A clue is a clue, said Agatha Christie, two clues are a coincidence but three clues are proof. In Trump's case, two clues could be enough.
The first clue is last Saturday's tweet on public debt. You have seen, he wrote, I've only been here for a month and the public debt has already fallen by 12 billion, with Obama the first month it went up by 200. Commentators let loose in jeers and economists pointed out the diversity of circumstances ( in early 2009 the economy was in free fall, today it is not).
Reasons and wrongs aside, everyone focused on the message and nobody on the much more interesting meta-message. And the meta-message, it seems to us, is that Trump places great importance on deficit and debt and that, if he could, he would like to be remembered as the president who slashed both. But life is what it is, Trump says between the lines, and I've been dealt some mediocre cards. There is some growth, it is true, but left to their own devices the deficit and debt have been programmed by those who came before me to rise rapidly in the coming years. In addition to what I inherit, I will then put mine into spending a trillion on infrastructure and cutting taxes across the board. And in any case, rest assured, you will see that the deficit and debt will not explode and everything will remain under control.
Is he crazy? Does he live in a world of alternative mathematics? Some Democratic congressmen think so and are preparing the way for Trump's impeachment via psychiatry through an expansion of the twenty-fifth amendment, the one on sick or mad presidents. Judging a president's insanity will, in their proposal, be a commission made up of ex-presidents, none of whom notoriously like Trump.
However, Trump is not mad and does not brag about 12 billion saved knowing that this tweet would be held against him a million times the day the deficit really explodes. If Trump throws himself into the void it is therefore not because he is mad but because he has finally decided, in his heart, whether to be with Ryan and the Republicans of the lower house (aggressive tax cuts financed by the border tax) or with the Republican senators (a few cuts and no border tax). And he evidently opted for the first hypothesis. He therefore throws himself into the void because he expects to fall into the safety net offered by the substantial revenues of the border tax (or border adjustment, as it would be more correct to say given that it is not a tax on foreign transactions but on cash-flow domestic).
The second clue comes from Trump's State of the Union speech. Many commentators found it lacking in concrete guidance on fiscal policy. Make America wait again, wrote Bloomberg parodying Trump's Make America great again. Again, too much haste. Indeed, Trump has given a very clear indication, even if expressed in code. Our wonderful Harley-Davidsons, all made in the United States, he said, could sell much more abroad if it weren't for those tariffs that in some cases reach 100 percent. He didn't add anything else to the taxman, except that taxes will drop a lot for everyone.
We put the two clues together, fill in the ellipses left by Trump with what he didn't say explicitly but implied, and we have hard evidence that Trump has fully embraced the lower house's sweeping tax reform plans. Until a week ago Trump's position was by no means obvious (the Goldman Sachs wing of his government was against it, but in the end the unsuspected axis between Ryan and Bannon prevailed), today we know. And here are the stock exchanges overcoming the rate hike anticipated in March (announced by three members of the FOMC just as Trump spoke) and scoring new historical highs. And here is the dollar strengthening (as per the program of the radical reformers) and thus performing the miracle of making the stock markets of countries, such as the European ones, which should be the victims of the American border adjustment, also rise.
Four caveats. The first is that the top political priority right now is Obamacare reform. An attentive observer like Dimon has drawn the conclusion that the tax reform will be ready, well it will go in a year and many things can happen in a year. True, but the lower house will work in parallel on the two reforms and the scaffolding of the fiscal plan will be ready before September.
The second caveat is that opposition from the Senate remains to be overcome. For this, action will be taken on three fronts. The first will be to provide him with a revenue-neutral text, without expansion of the deficit, removing the legal foothold for the Democrats for filibustering. The second will be the moral suasion that Trump will exercise on riotous Republican senators, offering them infrastructure in their constituencies. The third front will be against the lobbies of commercial distribution and refineries, damaged by the reform.
The third caveat is that even a one-off increase in consumption taxation (even if limited to imported consumption) can initially produce stagflation and even recession, as the recent Japanese experience has shown.
The fourth caveat is that the enthusiasm of the markets will have to deal with the French elections in a few weeks, where innovations continue to be produced at a rapid pace. We note here incidentally and with interest the fiscal program of Macron, at the moment the favorite. Macron wants to cut taxes but, even more, he wants to radically cut public spending and the deficit. Those in Italy who dream of a European Schulz-Macron axis to be able to continue spending in deficit should take this into account.
Even with all these caveats, the positive reaction of stock exchanges and the dollar to the new framework seems justified to us. The political impasse that seemed to be looming in America would have justified a consolidation of the stock exchanges which, however, has now been postponed to a later date. The markets will stall at some point, but if there are no surprises in France there will be no need for significant corrections. The attitude will continue to be one of hopeful expectation.
One sector sheltered from the uncertainties about tax reform is the banking sector, which will nonetheless benefit from deregulation and the increase in interest rates.
