Starting on January 20 2017, the United States will be a very different place to the one it has been for decades. President Donald Trump, who is an unconventional Republican, will control the Senate (52 Republicans to 48 Democrats); the House of Representatives (241 Republicans to 194 Democrats); 34 Republican Governors (out of 50) and the largest Republican control of the state legislatures ever. He could well appoint three new Supreme Court Justices and reform monetary policy from A to Z as well. 

In 2009 when President Obama took office, the political world in Washington was the opposite. Times have changed.

The defining issue in the US (and everywhere else) is the economy. America has had the single worst recovery in the past 70 years and there’s little improvement in sight. Government over the past eight years has doubled down on stimulus spending, taxes on the rich, regulations, dirigiste low interest rate monetary policies and failed trade initiatives. 

Unfortunately, these policies do work – but in the opposite directions to the ones their proponents hoped. Somehow most western governments have conflated helping the poor with hurting the rich. We’ve found out once again the hard lesson – that if governments tax those who work and pays those who don’t work, there will be lots of people not working.

Stimulus spending, meanwhile, is analogous to asking a poor man to spend himself into wealth. It just doesn’t happen.  And then again, whoever heard of an economy that’s been taxed into prosperity? Not I. 

Government-mandated low interest rates guarantee that no one will lend either to risky borrowers or to working-class homebuyers, and low interest rates will also destroy the lives of retirees and pensioners. And then there are trading blocs like the European Union, where the likes of Ireland are joined at the hip with countries they don’t trade with and held at a distance from countries they do trade with (such as the US and the United Kingdom).

Recognising that the future is more difficult to forecast than the past, I believe the new administration in the United States will reduce the corporate tax rate from 35 per cent (the highest in the OECD) to 15 per cent (the 3rd lowest); replace depreciation schedules with 100 per cent expensing of capital purchases in the year of purchase for tax purposes; eliminate the estate tax and repeal ObamaCare and replace it with common-sense health care savings accounts. 

Tax legislation will also proceed to reduce personal income tax rates, undo many executive orders that over-regulate our economy, increase needed infrastructure projects, negotiate fairer trade agreements and increase economic efficiencies in government purchases.

The nicest part of America’s checks and balances on government is that the House and the Senate will provide wonderful guidance to the administration and vice versa. The resultant policies will be first class, and I believe these policies will be supported on a bipartisan basis, just as they were when Reagan was president.

David Fuller's view

Republican President Dwight D Eisenhower served for two terms commencing in 1953.  He succeeded with a very stimulative economic programme which Arthur Laffer, still a student at the time, would have approved of.  

President Ronald Reagan had a similarly stimulative economic programme, influenced by Arthur Laffer. 

 I have not seen any reports that Arthur Laffer is part of Donald Trump’s advisory team but the President-elect will almost certainly know of the Eisenhower and Reagan economic policies mentioned above.  The key difference was the tightness of monetary policy when Eisenhower and Reagan entered the White House, so it took the better part of a year each before their stimulative polices proved to be effective. 

In contrast, President-elect Trump will hit the ground running with monetary policy only just coming off record low interest rates and the US economy clearly showing signs of economic recovery.  He will also have a reasonably free hand since Republicans will control both Houses of Congress, in addition to a clear majority of the country’s state Governorships. 

Consequently, Trump’s very stimulative economic programme, plus the Fed’s still accommodative monetary policy are likely to drive up US GDP growth more quickly than most people are currently expecting, the Fed included.  This could be very bullish for Wall Street over the medium term, subject to some profit taking for tax purposes as we enter January.

However, we already know what the economic headwinds are likely to be and I have frequently commented on them in recent weeks.  The Dollar Index could easily become a problem if it continues to extend its advance.  Some commentators, including the respected Tony Dwyer of Canaccord Genuity Group, have said that the Dollar is unlikely to maintain sharp gains because it tends to fall back if undervalued emerging markets and their cheap currencies are recovering.  Possibly, although this service maintains that the US currency is now in a secular bull market.  In any event, keep an eye on the Dollar Index above because the more it rallies, the greater the headwind for Wall Street. 

The other eventual economic headwind will be US 10-Yr Treasury Bond yields.  Currently, these are a stimulus for the stock market as some of the profits from bonds have been fuelling the equity rally.  However, the warning lights begin to flash above a yield of 3%, in my opinion.  Above 4%, they are a definite headwind.  Above 5%, they will be extremely competitive relative to equities.

 (You may also be interested in this video: Tony Dwyer of Canaccord Genuity Group Chief Market Strategist, on Bloomberg)

Here is a PDF of The Telegraph’s article.