Three Ways to Measure Trump's Impact
As the Trump presidency moves closer to reality, I thought I should pick several market indicators as gauges of how things are going. To the extent these indicators turn more positive or negative, we might consider revising our opinions accordingly.
Of course there is another way to think about this exercise. You might believe, as I sometimes do, that your judgment of the Trump administration is better than that of the market. In that case, following and trading these and related indicators is a possible way to make money.
I start with the view that the most significant and possibly most dangerous influence of a president is on foreign policy. Foreign policy is where the president has the most autonomy and the greatest reach, so if the worst predictions about Trump turn out to be true, the negative consequences ought to show up in some of the world’s most fragile spots.
Along these lines, my first nomination for a Trump-related market indicator is an index of Baltic stocks, namely the OMX Baltic Benchmark Index. It is a common and serious worry that the connections of the Trump administration to Russia will lead the U.S. to forsake the North Atlantic Treaty Organization and cave to the demands of President Vladimir Putin. If that is the case, the Baltics are likely to be among the biggest losers.
The good news is that Baltic stocks are up roughly 20 percent over the last year and generally have been rising. While they dipped following Trump’s election, they have since regained that ground and then some.
That doesn’t prove relations with Russia will move along a good track, but it is a calming sign. By the way, I take the Baltics to be the best indicator here because, unlike Ukraine, they are fundamentally sound economies that should prosper if relations with Russia don't deteriorate.
What next? The American-Chinese relationship is probably the most important foreign policy issue in the world, and recently Trump has talked about renegotiating the 45-year-old agreement to regard Taiwan as part of a united China. Depending on your point of view, this could endanger Taiwan, boost its prospects, or maybe it’s just a lot of rhetorical hot air. I’ll take the Taiwan Stock Exchange Weighted Index as one good measure of whether Trump is pursuing a safe and sound China policy. If things go wrong with China, it’s hard to see Taiwan coming out ahead. Yet the country has plenty of economic strength if relations run smoothly.
Fortunately, this index has risen more than 9 percent in the last 12 months. Like the Baltic index, it dipped following the election but has since more than erased those losses. So for all of the concern about the future of Taiwan I have been hearing, the market doesn’t seem to agree. To be sure, this positive performance may be reflecting factors other than the pending Trump presidency, but that is one sign that the U.S. election won’t wreck relations with China.
What about the third indicator? I would nominate the U.S. dollar for two reasons. First, the dollar remains a safe haven currency in times of trouble, and thus this indicator picks up the overall strength of the global economy. Too strong a dollar can mean too much of a flight to safety.
Second, if some part of the world has a financial crisis, a strong dollar may be partially at fault. Many emerging-economy companies are running up alarmingly high dollar-denominated debts, and a strong dollar increases that debt burden in real terms. More generally, the dollar remains the primary source of liquidity in the global economy, especially if the eurozone sees continuing troubles. A more expensive dollar implies a greater scarcity of liquidity, and there is increasing evidence this may herald or cause global financial and economic volatility. Hyun Song Shin, of the Bank of International Settlements, has taken the lead in making this argument.
Since the election of Trump, the dollar has strengthened, in part because the Fed is raising interest rates, and also perhaps because Trump has promised fiscal stimulus in the form of tax cuts and government spending on infrastructure. That is a worrying sign for the broader world because it exports some of our financial tightening to countries that may desire higher levels of liquidity. This is hardly ever the major complaint you hear about economic policy, yet so far it is the worry that has market data behind it.
Looking across the board, I find some of the above data puzzling, because the rosy read from the first two indicators does not reflect my strongest worries about the forthcoming Trump administration. U.S. stock indices are up, too.
I’ll be watching these indicators with interest because I know that someone is going to be proven wrong, and that is what science -- and investing -- is all about.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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