Goldman Sachs Gets Bearish On Trump, Sees Little Chance Policies Will Work

From Tyler Durden: Less than a week after Bridgewater’s Ray Dalio flip-flopped in his support of Donald Trump, going from vocally praising the billionaire’s vision for the US, to becoming “increasingly concerned about the emerging policies of the Trump administration” because “there is significant risk that his populist policies could hurt the world economy (and worse),” it was Goldman’s turn to dramatically sour on Trump’s economic policies.

And as the bank’s chief economist, who previously just like Dalio was ecstatic about the economic growth prospects under President Trump, warned in a Friday night note that “one month into the year, the balance of risks is somewhat less positive in our view.”

As the Goldman team writes, following the election, there was a burst in euphoria and “the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration”, however three months later “the risks are less positively tilted than they appeared shortly after the election.”

Hatzius gave three reasons for why his outlook has soured so much:

  • First, the recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story.
  • Second, while bipartisan cooperation looked possible on some issues following the election, the political environment appears to be as polarized as ever, suggesting that issues that require bipartisan support may be difficult to address.
  • Third, some of the recent administrative actions by the Trump Administration serve as a reminder that the president is likely to follow through on campaign promises on trade and immigration, some of which could be disruptive for financial markets and the real economy.

In short, everything we said was bound to happen in late November has now, again, become mainstream. So with that caveat in mind, what does Goldman believe will happen next: for now, much of the same as before, however in what is perhaps the most notable shift, Goldman – whose former president Gary Cohn now is in charge of Trump’s economic policies now sees only a 20% chance the border adjustment tax will be included in tax reform. If so, sell the dollar (something Goldman’s FX team will most certainly not be happy about).

We continue to expect a fiscal expansion of around 1% of GDP, largely through tax cuts starting in 2018. We believe Congress will reduce the corporate tax rate to 25%, but do not expect “border adjustment” to be included in tax reform. We also expect an increase in the effective tariff rate on imports and a reduction in immigration flows.

If Goldman is right, expect little if any Trump policies to be implemented until mid to late 2081, and not only the various near-all time high “soft” economic indicators like consumer and business confidence to roll over steeply in the coming weeks as optimism fades, but more importantly, hard data to plunge, dragging the USD, yields and stocks along with it.

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) was unchanged in premarket trading Monday. Year-to-date, DIA has gained 1.45%, versus a 2.60% rise in the benchmark S&P 500 index during the same period.

DIA currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #6 of 77 ETFs in the Large Cap Value ETFs category.


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