The American president omnipresence in the media and in the social networks has an inconvenient which he seems not to have completely controlled: to attract attention, it is necessary to avoid, as possible, to repeat himself and to announce every time something new. That leads him to take decisions and to pass judgments which are frequently carrying contradictions. The most worrying point is that he doesn’t seem conscious of that when even he falls into a denial. It is this instability of the economic policy and of the American diplomacy which constitutes a threat for financial markets as for international relationship with two risks which must not be underestimated: the emergence of conflicts and the triggering of financial crisis.
The oil markets situation gives us a first example. In going out of the Iranian nuclear agreement and in announcing very heavy sanctions against this country, Donald Trump provoked a substantial price increase. If Iran, which is a major exporter, cannot anymore deliver it to its clients, tensions about oil supply will appear. So, the strong price increase on the Brent oil platform which reached 85$ per barrel at the end of October, was not a surprise. Traditionally, expensive oil prices are in the interest of the United States because it favors major companies which are mostly American and the whole industry which contributes to the exploration and of the extraction of the fuel. It is even more the case since the shale oil revolution which needs higher prices to make investments profitable and reduce indebtedness of new producers. But it has political consequences. The prices increase has immediately hurt households, which was bad in the prospect of the coming midterm elections and especially of the next presidential elections in 2020. Then, the American president suddenly reversed his policy in taking out of the sanctions scope Iranian oil exports toward its main clients, and notably China, which is a paradox, India, Japan and Turkey. Quotations did immediately reversed their trend and fell back below 70$. That has generated the furor of Saudi Arabia which is the main Washington ally in the region. The Kingdom has announced, as a retaliatory measure, the reduction of its oil exports in December by 500 000 barrel per day. The next OPEC meeting which is due to occur at the beginning of next month would have as an object to make prices to rebound.
Second example, the trade war with China. The instauration of heavy tax duties is weighting on the American companies which had organized their supply chain through a de-localization of a part of their production process to reduce their costs and to offer to their clients a better price quality ratio. It is the same for big retailers, with Walmart at the top place, which directly buys there its products. Just before Christmas, it will not be without consequences on prices. The other option, for the companies, would be to reduce their margins, but that will weight on their financial results and generate a fall of their shares. Wall Street achievements were beyond these of all the other financial centers until the announcement of sanctions against Beijing. They had been attributed, truly or not, to Donald Trump action. A lasting change of investor behavior would put in question this judgment. Do we have to expect, in that case, a turnaround of the American president attitude toward China, as he did about Iran? It is not possible to exclude it.
That protectionist policy has also had, as a consequence, to refuel inflationist anticipations. The fall of oil prices will not be enough, if it lasts, to offset production costs rise. So, American central bank will have to pursue and even to accelerate the normalization of its monetary policy and to continue to increase its interest rates. It is a new contradiction and that angered the American president. He made passionate declarations and he questioned the Fed policy when it was the direct result of his own choices. Even if the Fed is not legally independent, as the ECB for instance, this kind of intervention is very rare. The interest rates rise, at a time when, in Europe, they stay at a very low level, has provoked a rebound of the dollar which has had, as its first consequence, to make less expensive American imports from China and Europe. So, the trade deficit will not be reduced and the policy consisting in promoting the return of industrial activities in the U.S. will fail. It is a new contradiction. In reality, protectionism is going against the country interest, to the opposite what its president is thinking.
If there is a loser, there are also winners. European exporters see, due to the simple effect of exchange rates, their margins increasing and are not inclined to invest in the U.S. to overpass the eventual trade restrictions which could be instituted by the Trump administration. Regarding China, nobody will be in the position to accuse it to manipulate its currency. It is the U.S. which are at the origin of the reevaluation of the dollar against the Yuan, as anyway against all the other currencies, and not the Chinese authorities. The country will continue to finance the American external deficit and, which is not the less paradox, will make financial profits thanks to the dollar rise and higher and higher interest rates decided by the Fed.
These contradictions have not been out of the analysis of the financial markets. Wall Street had been boosted by tax reforms, with the reduction of corporate tax rate and mainly the possibility offered to repatriate profits, along with a low taxation, accumulated outside of the country by American enterprises. But the Dow Jones index has lost, during a few weeks, the gains made during the year and the NASDAQ has suffered a severe correction with a 15% fall in three months. Until now, observers were judging that Trump policy was the right one because it was translated to a high economic growth providing the reduction of unemployment and profiting to enterprises as the good situation of the stock market proved it. It is all these results which are weakened today. The budget deficit has reached very high levels and the interest rates increase will make its financing more and more expensive. No progress is to be expected from trade exchanges and the U.S. external unbalance will not be reduced.
We are there at the heart of the Donald Trump policy. His isolationism and his acerb critics against multilateralism have not stopped growing. His attacks against his historical partners and American enterprise suppliers would make us think that he doesn’t need them and that his economy is able by itself to cope with its needs and its requirements. At the same time, that policy increases the U.S. foreign debt and makes the country more and more financially dependent from these partners whose attitude is permanently denounced.
In front of this fundamental contradiction, they are only two possible ways out. The American president comes back around the negotiation table and put an end to this damaging episode, at odds with the world evolution. He may also persist and increase international tensions until a breaking off. The U.S. would be, then, as in 2007, the epicenter of a major economic and financial crisis.