Summers Says Markets Underestimating Risks of Trump Presidency

Former U.S. Treasury Secretary Lawrence Summers said investors are far too sanguine about the risks of Donald Trump’s policies, which analysts at Eurasia Group say could contribute to a level of global instability not seen since World War II.

The Harvard professor, a Democrat who was Treasury chief under Bill Clinton, on Tuesday cited the possibility of protectionist measures by the U.S. as well as changes to foreign policy and domestic social programs as issues that are creating “extraordinary uncertainty.” Analysts at consulting firm Eurasia Group echoed those sentiments in a new report, saying the world is entering a period of “geopolitical recession” in 2017.

With Trump’s ascent to the presidency on an America First platform, the global economy can’t count on the U.S. to provide “guardrails” anymore, according to Eurasia, which advises investors on political risk. Trump’s signals of a thaw with Russia, skepticism toward the North Atlantic Treaty Organization and his “alignment” with European anti-establishment parties such as France’s National Front could weaken the main postwar alliance protecting the global order, according to its report released Tuesday.

The warnings are a reminder of the range of threats to stability in 2017, from elections in Germany, France and the Netherlands and Britain’s planned exit from the European Union to the transition of power in the U.S., setbacks in emerging nations such as Brazil and Europe’s refugee crisis.

Investors in the U.S. so far have shrugged off those concerns and instead are betting that Trump’s pledges to boost spending, cut taxes and unwind regulations will fuel economic growth.

With just over two weeks to go before his inauguration on Jan. 20, the S&P 500 is close to a record high, having risen almost 10 percent in 2016 on optimism over fiscal stimulus and stronger economic growth. While the Dow Jones Industrial Average has struggled to close at the 20,000 level, it rose 13 percent last year.

Dangerous Game

Summers, who also served in the Obama administration, said investors are playing a dangerous game by gambling on an administration whose policies are still unclear. He dismissed the incoming administration’s idea that encouraging U.S. companies to repatriate profits would boost investments, and said some members of Trump’s economic team have proposed ideas that go “well beyond voodoo economics.”

See what else Summers had to say about Trump’s policies here.

“This is probably the largest transition ideologically and in terms of substantive policy that we’ve seen in the U.S. in the last three quarters of a century,” Summers told Tom Keene in a Bloomberg Television interview. “Those kinds of transitions have to be — given the central role of the U.S. in the global system — matters of enormous uncertainty. I don’t think that’s fully recognized by markets.”

In addition to Trump, other global factors including China’s growing assertiveness and a weakened German Chancellor Angela Merkel will make 2017 the “most volatile” year for political risk since World War II, according to Eurasia Group.