Almost a year ago to the day, the Editor-in-Chief of The Economist, Zanny Minton Beddoes, took to the stage at SuperReturn International and gave us a fairly gloomy outlook on what 2016 had in store.
She talked about how a confluence of geopolitical insecurity, weak economic growth and rising populism risked becoming a snowball that would put the liberal world order at risk.
"I argued that time was running out for the pro-globalisation centre and that there was a very real possibility of events that, just a year before, would seem unthinkable," she reminisced.
"I said "imagine a Donald Trump President"."
The political earthquake that Minton Beddoes had envisaged ended up being even more dramatic, she admitted. Not only did Trump and Brexit make it, but now there were serious right-wing contenders in the Dutch and French elections.
"What is really striking is that the economic consequences have been so positive."
What on earth is going on?
Minton Beddoes then sought to explain how there could be economic growth; low volatility measures; upbeat CEOs, and market highs on the one hand, and a very clear possible turning point in the liberal world order on the other.
There were three possible reasons, she said.
Firstly, an anti-establishment victory didn't necessarily result in populist protection policies.
Secondly, populism is less economically damaging than many feared.
Or thirdly, everyone is being far too complacent.
"I think it's a combination of all three," she said.
Short-term outlook – the US
The US may experience short-term economic growth, but history has shown that populist protectionist policies were, in the end, extremely damaging (Latin America was a case in point, she said).
"Don't take market buoyancy at face value, they can take a long time to detect political shifts, because it's hard to price potential political instability," she warned.
Two kinds of Donald Trump
Minton Beddoes argued that having a view on what is happening in the US was the single most important judgment to be made while considering investment decisions. There were dramatically different outcomes that could still play out, as she went on to explain.
There were two forms of Donald Trump – "Dark Donald", the economically nationalist xenophobe; and Trump-lite – a latter day Reagan. Each would follow very different policies.
So far, we have seen evidence of both directions, stated Minton Beddoes.
While initial appointments – Rex Tillerson, Gary Cohn, and Steven Mnuchin – were evidence of Trump-lite.
The temporary travel ban and executive orders that fell in line with campaign promises were Dark Donald.
In her view, domestic economic policy was going to be Trump-lite, and less dramatic than markets were expecting.
Trade and immigration, on the other hand, would be Dark Donald and "will go further than most sanguine people think."
"Tax and spending decisions originate in Congress," she explained. "The republicans like tax cuts and deregulation but are sceptical of infrastructure. The democrats will pursue a policy of all out opposition. So how do you build coalition for getting legislation through?
While there was an enormous expectation of a big corporate tax cut or tax reform, it would not end up anything like the Tax Reform act of 1986, she added.
"It's not a fundamental readjustment, and the fiscal push it gives the economy will be smaller than people are anticipating."
As for spending, particularly regarding a huge infrastructure package, Minton Beddoes said that: "There will be something, but already it's gone remarkably quiet."
The end result was that there would be "less tax cuts, less spending and much less of the Reaganism redux which is currently baked into the markets.
"I would be prepared for disappointment on the demand side," she cautioned.
What about the supply side?
This is where things got interesting, said Minton Beddoes.
The key question was whether the gains to the US economy from deregulation would be outweighed by the losses caused by tighter immigration controls and protectionism.
There was no doubt that there would be deregulation, but there was room for caution. Some would be harder to roll back than others. Obamacare, for instance, "is a very careful balancing of a lot of competing interests, you can't just unravel one bit of it."
In addition, the boost to the economy by deregulation would be countered by the reregulation necessary to fulfil the Dark Donald elements. The clampdown on immigration was effectively an increase in the power of the regulatory state, she said.
"The immigration clampdown will have some quite serious negative effects. Five per cent of the US workforce is undocumented. It's also clear that the administration will be clamping down on legal immigration, which will also have economic effects."
Lastly, a huge international trade war will far outweigh any of the gains that come from modest reflation, she stated.
Europe
Over in Europe sanguine markets were masking the hugely divergent possibilities inherent in the current political climate.
In France, the presidential election could either mean a death-knell for Europe or a pro-European centre-left government, she said.
In the Netherlands, Geert Wilders would have the biggest party but wouldn't end up in government.
But in Germany, Minton Beddoes said she was struck by how many Germans thought that Martin Schulz could be the next Chancellor "and that hasn't really got onto the international agenda."
Whilst the European economy was doing slightly better, Minton Beddoes said that people were forgetting that the underlying concerns – Greece, Italian banks, Brexit – were still there.
The long-term view
Minton Beddoes concluded that the damage created by America First will be corrosive, but would only become evident over time. Asia would have no choice but to move closer to China, and America's stance towards international institutions such as the UN, WTO and towards climate change would see it lose its soft power.
US policy that followed tax cuts, deregulation and protectionism would not end up helping the very people that drove the election victory.
"It doesn’t provide them with the skills they need in the 21st century, rather, it's trying to turn clock back to 1980s," she said.
"Those that are dissatisfied now will end up even more dissatisfied."
