Will this be a titanic struggle between Trump and Wall Street?

Can Donald Trump compete with the financial markets? That is the question that becomes more acute every day. Last weekend, the Trump government took nothing back from the intention to greatly increase the American import duties-a measure that should take effect next Wednesday. The price falls on Wall Street do not yet change the White House. But that unapproachable attitude can change if the unrest persists.

After the hefty losses at the stock exchanges of Thursday and Friday, today is another black day. In Asia, the rates fell sharply last night and this morning, Europe took over the relay bug.

In part, this reaction is due to the fall falls in the US on Friday evening, to which Asian and European shares could only respond this morning. But investors mainly looked ahead, at the opening of Wall Street this afternoon at 3.30 pm. US shares set the tone worldwide: their joint market value is much greater than that of all the shares of the rest of the world together. This morning an opening of Wall Street was provided with 3 to 4 percent lower than the end of Friday.

That tech shares now plummet does not have to be bad – except for investors. The sector now only produces the enormous price gain that it made since a year or so ago. Potentially more disturbing is the fall in price of the financial sector. This was also on display this morning in Amsterdam, where banks and insurers have loud outsourcing.

A weakening financial sector often indicates a risk to the economy. And that makes the question arise whether and when the current unrest in the financial markets stops to be a purely financial phenomenon, and starts by seeping to the real economy.

This is possible through different channels. First of all, there is the Trump War used by Trump, which can be at the expense of economic growth, and at the same time we can chase inflation. Countries that have set the taxes, such as the US, or countries that have entered taxes themselves in response, such as China, are confronted with more expensive input and therefore higher prices.

The problem is that central banks can hardly formulate an answer to this. A slowing economy requires a wider monetary policy with lower interest rates that the central banks could implement. But at the same time, the risk of high inflation requires a rapid monetary policy, with rising interest rates.

Stagflation

The simultaneous occurrence of stagnation and inflation has entered history as ‘stagflation’ – a phenomenon that occurred after the oil crisis in the 1970s. Policy makers, confronted with this contradiction, had no answer to this for a long time. When inflation got out of hand as a result, a draconic policy with very high interest rates – and a heavy recession – was needed to turn the tide around 1980.

The second channel between the financial sector and the real economy is that of trust and ability. Investors feel richer in rising races, and spend a small part of their paper profit – this is the so -called ‘power effect’. But that is also the other way around: falling prices can lead to fewer expenses, and thus at the expense of economic growth. That is, certainly in the American case, on top of the thump that consumers already receive due to the higher prices as a result of the import duties.

The confidence that investors can lose in the stock market can have virulent consequences. Many people are now in so -called Exchange Traded Funds (ETFs). These are constantly tradable investment funds that, for example, shade a stock market index, such as the AEX. ETFs do this by having all the shares of the AEX in the index in this case, in a portfolio. If an investor sells the ETF, which can be done from one second to the other, it immediately leads to a sale of the underlying shares in the EFT. With an extra downward pressure on the rates as a result.

In that case, a price movement can reduce itself. The nervousness on the stock markets, measured as intensity with which the rates move (the ‘volatility’), is already increasing. The American VIX index (the so-called ‘fear index’) rose to a value of 54 this morning. That is the highest since the stock market vrust around the COVID pandemie in 2020.

In turn, volatility is another important factor in options and other financial derivatives with which investors insure price risks (or enter into). The price of certainty is higher due to increasing volatility.

Banks, insurers, trust, power loss and volatility. Like these, there are more mechanisms that speed up the switch from a stock market correction to the real economy. To prevent a possible downward spiral, there seems to be only one remedy at the moment: taking the cause. And that is the draconian taxing policy of the Trump government.

Goldman Sachs increased his estimate of the chance for a recession in the US in the coming months from 35 percent to 45 percent. It is now the question of how ominous that economic threat should be before the White House flashes.

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