The latest strategist to step into the pro/anti-Trump fray, is one of the original permabears, SocGen's Albert Edwards, who in a Thursday note sided with Dan Loeb, and wrote that while the Donald Administration "might be a neo-liberal nightmare" if one strips away some of his more controversial rhetoric on immigration, "a lot of what he says on the economic front makes perfect sense to me."
Edwards is also happy that unlike his predecessors, while crass and unpolished, Donald Trump continues to arouse "as much passion in office as he did on the campaign trail" and while one can "agree with him or not, unlike most politicians he seems determined to actually enact the things he promised the electorate." That said, Edwards points out something we warned back in November, namely that while until the last couple of weeks "the markets had embraced only the ?good? bits of his campaign rhetoric", only now are they reappraising, among other things, the likelihood of a trade war, with the Administration turning on Germany."
The best example of this was Ray Dalio's take in a recent Daily Observation note, in which the formerly enthusiastic hedge fund manager, warned that “we are now in a period of time when how this balance tilts will be more important to the economy, markets, and our well-beings than normally dominant drivers such as central bank policies,” Dalio wrote. The duo added that the current investment environment is marked by “exceptional uncertainty” and recommended avoiding concentrated bets, and holding easy-to-sell assets.
Edwards goes on to agree with Trump that "we have long written on these pages that Germany is one of the biggest currency manipulators in the world. Germany aggressively refutes any criticism, let alone does anything about it (unlike China)." The SocGen strategist also predicts that continued intransigence "will have huge implications for both financial markets and the sustainability of the eurozone" and notes that "Trump’s attack on excess regulation on US corporates also rings true. US corporate competitiveness is poor and deteriorating. The World Bank, for example, ranks the US a derisory 51st on how easy it is to start a business!"
This brings up a point we addressed one week ago, when using JPM calculations, we showed the staggering cost of regulatory compliance for US businesses, which amounted to $20,000 per employee on average, and a whopping $30,000 for workers employed across America's small business, traditionally the biggest sources of new jobs across the US.
Clearly, there is room for improvement.
Edwards shows the above hurdle to the US economy from a slightly different angle, citing the World Bank's annual survey, and notes that "competitiveness is not, as many economists suppose, about low wage costs and the ability to hire and fire at will. The World Bank looks at 10 categories of competitiveness to come up with an aggregate figure and ranking."
As mentioned above, the US is ranked a derisory 51st on ?how easy it is to start a business?, down six places from 45th last year and incredibly down from 3rd place only 10 years ago! That not only places the US below the most developed economies, but also below Albania, Armenia, Belarus, Burundi, Egypt, Jamaica, Kosovo, Kyrgyzstan, Liberia, Mongolia and Russia (among others, see chart below). It is even easier to start a new business in France than it is in the US. Now that really is a surprise!"
Edwards then focuses on another relevant topic: government spending and associated taxation.
Most long-term readers would have worked out by now, that despite my berating central bank QE and government interventions (eg former UK Chancellor George Osborne?s moronic help-to- buy housing subsidy), I regard myself as pretty liberal (socialist even) on many issues. I used to vigorously debate with my former colleague Dylan Grice. He made the very valid point that France?'s economic struggles were probably due to the fact that the government dominates the economy ?- indeed it is comparable to Cuba. A ranking of government spending of OECD countries does indeed have France at an extreme. By contrast, the more ?flexible?, fast-growing economies such as the US and the UK tend to have small government spending.
But, he concedes, it is not a question of taxation or spending, but rather strangling regulation that is a far greater issue:
I believe high public sector tax and spending is not the problem. Instead, I always thought the problem with countries like Italy and France was regulation that strangles enterprise. ?Socialism?, in the sense of having a high tax and spend economy, may be commonly associated with struggling economies, but high tax and spend does not in itself condemn a country to low growth (correlation is not causality). Most economists believe long-run GDP growth is driven by productivity growth and as this tends to be sluggish in the public sector, a vibrant private company sector is key (although government can help create the conditions for growth via education, etc.). So what really condemns a nation to sluggish economic growth is when ?socialism? strangles business enterprise with excess regulation.
So when you look at the latest World Bank ?Ease of Doing Business Survey? it is little surprise to see France, Italy and Greece near the bottom, and the UK and US near the top ? mirroring the size of their public sector (see charts above).
In other words, to Edwards it's not the socialism per se that is the problem, it's regulations that make suffocate new business: "look at the Skandi countries: these high tax and spend nations do not make life impossible for their private business sector – quite the reverse. These ?socialist? nations allow business to thrive, tax them, then redistribute the proceeds. The US is the opposite of the Skandi nations. The US is a low tax and spend nation that has strangled its corporate sector. That means the small company sector, which is traditionally the engine for jobs growth, has been struggling (see chart below)."
So is new business creation truly that bad in the US? Well, yes and no: "the only things where the US excels are the ability of companies to ?get credit? (2nd) and ?resolving insolvency? (5th). So US companies excel at leveraging up and going bust - great! In most of the other eight categories the US ranking is pretty appalling and if we average them we come up with the US at a lowly 37th position overall.
Edwards' conclusion: "There is much work indeed for The Donald." There is, indeed, and he should be prepared to fight relentless obstruction every step of the way by those who think the old ways are the best.