The caveat has to go up front: given his propensity for lying, exaggerating and generally raving, nobody can know what Donald Trump will actually do as president. He probably doesn't know himself.
But according to the bond market reaction, he will burst Australia's east coast housing bubble by causing interest rates to rise.
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Trump to burst Oz housing bubble?
The rise of President Trump could spell the end of the Australian east coast housing bubble. Michael Pascoe comments.
That would be the relatively nice way to prick the bubble. The more common fear is that he could start a trade war with China that would cause a global recession – one we wouldn't escape. That definitely would not be a nice way to achieve lower housing prices. So let's hope there is enough sanity left in Congress to prevent such madness and just consider the more benign interest rate story.
The Bloomberg poll of 27 local economists ahead of the Reserve Bank board meeting on Melbourne Cup day found a majority of them forecasting another RBA rate cut or two by the middle of next year. Nobody was forecasting a rate rise.
With the advent of Trumpistan, there is the possibility Trump will be an inflation driver. That would start changing the economists' forecasts. It certainly makes them less certain.
More inflation is what the bond market reaction is saying as yields rise and the price of bonds dive. Typical of that line was part of the initial thinking of AMP chief economist, Shane Oliver:
"Some of Trump's economic policies could provide a boost to the US economy. The Reaganesque combination of big tax cuts and increased defence and infrastructure spending will provide an initial fiscal stimulus and, with reduced regulation, a bit of a supply side boost to the economy. The downside though is that this will blow out the budget deficit and the risk is that his protectionist policies will set off a trade war and, along with much higher consumer prices and immigration cut backs, will boost costs. All of which could ultimately mean higher inflation and bond yields and a faster path of Fed rate hikes in the US (apart from any initial delays associated with uncertainty around his policies)."
The idea is that the immediate uncertainty could stay the Federal Reserve's hand next month, but a big-spending, big-deficit Trump could push up rates a little further down the track.
That hoped-for American rise next month was supposed to act as a defacto rate cut for Australia – higher American rates make ours look relatively lower without moving, thus taking some pressure off the Aussie dollar. I suspect that was pretty much priced in, pre-Trumpistan.
Genuinely stronger inflation in the US though would play a role in lifting global inflation – a more fundamental and important shift. If it happens, Australian individuals will have to start thinking about the chances of a rate rise. The increased borrowing power delivered by interest rate cuts has been the key factor is pushing east coast housing prices ever higher this year. Given the record household debt those cheap rates have encouraged, it will only take a tiny touch of the monetary brakes to have impact – taking the top off the bubble.
Nonetheless, a bit more inflation is what the world needs. And greater fiscal stimulus through investment in infrastructure is what most economists, including our Reserve Bankers, have been calling for. The potential problem with Trump's "plan" though is that he also wants to boost defence spending, sharply cut taxes and do it all in a hurry.
Former RBA governor Glenn Stevens, a big fan of infrastructure investment, nevertheless was wary of trying to use such spending as a short-term stimulus tool, observing that it takes too long to turn on and too long to turn off. Just "letting it rip", as the Donald suggests everything can, would prove a very wild ride with plenty of unintended consequences.
Trump doesn't mind defaulting on debt, "doing a deal" with creditors. That's one thing if you have a dud casino, it's another if you undermine confidence in the global economy's bedrock: US treasuries.
It's one of the reasons why contemplating the benefits of "soft" Trump has to be balanced by considering the danger of "hard" Trump. The Economist summed up the downside thus:
"If you set out to design policies to hamstring the economy, you might end up with something resembling Donald Trump's agenda. America's next president threatens to erect trade barriers, which would disrupt supply chains and dampen productivity growth. He wants to deport many of America's 11m illegal immigrants, which could reduce the size of the labour force by up to 5%. And his tax plan is ruinously expensive, costing almost US$7 trillion over a decade, or around half of America's outstanding national debt. How much damage can President Trump do?"
The Economist's attempt to answer that question then turns like everyone else to what controls a Republican Congress and Senate might impose on the executive president. The Tea Party end of the Republicans are as irrational as Trump and worship the idea of tax cuts and defence spending, but are wary of ever-greater debt. The populist racism and sectarianism have been demonstrated to resonate in America's diminished white heartlands and now appear to be the GOP's core values. For the party of Abraham Lincoln, these are dark days.
If Trump keeps most of his pledges, the chance of "nice" inflation recedes and the possibility of global recession increases. And with that, the consensus view of further RBA rate cuts become much more likely, along with higher unemployment and, therefore, lower housing prices.
Be careful what you wish for.
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