The story of the Trump administration so far is the weakness of the US dollar. Although policy making is confusing, when talking to people in the market, they emphasize three fears.
- The following US growth
- Higher US inflation
- Lower productivity/dynamism
These are classic features of a poorly performed economy, but also 180-degree turns from what the market was expecting at the end of the US election. Trump 1.0 spoke a lot about tariffs, but ultimately focused on growth and stock prices. Now it appears to be the product of his first cabinet, not his core instinct.
So, what drives fear:
1) Customs
This is clear, but there is more and more conversations about the unintended consequences of these policies. In Covid, I learned that supply chains are far more surprising than thinking, and that there is a concern that something can break and lead to inflation shocks beyond what simple mathematics shows.
2) Growth
There is Trump’s “growth agenda” on low taxes and deregulation that will help him be elected, especially for mainstream conservatives, but that’s been hidden so far. Furthermore, the core part of the tax cut is merely an extension of what is already in place, so we don’t know how much lower fruit there are in practice. But beyond these things, tariff and policy making uncertainty is a major headwind for growth, especially when the Fed needs to keep interest rates high.
The main fear is that there is an administration in place that believes it can rewrite the rules of economics. We have seen protectionism fail many times before, and this is no exception.
So far, consumer and business sentiment has only dropped dramatically, but the market is holding its breath as it collides with the real economy.
3) Red
There is some good news about the “Trump Agenda,” but there is also the question of how to pay for it. The US is in a deficit with 7% of GDP inhaling its eyes, coming at a 4% unemployment rate. As the bond market is currently bal, I think some of it was a sign from Congressional leaders last week, and that Trump is aiming to pass the budget on all the merchandise he has promised in his campaign. The fiscal Hawks are just not there, and the US may be on their way to a deficit at 10% of GDP, leading to inevitable calculations that will later hinder growth or lead to political turmoil.
4) Rules and norms
The US dollar is at the heart of the global system and is linked by strong beliefs about the rule of law of NATO, WTO, WHO, the United Nations and the United States. All of this is eroding or destroying at an incredible pace and destroyed in ways that are not easily reconstructed. It is difficult to even conceptualize what is at the crisis here, but today’s tweets from Beijing suggest that the vulnerability of the US is intellectual property. What US companies in a world that no longer respects that?
5) Immigration
It is not clear how much Trump’s crackdown on illegal immigration is theatre and how authentic it is. Moreover, while it is not clear how long it will last, illegal immigration in the United States is a key component of curbing agriculture and hospitality inflation. Trump raised plans last week that could allow some to leave and return legally, but there is no clear plan here either. I think Trump isn’t continuing to match his worst instincts.
6) FOD Policy
This is a tail risk, but earlier this month, a US judge allowed Trump to move forward with the firing of two senior officials at the Federal Trade Commission. If it is allowed to stand, it would pave the way for him to fire Federal Reserve officials, including Jerome Powell. It’s a fight towards the Supreme Court, but the impact of FX is clear. If the US Central Bank loses independence, it is stacked up by loyalists who keep interest rates low and undermine the value of the dollar.
