I HAVE been asked about how Donald Trump will impact people’s money. Naturally I don’t get excited at the ‘charade’ of democracy that is called the USA elections. Overall spending surpassed $3.9bn in this election, and that’s what was spotted. That’s not a democracy, that’s a ‘monetocracy’.
Emotionally trapped between inflation and real hardship, voters were convinced that immigrants, and other countries with foreign accents were the problem. Long sigh. ‘History doesn’t repeat itself, but it often rhymes’ said Mark Twain.
Twain had a particular disdain for hypocrisy, empty promises, and the excesses of wealth and power – all themes which resonate in critiques of Donald Trump’s policies. His populist appeal combined with protectionist and divisive rhetoric reminds me that: ‘The forest was shrinking but the trees kept voting for the axe as its handle was made of wood, and they thought it was one of them’.
As the dust settles on this US election, the world is bracing for what a second Donald Trump term could bring to the global economy. The market reaction so far has been something of a déjà vu, echoing the “Trump trades” of 2016 – US bond yields are rising, the dollar is strengthening, and equities are on an upward swing. You need to look beyond the initial market jubilation and consider what these changes really mean to your finances.
Markets
As markets have digested the news, we’ve seen US Treasury bond yields climb. It’s not just a flash in the pan; yields are expected to rise another 100 basis points over the next year or two, potentially reaching 5.5 per cent. But while rising yields and a strong dollar might feel positive, especially for US savers and investors, there are some catch-22s.
If Donald Trump follows through on his promises of tax cuts and hefty infrastructure spending, it will drive up national debt significantly. The effect? Higher government spending combined with lower taxes sounds like a good time, but it could also feed inflationary pressures and strain the Federal Reserve’s ability to cut interest rates. If inflation continues to bubble up, the Fed might even have to keep rates high to keep it under control, limiting the growth options for the US and potentially sparking volatility in global markets tied to the U.S. dollar.
The dreamer that he is, and clearly following his orders, Donald Trump promised a 10 per cent global tariff and a jaw-dropping 60 per cent tariff on Chinese imports. In theory, tariffs are meant to stimulate US manufacturing and reduce reliance on foreign goods, but, in practice, they’re like a tax on imports, which gets passed onto consumers as higher prices. For anyone shopping in the US, that could mean paying more for everything from electronics to clothes. So, more inflation.
China
Globally, these tariffs might hurt US trading partners even more. China, for instance, could see a significant drop in demand for its exports to the US, and a major tariff like this might prompt a devaluation of the yuan. The result? Chinese exports could flood other markets, creating stiff competition for businesses, particularly in Europe. The European Central Bank (ECB) is already considering rate cuts to shield its economy from these kinds of trade disruptions.
One of Donald Trump’s mantras is stricter immigration control, including the possible deportation of millions of undocumented immigrants. While it may be a vote-winner, economically it’s a double whammy. Immigrants make up a significant portion of the US workforce, especially in labour-intensive sectors like agriculture, construction, and hospitality. Booting millions out would mean fewer workers, driving wages up for businesses trying to fill these roles. While higher wages sound great for workers, they come with higher costs for businesses, which usually end up as price hikes for consumers. It’s another recipe for inflation, and not the good kind.
Europe
For Europe, Trump’s policies could be particularly disruptive. The ECB may need to accelerate rate cuts to counterbalance the effects of higher US yields and a stronger dollar, putting European bonds in a tricky position. The result could mean more uncertainty for European consumers, with inflationary pressures impacting everything from food prices to energy costs.
A second Donald Trump term promises more of what we’ve seen before but with added volatility. For consumers, it could mean rising costs and an uncertain job market. For investors, it’s a reminder to keep your portfolios properly diversified and eyes wide open for inflation risks and potential market turbulence.
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Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
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