There is much about Donald Trump's economic agenda that should worry investors – from his protectionist threats and bullying of corporate leaders to his plans for trillions of dollars in debt-financed tax breaks.
The Trump rally on stock markets suggests a lot of people either don't care or aren't paying attention. Or perhaps they don't believe the U.S. president-elect will do what he says he will.
Stocks are in the throes of a deluded post-U.S. election bounce. The Dow Jones industrial average is up nearly 9 per cent since the vote and is now flirting with a historic high of 20,000 points.
On a very superficial level, this might make sense. Absent everything else, the combination of massive tax breaks, deregulation plus boosting defence and infrastructure spending will energize the economy and corporate profits – at least for a while.
There are a few snags with this rosy scenario. Injecting massive stimulus into an economy that's already chugging along nicely (3-per-cent growth pace, low unemployment and steady job creation) risks overheating things and stoking inflation.
The sharp runup in U.S. government bond yields since the election is a warning sign. So too is the U.S. Federal Reserve's move this week to hike rates.
And then there is the pesky question of who will pay for all this. Mr. Trump insists he won't cut expensive entitlement programs, such as Social Security. This will inevitably leave a nasty debt hangover.
The longer-term fallout of Mr. Trump's agenda is even more worrying. His threats on trade and immigration could set back globalization for years.
A top official of the Bank for International Settlements – a consortium of the world's major central banks – warned earlier this week that growing disbelief in free trade threatens the global economy.
"The most worrying signs relate to the risk of greater protectionism. Those signs have been multiplying in recent years, and prospects have darkened considerably with the most recent political events," BIS chief economist Claudio Borio said, alluding to the U.S. election and the Brexit vote.
"There would be no winners, only losers," Mr. Borio said. "Lower global growth, and possibly higher inflation, would benefit no one."
Mr. Trump's plans in office are unsettling.
He has promised to brand China a currency manipulator, renegotiate the North American free-trade agreement, punish U.S. companies that invest abroad, tighten border controls and deport millions of illegal immigrants.
Boil it all down and Mr. Trump is threatening a trade war with its largest commercial partners.
The election changes everything. In October, economists Laurence Chandy and Brina Seidel of the Washington-based Brookings Institution argued in a paper that warnings of globalization's imminent retreat were overblown. The flow of goods, money and people would continue to grow, they insisted.
Now they aren't so sure. They say Mr. Trump's election represents the "biggest shift" in the U.S.'s relationship to the global economy since the Second World War.
"It is time to consider the possibility that a single politician could reverse decades of global trends," Mr. Laurence and Ms. Seidel wrote after the election. "We are much less assured that the open global economic order will endure."
Among other things, they worry that the U.S. will partially withdraw from the global economy, sending shock waves through the system. In turn, trading partners would retaliate against U.S. protectionist measures with trade-inhibiting policies of their own. China has already vowed to do just that. Some European politicians are warning they will tax U.S. products if Mr. Trump withdraws from the Paris climate-change accord. Other countries may follow the U.S. lead and turn away from international institutions, such as the World Trade Organization.
Mr. Trump's immigration policies risk compounding U.S. economic challenges. He has vowed to deport as many as three million illegal immigrants – roughly the equivalent of evacuating a city the size of Chicago or Houston. In an economy with low and falling unemployment, this could trigger labour shortages and stoke inflation.
Of course, Mr. Trump may be fooling all of us. Perhaps he's not serious about making good on his most repeated pre- and postelection promises. Maybe Congress will curb his ability to act – both on tax cuts and protectionism.
U.S. companies and workers won't fare well in a postglobalization world. And, surely, that won't be good for Wall Street.
Investors should at least recognize the "yuuuuuuge" downside risks.