Brexit vs. the Trump election

Trump and Brexit

Right before election day, Donald Trump predicted his victory by saying that it would be just like Brexit, only more so.

That turned out to be correct, in the sense that in both cases the pre-election polls were incorrect and that the result turned on the votes of older, disaffected, less-educated citizens who came out in large numbers in response to a call to roll back the clock to days of former glory.

post-Brexit

The immediate UK stock market response to the Brexit vote was to drop through the floor, with the multinational-laden large-cap FTSE 100 index faring far better than generally domestic-focused small caps.  The FTSE has rallied since, with the index now sitting about 6% higher than its level when the election results were announced.

That does not mean, however, that the Brexit vote turned out to be a plus for UK stock market participants.  By far the largest amount of damage to their wealth was done in the 15% drop vs. the dollar that the UK currency has experienced since June.

post-Election Day

Despite the voting similarity between UK and US, the currency and stock market outcomes have been very different.  In the week+ since the US presidential election,

–the dollar has risen by about 3% against both the euro and the yen since the election result became known

–the S&P 500 is up by a bit less than 2%, with small caps significantly better than that.  Potential beneficiaries of Trump policies–oil and gas, construction, banks, pharma, prisons–have all done much better than that.

Why the difference?

Brexit

Brexit was a simple, binding in-or-out vote on an economic issue (recent legal action seems to show it’s not so clear-cut as that, however).  Leaving, which is the action voters selected, has immediate, easily predictable, severely negative economic consequences.  Hence, the continuing slide in the currency.

Trump

The Trump vote, on the other hand,  was for a charismatic reality show star with unacceptable social views, very limited economic or policy knowledge/interests and a questionable record of business (other than show business) success.   Not good.

The US vote was for a person, however flawed, not necessarily for policies.  In addition, the  legislative logjam in Washington has potentially been broken, since Republicans will control both houses and the Oval Office.

The general economic tone Trump seems to be setting is for fiscal stimulation through tax reform and deficit spending on infrastructure.  Both would relieve the extraordinary burden that has been placed on the Fed (the only adult in the Washington room).  This will likely mean larger, and faster, interest rate hikes.  Hence the rise in the currency.

knock-on effects

Democrats seem to realize the folly of having a cultural program without an economic one; a substantial restructuring of that party may now be under way.  Bipartisan cooperation in Congress seems to once again be in the air, if for no other reason than to act as a check on Mr. Trump’s more economically questionable impulses.   Trump’s “basket of deplorables” social views may make Americans more vividly aware of the issues at stake, and what progress needs to be made   …and serve as a call to arms for activism, as well.

Another thought:  yesterday’s news showed the Trump brand name being removed from several apartment buildings on the West Side of Manhattan.  Based on feedback from tenants, the owner, who licenses the Trump name, concluded that retaining the buildings’ branding would result in lower rents/higher vacancies.  Given that Trump does not intend to have his business interests run by an independent third party while he is in office, the public would seem to me to have an unusually large ability to influence his presidential actions by its attitude toward Trump-branded products.  I’m not sure whether this is good or bad   …but “good” would be my guess.

All in all, the UK seems to be lost in dreams of the days when it ruled the oceans.  The US is less clear.  We may be in the early days of a renaissance.

 

more Brexit

–At the open in London last Friday, the first time UK stocks could react to the “Leave” vote on Brexit, the benchmark FT 100 index plunged by about 10%, to a low of 5788.  It spent the rest of the day recovering something more than half those losses.  Today, the index is inching lower again, something I suspect will eventually result in a test of the Friday lows.  If I were forced to make a bet, I’d say the index ultimately bounces off that low rather than falling further. During this time, the market will likely also reorient itself to favor beneficiaries of Brexit and penalize losers from it.

I’d prefer to stay on the sidelines and watch.

–To me, the more striking–and probably more permanent–feature of the market reaction to Brexit is the close to 10% fall in sterling that the “leave” vote has triggered.  This offsets some of the harm done to exporters by placing them outside the walls of the EU, and thus subjecting them to the extra costs of tariffs and regulatory red tape.  But it also means an immediate drop in the standard of living of ordinary citizens, by raising the price of imported food, clothing and fuel.  We can look to Japan, which is suffering from double the UK level of currency decline, for insights into what this implies.

–It’s already appearing that Brexit will be a less cut-and-dried affair than I had imagined.  There appears to be plenty of parliamentary room for following the letter of Leave while retaining the substance of Remain.  We’ll see.

–Post-vote polling shows not only strong pro-Remain sentiment in Scotland and most urban areas in the UK, but also a very large age difference in voting patterns.  Support for Leave was strong among those over 50, with those over 65 intensely in favor of exit from the EU.  Younger citizens were equally strongly in favor of Remain.  The actual voting tally implies that the former group was out in full force on Thursday, while about half the latter neglected to cast a vote.  …a cautionary tale for the US?