Decoding Mr. Trump’s Economic Proposals

Here are the main points of Trump’s economic policy proposals:

□ Higher tariffs on global trade (4-10% tariffs on imports from China and Mexico)

□ A strong US Dollar policy

□ Corporate tax cuts

□ Incentives for domestic manufacturers

□ Income tax cuts

□ Increased federal stimulus to boost GDP

□ Incentives to bring overseas earnings back to the US

□ Doubling infrastructure spending to $500 billion

□ Cutting social services and similar government expenses

Here is what we can expect over the next 12-18 months

• About $600 billion is needed each year in the US just to cover the income and business tax cuts. The Tax Policy Center warns that unless Trump’s tax plan is “accompanied by very large spending cuts,” it could sharply increase the US national debt over the next decade.
• Forex markets expect the US dollar to strengthen under Trump as interest rates rise. Fed Chair Janet Yellen said interest rates will rise “really soon” if economic data shows a stronger labor market and rising inflation. While Trump calls himself a ‘low-interest rate person,’ it’s unclear what level he considers low.
• Regarding global trade and globalization, Trump said in June 2016, “China’s entrance into the World Trade Organization has enabled the greatest jobs theft in history.” He also said, “Our politicians have aggressively pursued a policy of globalization—moving our jobs, wealth, and factories to Mexico and overseas.”
• Lower imports to the US, combined with a stronger dollar, will likely reduce global GDP. Goldman Sachs expects annual global growth to be 0.1% lower. Note that global growth was +3.1% in 2015, and analysts see growth below +2.0% as a global recession.

Conclusions

Both fundamental and technical analysis of the US dollar are strong. The key level for the USD Index (USDX) is around 100.00-100.50 points. If the USDX holds this level, it will likely continue its strong upward trend against other major currencies.

On the other hand, US markets have risen very fast in November without much correction. Many technical indicators show the markets are overbought. Also, December is statistically not a strong month for the dollar.

Overall, the smartest move now is to wait. Wait to see if the USDX holds the 100.00-100.50 level before opening any long or short positions. Our indicator (TCI) suggests the USDX can grow more after a short pause.