ROUBINI: The Trump rally is about to smack into a wall of worry
REUTERS/Fred Prouser
"It is little wonder that corporations and investors have been happy," the New York University Stern School of Business professor and Chairman of Roubini Macro Associates wrote in an opinion piece for Project Syndicate. " This traditional Republican embrace of trickle-down supply-side economics will mostly favor corporations and wealthy individuals, while doing almost nothing to create jobs or raise blue-collar workers' incomes."
He cites a study from the nonpartisan Tax Policy Center showing nearly half of Trump's proposed tax cuts would be directed at the top 1% highest-income Americans.
"Yet the corporate sector's animal spirits may soon give way to primal fear: the market rally is already running out of steam, and Trump's honeymoon with investors might be coming to an end," Roubini concludes.
Destroying jobs
His reasoning is as follows. As the markets became hyped up about the possibility of a fiscal stimulus that is still largely undefined, they have pushed up bond yields and mortgage rates, making it more costly for firms and consumers to borrow. In addition, the dollar strength that accompanied Trump's victory is deeply harmful to the very manufacturing export sectors the Republican president has promised to help.
"The US dollar's appreciation since the election could destroy almost 400,000 manufacturing jobs over time," Roubini argues.
Because he also foresees high spending with low economic returns under Trump's presidency, the cycle of higher rates and a stronger dollar could be self-reinforcing."Trump's fiscal-stimulus package might end up being much larger than the market's current pricing suggests," he says, seemingly confident that Republican fiscal conservatives in Congress will naturally bow to their president. "If this happens again under Trump, fiscal deficits will push up interest rates and the dollar even further, and hurt the economy in the long term."
A weakening economy could force Trump to double-down on the heavy-handed protectionism that has already become a hallmark of his administration, triggering a prolonged and damaging trade war.
The US has already spooked its trading partners by unilaterally pulling out of a long-negotiated and hard-fought Transpacific Partnership agreement, or TPP. If pushed further, "America's trading partners will have little choice but to respond to US import restrictions by imposing their own tariffs on US exports," Roubini says. "The ensuing tit-for-tat will hinder global economic growth, and damage economies and markets everywhere."
Ultimately, Roubini's stock market advice appears to come down to two words: caveat emptor.
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