Whilst not exactly an eye-opener, the first few pages of Donald Trump’s book, the Art of the Deal shed some light on the incumbent administration’s erratic policing of domestic and international affairs. It appears that the Mr Trump’s attitude to conduct business, whether for his enterprises or country, has not changed over the past 40 years. His Ars Poetica of dealing includes confessions, such as ‘I prefer to come to work each day and just see what develops’ or ‘…I have at least a dozen meetings. The majority occur on the spur of the moment'.

It is this consistent and static modus operandi that possibly forced him to admit over the weekend that recession cannot be ruled out on the way to Make America Great Again. His criticism of corporate America to demand clarity over his policymaking, however, seems somewhat unjustified since CEOs of public and public companies strive to plan well ahead in their attempts to remain competitive, to provide predictability for share and stakeholders and, well, avoid a single declaration of bankruptcy, let alone four.

The present narrative and practical steps, both in the economy and foreign policies have tangible effects. Of course, these are very early days in his second 4-year tenure but the results of his 2 months in office are ominous. Consumer confidence falls, and inflation and unemployment expectations are on the ascent. Credit card delinquencies are at a 13-year high. According to the Budget Lab at Yale and as reported by the FT, the proposed tariffs will push the effective US rates to the highest level for more than 80 years and it reckons that rising consumer prices it would entail will cost up to $2,000 per household.

The US stock markets have lost significant value since the middle of February. During the same period, German equities remained stable (with defence stocks considerably higher) and have received a rather spectacular boost over the past week because of the German plan to lift the debt brake and the talks in Europe of exempting defence spending from fiscal rules. (Recent gains have been reined in in the last two trading sessions, chiefly due to plummeting US equities.) Launching a joint debt instrument is gathering pace. It is impossible not to compare how Russia’s demand to halt NATO expansion and the US plan to support the domestic economy achieve the opposite result: Finland and Sweden have joined the Treaty and, at least for now, Europe is outperforming the US.

And then there is the dollar. Its index against 6 major currencies dropped 3.5% in the last two weeks with the euro being the biggest winner because of the fiscal easing referred to above. The dollar's weakness has been so unexpected and pivotal that the talks of waning trust in the world’s reserve currency are getting louder. Its status is due to the fact that it is held by central banks around the globe. It plays a significant role in global trade, and it is acquired by central banks through trade as exports into the US will result in dollar income, which is then held as a reserve as opposed to released back into circulation. It plays a vital role in smooth international trade as it allows cross-border transactions to be settled in a standardized manner, an easier task than conducting business in different currencies. Its reserve role provides enormous political leverage. 

To fulfil the role of reserve currency the economy needs to be stable, capital flow must not be controlled, the banking system must be reliable and, generally speaking, there must be an infinite amount of trust in the issuing country. Once this trust is shaken, the status of the reserve currency, in our case the dollar, will considerably weaken. The lack of coherent policies is the primary trigger of the current dollar malaise. Confusion reigns. Will the situation worsen or brighten and the sell-off will change course?  Clarity on US economic policies could steady the dollar boat. An implausible failure to agree on a new debt ceiling would rattle the US bond market and send the dollar even lower. So would the vague threat from President Trump a month ago that the US might renege on some of its national debt as he questioned government debt figures and promised to investigate Treasury debt payments for fraud. Tacit and so far, unsubstantiated claims, let’s call them speculations, about depreciating the dollar would also result in catastrophic repercussions.

The most significant impediment, however, is the progressively bleak view on US economic policies, tariffs, tax cuts, the crackdown on immigration and deregulations. Should the campaign pledges be honoured, the trust in US economic resilience would further deteriorate keeping the dollar under the cosh. A weak dollar, conventional wisdom has it, is conducive to oil prices. However, times and perceptions change. Pre-Trump economic tailwinds supported the dollar due to ubiquitous optimism. Headwinds appreciated its safe haven status. Now, as trust in the US administration is being questioned its safe haven reputation loses considerable relevance. Falling stocks are coupled with falling oil and falling dollar. A fundamental change in narrative and practical steps are needed to start re-building faith. Until then the dollar and risk assets prospects will remain dubious.

Carnage Aggravated

Whether this change in economic policy will come is the great known ‘unknown’. Nonetheless, investors sent out a brutal reminder of their view on the administration’s first two months yesterday as the stock market rout exacerbated with the Nasdaq composite index tumbling 4%, taking the total loss of the last three weeks to 13%. Call it fear of recession or rising inflation; the President and his acolytes must come forward to reassure markets that convincing and effective steps are being taken to put the US economy on a growth trajectory, otherwise support from the electorate and his party will evaporate. This would mean the reversal of the announced and executed policies. There is no need to lose face, what will greatly calm nerves is to declare that every country threatened by tariffs has started to comply with US demands, let it be fentanyl trade or immigration. Scaling back or abolishing punitive measures will ease the fears of economic contraction or inflation and halt the stock market slump, especially if coupled with a mutually acceptable Ukrainian-Russian peace deal (this sounds like an oxymoron, in all honesty). Consequently, oil prices would stabilize although due to the current plunge, it is hard to see OPEC+ going ahead with its plan and releasing oil back to the market from April. Markets are nervous, and upcoming economic data, starting with tomorrow’s US inflation report will be thoroughly scrutinized. Sticking to the original quadfecta of tariffs, tax cuts, deregulations and immigration policies would amount to a political suicide, it appears, even for a maverick such as Donald Trump.

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