Positioning for Trump
The US Presidential election is the single biggest political risk of 2024; and firms, investors, & governments need to position for the consequences
This year’s US Presidential election is the single biggest political risk of 2024, with global economic and geopolitical implications. Three years on from the storming of Capitol Hill on 6 January 2021, we are odds-on for a second Biden v Trump Presidential election. Iowa and New Hampshire go to the polls over the next fortnight to kick off primary season.
This note assesses the likelihood of a second Trump win; the economic and geopolitical implications that would follow; and some thoughts on how governments, firms, and investors, should position.
Likelihood
I continue to think it unlikely that Mr Trump will win a second term, although it is more likely than it was a year ago: I have revised my assessment up, from 20-25% to 35-40% now. This probability is sufficiently material that firms, investors, and governments should be actively considering how to position for a second Trump Presidency.
However, this is still more a possible than a probable outcome. To start, Mr Trump does not have a good political record. He has only won one election – narrowly against Ms Clinton in 2016. He lost against Mr Biden in 2020; and the Republicans performed poorly in the Congressional mid-term elections of 2018, importantly because of his lack of popularity. His manifold legal difficulties in state and federal court, including the potential for him to be removed from primary elections by the Supreme Court, will also drag on him – these issues would have been disqualifying for a conventional candidate.
Mr Biden’s popularity will likely strengthen as inflation, energy prices, and interest rates reduce and as real wage growth picks up. Mr Biden is not currently credited by the public for decent economic outcomes (partly due to the increasingly partisan assessments of economic outcomes), but this may change by November. The Biden Administration can also use the advantages of incumbency to support its re-election bid, including expansionary macro policy.
Mr Trump has been ahead of Mr Biden in the polls for several months, although his numbers are softening. There is a solid core of Trump support that will vote for him whatever happens. And Mr Biden and VP Harris are not a compelling ticket.
There are wildcards: a compelling independent candidate may emerge that drains support away from Mr Biden; the Supreme Court may prevent Mr Trump for running; and there may be a big surprise in the Republican primaries. But Mr Biden defeating Mr Trump in November is the most likely scenario.
Implications of a Trump victory
Despite this, it is important to consider what a second Trump Administration would look like. Mr Trump has made few meaningful policy statements in this campaign cycle, and there is significant randomness in his governing style. But his second term agenda will likely be a more aggressive version of his first term, with a more stable, disciplined team in place.
In terms of policy, there has been significant continuity between the Trump and Biden Administrations: fiscal deficits; decoupling from China (note that the Trump tariffs remain); and an America First approach to trade and industrial policy. If anything, the Biden Administration has pursued these policies more aggressively – and would continue to do so.
But expect meaningful changes in policy if Mr Trump wins, particularly if there is a Republican-leaning Congress. In particular, expect wider fiscal deficits, as higher government spending meets Trump tax cuts; much less funding for green initiatives, and more support for oil and gas production; and more America First industrial policy, with stepped-up import protection (a universal 10% tariff has been proposed).
In the near-term, this would likely mean high nominal GDP growth – a high pressure economy with strong inflationary forces. Indeed, US equity markets performed well in the pre-Covid years of the Trump Administration: the S&P500 was up >50% in the 3 years from the election in November 2016 to November 2019 (and the Nasdaq ~70%).
These potential policy changes are far from ideal, but do not represent a mortal threat to near-term US economic outcomes. It is the broader political implications that are of greater concern. In a second term, Mr Trump is likely to significantly damage US political institutions: undermining government agencies (as well as the Federal Reserve) and eroding electoral integrity and other democratic institutions.
Some of these risks also exist if Mr Trump loses, with the near certainty of a contested election result and a bitterly divided country (and the potential for violence).
The perennial question in the US is for how long economic dynamism can out-run its political dysfunction. Elevated political instability and division will not support investment and innovation; and political crises and turbulence may cause equity and bond markets to turn on the US.
This US election will also have substantial international impacts. There will be an accelerated path towards global economic fragmentation – with the US closing off to imports, using aggressive industrial policy, and withdrawing from trade deals (like the IPEF). Other large economies, from Europe to China, will respond in kind to attract and retain capital as well as to find new markets. Western friend-shoring will assume a different profile, diversifying away from the US; and trade and investment flows between emerging markets will intensify, such as across the BRICS+ grouping.
Mr Trump does not do alliances and partnerships: expect the G7 and G20 to become ineffective (they could not agree on communiques when Mr Trump was in office); and for US withdrawal from NATO, the WTO, and the Paris Accord to be firmly on the agenda.
Countries on the front lines of big power rivalry will be particularly exposed. In Asia, there will be reduced US willingness to provide security guarantees to Taiwan, Japan, and South Korea. Although Mr Trump portrays himself as tough on China, he is transactional – and would be prepared to downgrade US commitments in exchange for a high-profile ‘win’, such as a trade deal with China. Similarly, deals like AUKUS may be renegotiated as Mr Trump tries to show he is a better negotiator.
In Europe, as NATO is weakened, Europe will need to rapidly become more militarily self-sufficient. Substantial US support for Ukraine will likely be discontinued, in turn likely forcing a settlement favouring Russia. Indeed, both Mr Putin and Mr Xi will be delighted if Mr Trump secures a second term, as it will lead to a weakening of the Western alliance.
In other words, a second Trump Presidency would lead to a substantial reconfiguration of the global economic and geopolitical system – accelerating some dynamics (global economic fragmentation) and reversing others (a coherent Western alliance). These are not implausible events, but simply assume a more disciplined implementation of actions and statements in the first Trump Administration.
What to do?
The chaos of the first Trump Administration meant that countries and firms could ‘wait it out’. The trade wars with China mainly affected the US and China, with world trade volumes relatively resilient; and the damage imposed on Europe was largely rhetorical. And smaller economies were able to largely fly beneath the radar. But this is much less likely to work in a second Trump Administration: it will be hard to hide.
Although my assessment is that the probability of a Trump victory is materially below 50%, countries and institutions need to actively position because the consequences of this event are so substantial. The pervasive, systemic nature of these economic and political effects mean that hedging these risks will be difficult. But proactive, no-regrets investments should be made. For example, increasing military spending to 2% of GDP across Europe; and strengthening relationships across the rest of the West (such as between Europe and North Asia/Australasia).
Similarly, firms and investors should consider how to build resilience to scenarios in which US market access reduces or the global risk profile increases markedly. Because there is deep uncertainty on probabilities and outcomes, scenario planning and monitoring through 2024 will be important to identify the key risks as well as opportunities.
This is one of the big calls to get right in 2024. Many under-estimated Mr Trump’s prospects in 2016, we shouldn’t make the same miscalculation again.
At Landfall Strategy Group, we provide insights and advice to help our clients navigate economic and geopolitical risks and opportunities. Do get in touch if you would like to schedule a briefing/presentation for your team, Board, or clients, on these issues. Contact me by reply email or at david.skilling@landfallstrategy.com.
If you haven’t already, you can subscribe for free to receive my public notes - or take out a paid subscription to receive every note. Group & institutional subscriptions are available, with the option for regular briefings.
If you liked this note, please hit the like button and also share it with your network:
Previous small world notes are available here:
You can also connect with me on LinkedIn.