Stunned Morgan Stanley Admits Nobody Has A Clue What Trump Will Do: "His Policies Are Like Schrodinger's Cat"

As the sellside reports analyzing the post-president Trump world keep pouring in, one that caught our attention was from Morgan Stanley's Andrew Sheets in which the strategist openly admits that pretty much nobody has any idea what is coming: "Most remarkably, however, after three debates, two conventions and an election that seemed to last forever, there remains a great deal of uncertainty over what type of president Trump will actually be. In an election that was dominated by coverage of tweets, videos and emails, policy questions received surprisingly little airtime. And those questions are now crucial for markets.

To a remarkable extent, investors we’ve spoken to both before and after November 8 disagree on what President-Elect Trump will actually do. Many have told us, confidently, that they believe that, while he said some extreme things on the campaign trail, he is ultimately a moderate, pragmatic businessman. A deal-maker who will delegate policy to experts, lead with market-friendly (almost Keynesian) fiscal stimulus and ultimately avoid a large fight on trade. Other investors take a less benign view. They say the President-Elect should be taken at his word, and that since the start of his campaign he has defied predictions that he would moderate his tone or policy message."

The problem, according to Morgan Stanley, is during the campaign, "Trump was a master at keeping both possibilities open, broadening his appeal. Like Schrodinger’s cat, his policies existed in a state of being both pragmatic and radical, all at the same time. Upcoming cabinet appointments offer clues to which interpretation is right. Until then, we promise to keep an open mind, and focus on modelling the different paths a Trump administration could take, and what it means for markets."

Here is the full MS note for those who want to add to their confusion:

And Now The Questions Get Answered

Donald Trump will be the next President of the United States, in a win that defied expectations and political convention. He won without a fundraising advantage or the support of many in his party’s establishment. He is a wealthy businessman who rode to victory with a historic swing of working class Midwesterners. He ran a populist campaign and yet is likely to lose the popular vote narrowly.

Most remarkably, however, after three debates, two conventions and an election that seemed to last forever, there remains a great deal of uncertainty over what type of president Trump will actually be. In an election that was dominated by coverage of tweets, videos and emails, policy questions received surprisingly little airtime.

And those questions are now crucial for markets. To a remarkable extent, investors we’ve spoken to both before and after November 8 disagree on what President-Elect Trump will actually do. Many have told us, confidently, that they believe that, while he said some extreme things on the campaign trail, he is ultimately a moderate, pragmatic businessman. A deal-maker who will delegate policy to experts, lead with market-friendly (almost Keynesian) fiscal stimulus and ultimately avoid a large fight on trade.

Other investors take a less benign view. They say the President-Elect should be taken at his word, and that since the start of his campaign he has defied predictions that he would moderate his tone or policy message. They point to the surrogates that surrounded his campaign. They point to Republican control of the House, Senate and Presidency, which means there is no check on policy. They worry more openly about the implications for foreign relations.

Which interpretation is right? During the campaign, Trump was a master at keeping both possibilities open, broadening his appeal. Like Schrodinger’s cat, his policies existed in a state of being both pragmatic and radical, all at the same time. Upcoming cabinet appointments offer clues to which interpretation is right. Until then, we promise to keep an open mind, and focus on modelling the different paths a Trump administration could take, and what it means for markets.

For macro, this could mean big changes. Our narrative for 2016 has been ‘slow growth, slow reflation and slow policy normalisation’. A Trump administration could affect all three. When our US economists and strategists attempt to quantify a ‘middle’ scenario of looser fiscal policy but only modest trade protectionism, GDP and inflation could both be 0.3pp higher in both 2017 and 2018. But that boost could mean more Fed tightening, and potentially a sooner end to the US cycle than we previously assumed.

This analysis emphasises that other outcomes are also highly plausible. In a scenario where one takes most of President-Elect Trump’s proposals at face value, there could be a trade-induced shock of 0.6pp to GDP in 2017. In a scenario where divisions in the Republican party bog down proposals, there could be relatively little change from our previous baseline.

Until we know which version of Trump we get, our market views have to be more tactical than we would like them to be. For now, we think low risk premiums and the potential of fiscal policy mean curves are likely to steepen and rate volatility can rise. Upside risks to the Fed path coupled with downside risks to global trade should support USD against low-yielding trade-focused Asia currencies (JPY, KRW, CNH). We think this supports equities in the US over Europe and EM, with the former benefiting from hope over tax cuts and repatriation, while EM faces headwinds from a stronger USD and Europe needs to deal with a heavy political calendar in 2017. In US equities, this points to overweight industrials, healthcare (especially biotech) and credit cards, and underweight consumer staples.

This has been a long and emotional election cycle in the US. There is an unusual level of uncertainty among investors over what type of leader the largest economy in the world has elected, and what policies he will pursue. The next several weeks are likely to bring more clarity. A famous US President once said “Trust, but verify”. The assessment of policy may call for the reverse: Verify, then trust.