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  • Mathieu Provencher

Not another Trump article...


(picture from Wix's library)

Hi everyone!!!! First of all, the article came very late this month because I’ve been improving the format of my educational videos. Now that I’m relatively satisfied with the changes, I can continue focusing on other parts of this project… one of which is you guys!

I know you all want to hear about Trump's economic agenda and its potential impact on the economy. Can he really deliver on all his promises, and if so what will it do? Although I am very convinced that his general message of racism and machismo is indeed quite bad (both in itself and for the economy), I can’t judge yet on his overall effect on the economy. An article on Trump would be very similar to my previous article on Brexit (see here)… in other words: it’s too early to say.

SO, let’s talk about something else!

For those that followed Brexit and the United States of America's presidential elections, you have probably heard many times that markets hate uncertainty.

This uncertainty was blamed for the Pound’s fall after Brexit and for the US Dollar’s fall after the elections. I’ve looked more closely at the exchange rates between the Euro and the US Dollar to see if the drop in USD matched indeed the election of Trump.

As you may remember, the elections were the 8th of this month in the USA. Since that was a tight election, people had to wait at night to know the results. From around 6pm eastern time (in the USA) to around 11pm, the USD dropped by around 2%. From 11pm to 4am (another five hours), the USD recovered by around 1.7% and from 4am to 9am, the USD gained around 1.2%, bringing it to a level higher than before the drop (source: x-rates.com).

As everything else in Economics, we don’t get very clear evidence when looking at the data. Remember that Trump was often shown as a risk candidate. Given his lack of experience in government and his short temper, it is still very unclear what he will do… as such, his victory can be seen as bringing a lot of uncertainty.

It could be argued that results were convincing enough around 6pm on the 8th to make investors believe that Trump would win… or had a good chance of winning. This could have pushed investors to sell a lot of USD to buy something else in return, perhaps Euros. That would support our theory that “markets” hate uncertainty (I’ll come back to that soon). Also, Trump gave his victory speech around 3am on the 9th, which seem to have brought back some confidence in the USA’s economy. However, why did the USD recover between 11pm and 4am (the recovery starts at 11pm)? From what I’ve read and heard, Trump only appeared at 3am to give his speech, not at 11pm (at which time they were still counting the votes).

OK, let’s step back a bit and think about what we just found. Some of the drop in the USD seem to be related to Trump’s success (which was being reported worldwide). Some of the strengthening of the USD seem to be related to Trump’s victory speech, which was very calm and professional compared to his previous rhetoric.

However, we are looking at fairly small values of around 2%. Don’t get me wrong, a change in currency of 2% can have quite significant impacts on an economy. This being said, a Trump victory was branded as a very uncertain next four or eight years of economic policy for the USA, the biggest economy in the world. One would think that investors would react a bit more than a 2% change. Not to mention that the recovery of the USD starting at 11pm doesn’t seem to fit with this theory at all.

SO, markets don’t care… much?

Well… you all know what I’m going to say… don’t you?

For this little analysis, I focused on the currency market. Although it is often portrayed in the media as a thermometer of the health of an economy, it is not a very good measure of economic performance. This market is often disconnected from the rest of the economy and its short-term movements are mostly influenced by emotional reactions. Currency speculators can create relatively important changes in value in a short period of time… which is what we saw with the USA’s election.

Short-term changes in the exchange of a country cannot be used as a serious argument to support that markets “hate” uncertainty.

Let’s talk a bit about the rest of the economy then. It is true that most markets do worst when there is a high level of uncertainty. Firms can be uncertain about a number of things, including: prices of their competitors and their inputs of production; the direction and implementation of policies that affect their business directly and indirectly; growth of their market, their consumers, and the economy; and finally the growth of world trade and other countries that affect them.

More uncertainty means that firms are not able to make long-lasting decisions for their businesses. It makes expensive investments less likely since their future returns are almost impossible to predict. Most markets need to be able to estimate accurately the profitability of a partnership or a machine before they commit resources to it.

Other markets, however, are more profitable when there is uncertainty. Markets based on speculation have the possibility of making more (and also losing more) when prices vary more. Markets that provide safety services (security guards and asset guarantees for example) are often in higher demand when there is more uncertainty. Legal representation markets can also profit from uncertainty if more firms go bankrupt (for the need of lawyers) or if more contracts need to be reviewed. Finally, arbitration firms can be needed more often if contracts are broken or dissolved more.

Is uncertainty good or bad for markets? It depends!!!!!!

Some markets lose, some markets win. Is it bad for the economy? It does depend on the structure of your economy but it tends to be more problematic than helpful…

Well guys, I hope this helps understand a bit more about the wonderful world you live in!

Take care everyone and have fun!

#Macroeconomics #Speculation #Currency #Trump #Uncertainty

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