Regular readers of this report are probably aware of our worldview. We believe that the ultimate world order, borrowing the words of Francis Fukuyama, the end of history, is liberal democracy combined with effectively functioning markets. This tenet rests on a simple approach, which goes something like this: the fundamental duty of every government is to enhance the wealth and well-being of its citizens. War, in addition to being the greatest possible human rights abuse, causes unnecessary suffering to people, and hinders economic growth and prosperity. Given that liberal democracies, throughout history, never go to war with one another, they must, almost by definition, be the most effective political and economic system there is. Of course, the road to achieving this ultimate target is paved with setbacks. Democracy, in its current form, is ineffective and failing. It is best described by the adjective neoliberal. Neoliberalism does not offer the freedom of everything in a way liberalism does, in a way it suppresses numerous aspects of it, increases inequality. Thus, the rise of the extreme right and inward-looking, protectionist autocracies across the Western world is almost a natural evolution of the post-Cold War world. Consequently, what was at stake in this year’s US election is whether reforming, restoring democracy and laying down the foundations of a functioning market capitalism would be given a chance. The answer was no. Not only did Donald Trump win the election resoundingly and undeniably, but the Republican party will plausibly achieve the unlikely feat of the trifecta and will have full control of the US executive and legislature branches for at least two years.

Everybody Knows that the Dice are Loaded, Everybody Rolls with their Fingers Crossed

US Presidential Elections are flawed. It is not pertinent who wins the popular vote, or who is the favoured candidate nationwide. The nominee who collects the majority of the 538 so-called electoral college votes will occupy the White House. Each state has a certain number of electoral college votes, broadly in line with its population. It is a winner-takes-all system in each state. It is irrelevant if a candidate wins a state by a landslide or by collecting merely 51% of the votes, she will take all the electoral college votes in that state. Most states are die-hard Democrats or Republicans but there are so-called swing states where only a few thousand votes will decide the ultimate winner. In simplistic terms, Arizona’s 11 electoral votes, for example, might be won by a margin of 100 and this could swing the result of the election to one candidate or the other. The outcome of the election was to be determined in these swing states. Polls showed that the two candidates were virtually tied in all seven, yet Donald Trump came out on top in most of them. The fact that he also won the popular vote makes his victory ever more emphatic. Whether one likes it or not, it was the overwhelming wish of US voters to put the fate of the country in the hands of Donald Trump for the next four years, something that must be respected. It is a tenacious mandate. Notwithstanding the convincing Republican win, the polarized US society is aptly mirrored in the ruthless campaigning of the last year, fired up by an unregulated social media spreading mis- and disinformation.

Everybody Knows that it’s Now or Never, Everybody Knows that it’s Me or You

There were similarities and deep differences between the candidates on the economic and foreign policy fronts. Kamala Harris proposed a raise in individual tax rates for households earning more than $400,000 per year and an increase in Child Tax Credit. Donald Trump has campaigned by promising to keep the 2017 individual tax rates unchanged. Kamala Harris was to increase corporate taxes from 21% to 28% if she wins, whilst Donald Trump will probably lower them to 15%. Goldman Sachs calculates that the difference between the two extremities is $250 billion. In the light of the result, no wonder that equities rallied.

The Republican candidate pledges the largest deportation effort in US history and to send 11 million undocumented migrants back, an impossible task. The incumbent Vice President was the advocate of an ‘orderly and humane pathway to earned citizenship for hardworking people’. Economists estimate that migrants are a crucial source of the workforce in the US and Trump’s mass deportation plan would drive up wages.
The hostile approaches towards China were broadly aligned – it is either the US or China, the mantra goes. The global economic architecture laid out after the Iron Curtain came down will remain unchanged and the battle for economic dominance will continue. Trade wars and tit-for-tat tariffs will be the dominant feature of the new administration. Trump will impose 60% tariffs (effectively tax) on Chinese imports and proposes a 10% general tariff on all imports. The federal debt will grow twice as fast under Trump than it would have under Harris. It is a worrying prospect as it is not clear how it will be financed. Import tariffs will be insufficient to make up for the shortfall. By any means, economic policies of the incoming president are widely viewed as inflationary. It is challenging to reconcile a protracted bull run in equities with policies that entail rising consumer prices, increasing wages, reciprocal trade sanctions, not just with adversaries but with allies, too. Continuous rate cuts are not guaranteed anymore.

Everybody Talking to Their Pockets, Everybody Wants a Box of Chocolates

Energy policies were diverging, at least on a rhetorical level. Harris was expected to continue President Biden’s transition away from fossil fuel to renewables in the form of tax breaks, both for consumers and renewable energy producers. Trump has promised to reverse the Biden administration’s green policies. He would support oil, gas and coal projects, pull out of the Paris Climate Accord again, relax environmental regulations and scrap electric vehicle mandates.

The US became the world’s largest oil producer under Joe Biden who did not shy away from using the Strategic Petroleum Reserve for political purposes and tame pump prices. Trump, on the other hand, promised to fill up the SPR to levels not seen before. Yet, one must not be fooled by the narrative. The president elect’s pain threshold is around $3.5-$4/gallon basis US retail gasoline prices and once it is reached, he will do everything in his power to lower it, let it be SPR release or pressure on OPEC. It is intriguing to note that the chief executive of one the world’s biggest oil companies, TotalEnergies, has urged Donald Trump not to tear up climate policies as it would tarnish the industry’s reputation. Other oil companies are warning against repealing Joe Biden’s Inflation Reduction Act, a significant source of green tax breaks and subsidies. It appears, that national energy security concerns take priority over global climate worries. The US will remain a salient oil producer whilst economic policies will plausibly dent economic and oil demand growth.

(Headline and sub-headlines are taken from song by Leonard Cohen titled…well, everybody knows what the title is.)

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