Will Trump be Brexit II?

The European financial markets are being relatively calm – with the exception of stock markets which are being pulled down like a weight in water by problems of Deutsche Bank. Extreme silence prevails in our office as my colleague Pikora is almost not talking today and shows off signs of certain indisposition after his imprudent digestion of the “scorpion” chili pepper (which is one of the spiciest peppers in the world) yesterday. (He even went to “healthy walk” instead of lunch.) This is why the speculators and investors – if they are not particularly interested in stocks – have time to pay attention to things that are seemingly unrelated to the finance world. One thing like that would be for example the American presidential election.

According to the latest polls of public opinion done before the upcoming presidential television debate, Trump is probably leading Clinton by 4 percentage points. Saying “probably” is in place. All of us still have in fresh memory how deeply wrong the polls of public opinion were before the Brexit vote. According to some hypothesis, it is even lawful that the polls of public opinion in political matters, especially in referendums and elections, where you have to choose between two answers or two candidates underestimate that opinion which is generally considered “more extreme”, “more revolutionary”, “more innovative” etc. On the one hand, the respondents can be hesitant to publically admit they support the more revolutionary opinion and on the other hand, they are hiding in the “undecided” group until the very last moment, and just when the elections get really close they get more courage to stand up for their opinion. On top of that, one thing can play part in it too and that is that the voters with “more revolutionary” opinion are getting more courage as the polls show that their opinion is not favorable, which gives them impression that they won’t win anyway so they won’t hurt anybody when they vote for their favored more revolutionary option. In the end, there’s one more thing that can influence this poll and that’s the voter’s turnout helping the less favorable opinion because its supporters are going to get worked up to go vote in contrast to those, who are feeling like the win is already theirs.

Voting systems and the psychology of election is not exactly my field of study but there’s something about this hypothesis which seems very rational. If it was really true then it would mean that Trump has bigger chances than it may seem from the polls. How is all of this related to the market and the economy? Absolutely fundamentally.

Strictly from the financial market’s point of view, Trump is labeled as a wild card. While it is certainly clear what are his political views we know significantly less about his possible steps in the economic field. It seems that his individual steps would be rather based on his intuition at the moment then on some definable economic direction or specific philosophy. Sometimes they compare him to Raegan with his Raeganomics – but that is a huge mistake. Raegan claimed specific direction: libertarianism. Trump managed to declare his support to a peculiar mixture of to certain degree economically opposing opinions. We know he would sign up for taxes favoring families, lowering federal corporate income tax rate more than half (from 35 to 15%), better protection of intellectual property or protection in foreign trade. That has no clear philosophic link. And that is precisely the problem for the economic circles. If there is something the financial markets absolutely loathes then it is uncertainty; they hate it even more then unpleasant certainty.

That’s exactly why it’s an open secret that the Fed will hardly raise interest rates sooner than after the American presidential elections because it can’t imagine concurrence of two events potentially more stressful for the market: Higher interest rates and president, we don’t know what to expect from in the economy. Analogically if Trump really did win and the financial markets would be similarly “shocked” as they were after the Brexit vote, the rising of the interest rates could be postponed again. Understandably, all this postponing would have a negative impact on the dollar. The exchange rate of the dollar has completely global connection, starting with the influence of oil prices, influence of the price of gold or the flow of speculative capital among the three peaks of notional triangle: developing countries – Europe – USA. In other words: American presidential elections will influence for example the exchange rate more than it could have been in the previous elections.