic future and by extension, your own wealth and well-being.
I must admit, I always have secretly admired Donald J. Trump, from the time I read his first book – “The Art of The Deal”. His story inspired me and his subsequent up and down journey and financial comeback to become a successful property billionaire. I enjoyed watching him fire people on his hit TV show “The Apprentice”.
But I didn’t think he would make a great President. He was inexperienced in the machinations of politics, arrogant and opinionated, prone to shoot from the lip – the least presidential person running. I continued to think he would make a poor President right up until I watched his victory speech.
He demonstrated a completely different persona – more humble, more inspiring, and he outlined a vision for America’s future. Gone were the divisive comments – he even asked the nation to thank Mrs Hillary Clinton for her service to the country. He didn’t mention deporting illegal immigrants or building walls along the Mexico border or initiating trade wars with China.
What he did speak about was rebuilding America. Roads, bridges, schools, hospitals, industries and the defence forces.
And who better to drive that program than a builder?
It is clear that the USA has suffered a decline in its infrastructure at a time when growing Asian economies are building fast rail and new cities. The US economy has been dragging its heels at near zero interest rates and money pumped in to the system by a program euphemistically called “quantitative easing” – more simply known as printing money. It hasn’t worked and the global economy has been reasonably flat for nearly a decade.
What is needed is an old fashioned shot in the arm, just as Mr Trump outlined. Rebuilding America and putting its people to work to do so. The cost of doing that is going to be bigger deficits and more debt but the boost to the economy and the lift in inflation could help offset that.
Mr Trump also is promising tax cuts – which if they are effectively delivered across the income spectrum rather than just for the higher income earners, will also provide economic impetus and growth.
All of the resources required to rebuild America will lift global demand for iron ore & coal – the prime ingredients for steel. Australia has these commodities in abundance and will benefit from the increase in the price of these commodities. Iron ore has already doubled in the last 6 months while coking coal has trebled – with spot prices rising on news of the Trump victory. These commodity price increases will mean billions of extra dollars for Australia.
So Australia in the short term will benefit economically from this, but I think it will come at an ultimate cost. All the borrowing required to ramp up the American rebuilding program will fuel inflation and strengthen the US dollar. That will force our dollar down, which is good for exporters. But higher global inflation will lead to higher interest rates at home.
That means that I think that instead of flat interest rates for the next 3-5 years, Australia could begin its upward cycle for interest rates a lot sooner, right at the time when we need them low as our economy shrugs off slower growth.
For you, that means being aware of what it could mean for higher monthly payments on any of your variable investment loans. Higher interest rates could also mean slower capital growth in real estate prices.
Personally, I will monitor closely what actually happens in the US versus what is being said. If I see signs of massive debt funded spending programs, albeit to rebuild, I will know inflation and interest rate hikes will surely follow. At some point it will be time to fix interest on any investment loans or sell any excess assets.
When? It’s hard to know, though I think we will see the signals early enough to make a new plan.