Scene + Heard

Donald Trump, Hillary Clinton, and the dismantling of the EU: CIO imagines the world if.

It started with an escalator.

Last June, to the tune of Neil Young’s “Rockin’ in the Free World,” Donald Trump rode an escalator down to the lobby of Trump Tower in New York City, kicking off his 2016 presidential campaign. For the next hour, the real estate mogul and reality star promised to “build a great wall,” lamented Mexico “bringing drugs… crime… rapists” to the US, and declared he was very rich—$8.7 billion rich. “If I get elected president, I will bring [the American dream] back bigger and better and stronger than ever before, and we will make America great again,” Trump announced.

Fourteen months—and one of the weirdest primary seasons ever—later, Trump has secured the Republican nomination and is now closer than ever to the White House. He will face Hillary Clinton in November. In the meantime, the world wants to know: what would a Trump presidency look like? How would his proposals impact investment and financial markets?  And what scenario would be more unthinkable than President Trump?

One outlook on Trump’s victory is bad—really bad. “The upshot of Mr. Trump’s economic policy positions under almost any scenario is that the US economy will be more isolated and diminished,” said a June report written by economists from Moody’s Analytics, a subsidiary of Moody’s Corporation. The authors claimed that if Trump’s economic proposals were taken at face value, the US economy would “suffer a recession that begins in early 2018 and extends to 2020.” Even if his policies on major tax cuts, a tougher stance on immigration, and proposals to exit international free-trade agreements were implemented on a small scale—or Trump was forced to compromise with a hostile Congress—the presidency would bring on higher unemployment and a weaker economy, larger government deficits and more debt, and a near standstill in growth early in the first term, the authors wrote.

CIO916_Landscape-SH1-JooHee-Yoon.jpg Art by JooHee Yoon

Granted, the report—which has been used by the Clinton campaign to attack Trump—has been criticized for underestimating the benefits of the potential tax cuts. The paper’s main author Mark Zandi also happens to be a registered Democrat who has donated to Clinton, according to the New York Times.

But Moody’s is not alone. Citigroup’s Chief Economist Willem Buiter warned in an August client letter that a Trump victory “could prolong and perhaps exacerbate policy uncertainty and deliver a shock (though perhaps short-lived) to financial markets.” The missive, first acquired by Bloomberg, predicted that “tightening financial conditions and further rises in uncertainty could trigger a slowdown in US, but also global growth.”

Despite such alarmingly negative viewpoints, American Red Cross CIO Greg Williamson is optimistic. “Under any scenario, a Trump victory would be an upset,” he explains. “We’ll see short-term volatility once he’s in office. He has a pro-growth agenda—especially if he reduces taxes, the market would react positively. Reducing regulatory burdens such as Obamacare and current immigration policy would also be positive steps forward.”

Trump is also good news—“a boon”—for asset owners, Williamson adds. Trump’s policies—assuming he’s able to gain the right support structure in office and learn to operate government effectively—would signal a move to a more normalized economic policy in the US. “This means risk is going to be compensated and cash will be priced at an appropriate level,” the CIO continues. “Asset owners will be put in a stronger and more prudent economic position. For defined benefit plans, rates should rise, liabilities will fall, and funding levels will climb—reversing the trend we had for the last eight years.”

For asset managers, a Trump presidency would create dislocations in the markets (at least in the short term) that could allow them to better differentiate bad stocks from good stocks, Williamson says. Translation: They’ll be able to find alpha again.

“It’s true. There’s more of an opportunity to make money with Trump,” says KC Connors, a partner at consulting firm NEPC. “But there’s also a huge opportunity to lose money with him.” The nominee’s tendency to make decisions based on emotions and sound bites instead of fact or logic is troubling, she adds. “So much of investing is anticipating and looking at behaviors. But Trump is erratic, unpredictable. Investors could look for short-term displacements with a Trump presidency—but they are short term.”

Plus, Trump’s tax cuts could push investors to take on excessive risk against the backdrop of a fragile global economy, says David Levy, chairman of the Jerome Levy Forecasting Center and macroeconomic advisor to institutional investors. “Assuming Trump’s able to push his tax agenda forward without strong opposition, it would be a big shot in the arm to the economy—a multi-trillion dollar shot,” he explains. “But it might accelerate the economy too much and cause dangerously risky situations.”

However, the 2016 election is far from binary—Hillary Clinton and her policies aren’t offering much better. In fact, it would be business as usual with the 68-year-old political veteran, says Connors. “She’s pushing forward changes in some of the social issues, but economically and fiscally, she’s predictable. Growth will continue in the same pattern as we have seen over the last few years—slow.” Specifically, Clinton’s tax plan—lower deductions on estate tax and no real change in corporate tax—can be “viewed negatively on GDP growth,” says Red Cross’ Williamson. “Markets and growth could slow down even more because it is more of the same.”

Moody’s most realistic scenario of Clinton’s economic policies reflects a similar sentiment. A Republican-controlled Congress would likely put up “substantial roadblocks” to the Democratic nominee’s economic policies, the report said, pushing Clinton to compromise. Specifically, the $1.65 trillion in proposed tax increases over the next 10 years would likely be cut down to only $350 billion; minimum wage would only rise to $10.10 per hour by 2021, instead of the proposed $12 an hour by the end of her first term. “With most of Secretary Clinton’s economic policy proposals failing to become law in this scenario, it is not surprising that the economy’s performance is similar to that experienced under current law,” Moody’s said.

Neither option is ideal. But before you pack up your American passport and call Justin Trudeau to declare you’re moving to Nova Scotia, imagine one more unthinkable yet potentially catastrophic scenario: What would the world look like if other nations followed the United Kingdom to exit the European Union (EU), effectively ending its existence?

“If the EU dissolves, there will be an incredible amount of volatility economically, politically, geopolitically,” Williamson warns. “It will be the biggest event to hit the global economy, and it might even cause a short-term global recession.” In particular, a mass exit from the EU means bad news for institutional investors with currency and debt holdings, Levy adds. While there will be a strong rush into US treasuries and asset flows into the US, Japan, and China, European currencies would experience serious instability and volatility. “This sort of event would significantly worsen the financial fragility around the world,” he continues. “Most notable will be in emerging markets, where excess market valuations could shrink rapidly and lose value.”

In the midst of such chaos and volatility, Williamson sees opportunity. Similar to a Trump presidency, there would be possibilities to profit in the short term, he says. “Asset managers will better realize winners and losers, and opportunities will arise in stronger corporations, currencies, and sovereign bonds after the dislocation occurs.”

NEPC’s Connors, however, is hesitant. “All I see is risk!” she says. “There will be opportunities, but I’d wait for the dust to settle before jumping in. The EU’s demise would bring on so much political and economic unrest.”

All three experts assure me this is unlikely to happen, at least not right away. Trump, Clinton, Brexit, and the EU’s potential collapse don’t point to Armageddon, the Red Cross CIO says—“but it’s my job to think about it every single day.”

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