Tale Risk & a Momentous Reversal of the Bill Clinton Doctrine?


Not only was the Trump victory stunning in its own right, but equally stunning has been the wave of enormous confidence sweeping through American markets. Bill Ackman, a prominent Hedge Fund manager, said “I woke up on Wednesday morning bullish about America“. Ackman added “he [Donald Trump] is going to get a lot done; nothing has been done in USA for a very long time … extremely bullish for growth“. 

Stanley Druckenmiller, the legendary macro investor & a non-supporter of Trump, was even more clear:

  • “the economy is so over-regulated & people are just drowning in red tape, that the removal of that & … serious tax reform & may be a blended rate of return of under 10% to repatriate capital … I am very optimistic on the economy

He added that he expects to see a 4% growth at some point next year and said he had sold all his gold on Tuesday night. Jeffrey Gundlach, today’s “bond king”, went a step farther and said we could see a 5% growth rate at some point in 2017.  The US stock market had its best week in years with Dow Jones up more than 5% this week. 

What’s going on? Donald Trump has not even been inaugurated let alone actually getting his plans implemented. We understand Republicans feeling giddy but have legendary investors lost their minds? 

No. What you are seeing is the phenomenon called “Tale Risk” at work. Robert Shiller, a Nobel Laureate in Economics, had coined the term “Tale Risk” in March 2014. His point was that ” Fluctuations in the world’s economies are largely due to the stories we hear and tell about them”. Shiller argued that a charismatic leader who inspires a wave of confidence in his nation that can lead to significant upside in the success of his nation. 

At that time, we applied the Tale Risk concept to the candidacy of Narendra Modi who went on to win his election with a massive mandate. Look what has happened to India since June 2014 – India now has the highest growth rate in the world, America has built a strategic partnership with India and virtually all nations are desirous of working with India. 

The victory of Donald Trump is far more momentous than the amazing victory of Narendra Modi in 2014. Obviously the American President affects the entire world while the Indian Prime Minister affects a much smaller portion of the world. Also PM Modi only won the lower house of Parliament. The upper house is nominated by various states and is still dominated by the opposition. As a result, PM Modi has not been able to implement many of his far reaching plans. So much of what India has gained has been because the “Tale Risk” of PM Modi & confidence of the world in him.

In contrast, the victory of Donald Trump gave his party control of all three branches of US Government – Presidency, Senate & House. So President Trump will have actual power & capability to implement his momentous agenda. What might be one of his early acts?

American corporations have parked $2.5 – $3 trillion overseas because repatriating these monies to America would expose them to a large tax burden. Through out the campaign, Mr. Trump has ridiculed this stupidity and promised to bring this money back to America for investment in America. Both parties want to see this money come home and so all it needs is a skillful deal maker. Stanley Druckenmiller referred to this above with his “under 10% blended tax rate for repatriation of capital“.  

Mr. Trump has consistently campaigned on bringing the corporate tax rate down to 15% from its current 35% level. Republicans want this badly and have the votes to pass it. The Democrats will go along it is combined with a jobs-creating package. 

The American economy is like a coiled spring held down over the past 8 years by terrible regulations & high tax rates. Imagine what the American economy would do if $2.5 trillion of monies came back to America and American corporations could invest it under a 15% corporate tax rate. Is a 4% or 5% growth rate achievable under those conditions? Absolutely.

Understand that growth rate figures are really for media. What really matters for investment is the total amount of new wealth or growth generated in the economy. Because that is the pot which all investors want a share of. Take India for example. A stunning 10% growth rate for India’s $2 trillion economy means increase in size/wealth of $200 billion. A 1% growth rate for America’s $20 trillion economy also means increase in size/wealth of $200 billion. So for a global corporations & investors, 1% growth rate in US is sort of equivalent to 10% growth rate for India in absolute rise in wealth/size. 

Now imagine a 4% growth in America. Now the increase in size/wealth of US economy becomes $800 billion, four times that of India. In that scenario, where would investing money fly? To America or to India? Why do you think the Indian stock market is down 4% this week while the US Dow Jones in up 5%. And India is truly today’s success story. Many other emerging markets are down far worse than India.

What investors are sensing is a momentous sea change in the global landscape, a realistic possibility that Trump reforms will ignite US growth & that will serve as a huge magnet to suck investment capital from the rest of the world into America. This will be a momentously massive reversal of the global trend of American monies flowing overseas and in particular to emerging markets. That trend was created when President Bush allowed China into the WTO and it might end with President Trump’s tax reforms & his choices in global trade.  

Reversal of Bill Clinton Doctrine?

Bill Clinton established the prevailing international trading & economic order in 1994-1995. As George Friedman of Geopolitical Futures wrote recently:

  • “The central issue was managing global economic growth. The 1990s were a period of large-scale development, and it was assumed that increased trade and international investment would perpetuate this growth and create a peaceful and prosperous world. Therefore, the primary interest of the Clinton administration was shaping the international economy. This was the strategic issue of the decade. The rest were secondary.”
  • “Three beliefs were at work.
    • The first was that we had entered an era in which nothing would disrupt economic growth.
    • The second was that with economic growth, the world would be increasingly liberal.
    • The third was that increased liberalism would lead to international harmony and no one would want to disrupt it.” 

What about Russia & China? Friedman wrote:

  • “It [Clinton Administration] also saw Russia as a closed issue. In spite of the catastrophic decade it had experienced, the Clinton administration did not believe Russia would emerge as a strategic challenger, but would rather settle into its role as a liberal democracy. As for China, increased global integration would simply increase its prosperity, and that prosperity would liberalize China”

That has proved totally wrong. China has become more & more anti-liberal with its prosperity and Russia became a strategic competitor as its economy grew. 

We think the Clinton concept that increased trade & international investment will lead to a more peaceful world is dead. During his campaign, Mr. Trump railed against the Bush decision to allow China into WTO just as he has called NAFTA the worst deal in American history. 

We think the Trump Administration will view trade as a good thing when done with America’s preferred partners & when it provides benefits to American workers & not just to American corporations. Meaning that American corporations that benefit from global trade will be required to share the benefits with workers.

The Dow Jones average stood at 3,831 on November 8, 1994. It was that Congressional election that made Bill Clinton into a proponent of global trade. Today the Dow Jones is at 18,848 or nearly 5 times as high as in November 1994.

While the Dow rose by 500% since November 1994, blue collar American workers lost jobs & suffered a grievous loss in income. These were & are the workers of the Industrial Midwest – the states of Pennsylvania, Ohio, Indiana, Michigan , Wisconsin & Iowa – who made Donald Trump the President elect of America.

So who do you think President Trump will back? These workers who made him President or the business interests that gain from the US stock market? Which companies will the Trump Administration favor? Those who invest American monies overseas or those who invest at home in America?  Would the Trump Administration encourage global companies to build factories in America & hire American workers & penalize those who do the opposite?

If your answer is same as ours, then you should start preparing for a momentous change in global trade & in the global economy. Because Hillary Clinton did not lose the election alone. The Bill Clinton economic/trade philosophy lost big time as well.  


Send your feedback to editor@macroviewpoints.com Or @Macroviewpoints on Twitter   

Leave a Comment

Your email address will not be published. Required fields are marked *