As Trump-mania wanes, expect Macron fever to take its place

Donald Trump announced his big tax plan yesterday.

The US president wants to simplify the American tax system. That basically means tax cuts for everyone.

So why did the stockmarket act as though it had been doused with a bucket of cold water?

Why Trump’s big tax plan is set to fail

Donald Trump put out his tax plan yesterday. It all sounds quite exciting. Big tax cuts for all. Corporation tax would be slashed to 15%. The US equivalent of the 0% income tax band would rise a bit. Filing tax returns would be simplified.

You can see why it’s just the sort of thing that the market should like. There’s just one problem. It hasn’t a hope in hell of being passed.

Put simply, Trump’s tax plan would cost a fortune as it stands. The original idea was that a tax on imports would pay for it all. But Trump has backed away from that idea. So it’s all giveaways and no take.

It doesn’t matter how much faith you want to put in the Laffer curve, at some point if you collect less tax and plan to keep spending as much money or more, you are going to struggle to balance the books. As it stands, this plan is not ‘revenue neutral’ by any stretch of the imagination. Instead, it’s expected to cost around $7trn.

 If you’ll remember correctly, the healthcare debacle happened primarily because Trump couldn’t bring all of the Republicans with him, particularly those who are worried about government overspending (also known as the deficit).

So it seems highly unlikely that they’ll embrace this deal either.

The Art of the Deal is no use if you have nothing to trade

From a British perspective, it seems to me that you can equate the libertarian Republicans with awkward backbenchers in the House of Commons. That’s why Trump is finding his much-vaunted negotiating skills utterly useless in this situation.

It’s hard to negotiate with someone when you have nothing that they want. This isn’t like doing a real estate deal. There, both sides want something – you have a potential seller and a potential buyer. All you need to do is find a set of circumstances whereby that potential gets converted into a deal that both sides find acceptable.

This is different. Trump has no leverage here. He can’t fire these people – they aren’t his employees. He can’t “shame” them – they are simply standing by their principles, whether you agree with those or not.

In politics, your typical awkward squad couldn’t care less about outcomes. They care about ideology. Being a political martyr is as much of a victory for them as actually getting what they want (in fact, as protest parties the world over are demonstrating right now, ideologues would rather lose nobly than win and have to cope with the consequences of getting what they said they wanted).

This, by the way, is why Theresa May is absolutely right to call an election – it’s the political martyrs on the inside of the party she needs to be able to over-rule, not Corbynites and the SNP.

So it’s hard to see Trump getting anywhere with this. It’s going to be a case of “back to the drawing board”.

What does that mean for investors? Eventually, the market is going to realise that it can’t expect any help from Trump on the sort of timescale it had been hoping for. That creeping realisation is probably dawning now. That could be a problem for US stocks.

However, the bulls shouldn’t despair. With the scary French election now looking as though it will go the market’s way, everyone has a new leader to get excited about – Emmanuel Macron. Now that Macron looks like he’ll take over, he’s suddenly being hailed as the man to turn France around. Meanwhile, the European Central Bank (ECB) is struggling to find excuses to keep printing money at its current rate.

So rather than collapsing in despair, we may simply find that the “reflation” story shifts its focus. The new narrative will be eurozone recovery, helped by a resurgent France, and the still-significant valuation gap between European stocks and US ones. That’ll tide things over while Trump flails around.

What happens when it turns out that Macron can’t get anything done either? Well, I’m sure that the market will cross that bridge when it comes to it. For now, the story is good enough for the bulls to shift their focus. So stick with your eurozone equity exposure – unless Macron ends up losing on 7 May (still a possibility), it should do well this summer.