At Tuesday's United Nations General Assembly, President Donald Trump was able to stun world leaders with a historic address. While Trump's words are often shocking, these words were surprising even for Trump: "We will never surrender America's sovereignty to an unelected, unaccountable global bureaucracy. America is governed by Americans. We reject the ideology of globalism. And we embrace the doctrine of patriotism." And with those words Trump solidified his worldview in the eyes of his foreign counterparts, many of whom may have mentally thrown in the towel on cooperation with Trump following his speech.
The rejection of globalism is hardly a welcome statement for financial markets that have grown increasingly interdependent. The trade wars Trump has sparked, most recently with China, the EU, and Canada are textbook methods of undermining global trade. Will U.S. firms support Trump and his Republican party in the upcoming elections when the interests of many are threatened by Trump's neo-jingoism? Probably not. Tariffs have very short periods of effectiveness and ultimately are worked around in some way. Mostly the tariffs will end up being a regressive tax for Americans. Coupled with record crude oil prices, U.S. consumers will begin to feel their wallet getting lighter and consumption will slow. Slowing consumption, inflationary pressures from energy and higher interest rates, will force the U.S. and global markets into another global recession.
The rally in U.S. equities and the dollar may well be coming to an end. Growing income inequality hasn't been addressed and with the Alexandria Ocasio-Cortez wing of the Democratic Party gaining momentum, this may very well lead to a political revolt in the upcoming U.S. elections. Trump's attack on OPEC members, many of which are America's best allies, plays to Trump's base but prices at the pump will increase and be felt by the poorest of Americans despite Trump's words.
National Security Adviser John R. Bolton's saber rattling on the sidelines of the U.N. meeting may also help galvanize support from Republican voters this November, but ultimately people vote with their pocketbooks. If the economy turns by November, Trump will face an uphill battle in the waning days of his presidency, especially if special prosecutor Robert Mueller has a Democratic House and Senate to present his findings to in January. A Democratic Party win means two years of gridlock for the U.S. president and potential impeachment hearings, none of which are conducive to investor confidence.
While Trump's jingoism is a great political strategy, his ability to wink to trading partners while attacking them from the podium will be increasingly important. The Fed has yet to announce its 25 base point rate hike at the time of writing, but that is almost a foregone conclusion at this point. More importantly, should the Fed hike and signal another hike this year and four hikes or more next year, equity markets will begin to sell-off. Why risk capital when the "risk-less" rate is healthy enough for many investors? Any indication by the Fed that rates will rise by over 200 base points in the next 18 months would almost certainly jolt global markets and cause sell-offs globally and lend to dollar strength.
Global economic weakness, a strong dollar, jingoistic American foreign policy, and trade wars with potential military adversaries like China are not welcome news for anyone. This makes the Fed announcement Wednesday and more importantly the Federal Open Market Committee's (the committee that makes the rate decision) outlook for the future, critical. A too-close-to-call midterm election makes this an opportune time to go risk-off here and I fear the start of a deep and long recession to hit global markets.