When newly elected politicians take office they invariably enjoy a honeymoon period. We elected them so we continue to believe they will do what they said they would, and those actions will benefit us. The honeymoon period continues until it becomes clear the benefits won’t be delivered quickly.

US President Trump is in his honeymoon period. The financial markets are not alarmed even by his extreme promises. The S&P 500 Index of US shares has only slipped back a little from its record high of January 23^rd. The Dow Jones Index is also near its all-time high.

Fixed interest markets are similarly relaxed and confident. Since the US election investors have bid the US dollar up against most currencies.

Yet careful analysis of President Trump’s promises shows major problems will develop in time. One investment management company that has thoroughly reviewed these issues is Yarra Capital Management.

They point out that Team Trump claims they will cut the government deficit from 7 to 3 per cent of GDP (total economic output) by 2028. That’s 1 per cent reduction each year. The cost of Trump’s election promises such as tax cuts is US$7.5 trillion which is about 2.5 per cent of GDP per year.

That means the Government needs to collect extra revenue of 3.5 per cent of GDP per year to meet its promises. Yarra says that simply will not happen. There is some likelihood of some savings by the new Department of Government Efficiency, but costs such as defence won’t reduce.

Nor is there any realistic chance of such huge growth in the US economy that tax collections will surge to that target. Deregulation, cheaper energy and efficiency gains may help, but not nearly enough for tax collections to increase by 3.5 per cent of GDP each year when tax rates have been cut.

Yarra says it requires an enormous suspension of logic to think large tax rate reductions and large Government spending increases can be delivered yet generate a smaller deficit.

While tariffs on Mexico and Canada may not proceed, those on China have started, and it has retaliated. Tariffs and trade barriers will slow trade, reduce economic efficiency, raise the cost of goods, and reduce living standards in the US and elsewhere. Interdependence is much better than independence.

Much of President Trump’s imagined better US living standards won’t be delivered, but some may. Let’s hope the benefits he does deliver are enough to satisfy financial market investors.

It’s unknown how long the Trump honeymoon period will last. Investors are fairly safe for now, but when it ends there may be more market volatility.