To sum up the previous two posts, Trump’s economic policy is a stew of way-past-their-sell-by-date ideas that will likely produce (this is what has invariably happened in the past) some combination of low growth, high inflation and rising interest rates in the US, with, most likely, a falling currency.

This would be sort of like the Trump University or Atlantic City casino debacles, only on steroids. And it would doubtless be sowing the seeds of a wicked bear market of the 1973-74 or 2007-08 variety, or worse.

Still, there are ways–like shorting, holding cash or precious metals or foreign stocks (Japan?) to deal with the fallout. All of these avenues have counterparty or political risk associated with them, however. In the US, for example,

–in 1933, President Roosevelt made it illegal for Americans to possess gold in the US and required that they turn their holdings in to the government

–in early 1929, noted speculator Jesse Livermore shorted the US stock market. As the subsequent collapse developed, he went to his broker to collect some of his gains, only to find that the firm had gone out of business.

–if we want to think darker thoughts, we know that Trump’s social policy is deeply anti-women and anti-immigrant. As a survivor of the Nazi holocaust in 1940s Europe commented to me at a recent event supporting holocaust awareness, the views of Trump and his aryanized religious right supporters sound to her an awful lot like those of the national socialists in the Germany of her youth.

This is where crypto comes in.

To me, cryptocurrencies are similar to chuk kam gold, in that both are stores of value outside the official banking system that’s easily portable and can be hidden from others. In the case of gold, as holdings scale up storage and transportation become significant issues. And moving gold in large amounts across national borders can be problematic.

In the case of crypto, cross-border movement isn’t an issue. Arguably, then, the more likely a Trump presidency becomes, and the more divorced from reality Trump himself appears, the better for cryptocurrencies.

In the broadest terms, it seems to me that the overall effect of Trump’s economic strategy will be to decrease economic growth and increase inflation. (“Strategy” might not be the right word for the efforts of a brilliant self-marketer who doesn’t have much career evidence that he can run a successful business, He has, however, shown an incredible knack for offloading losses onto third parties–think Trump University, the Atlantic City casinos, his pandemic denial).

If so, two issues arise:

–about a third of Federal debt matures in less than 12 months. If that remains the case, interest expense on existing debt will rise rapidly as Trump puts his plan in place. Renewing tax cuts for the wealthy, which is also Trump’s apparent plan, would make the situation worse. Presumably, buyers of Treasuries will demand higher interest rates to offset the increasing risk of holding US debt. This implies losses for current holders of long-term bonds, as well as higher overall interest expense for the federal government

–in addition, about a third of existing debt is held by foreigners, who are subject to home-currency losses if the dollar weakens. They also know that during Trump’s first term, the debt/GDP ratio rose from 100% to 125% (it’s about 122% now). Having seen this movie before, they may well sell in the expectation that the debt/GDP ratio will rise again, potentially driving rates higher and the currency lower. We’ve seen this movie before, too, when it produced the Wall Street collapse of 1989. So domestic investors may well be faster to sell, too.

…a move to cryptocurrencies?

more on Monday

The general idea is to buy stocks in areas that will benefit from a Trump presidency and/or sell short stocks in areas that will tend to be hurt by a Trump presidency. I think the economic implications of a second Trump term are relatively clear, but the trade presumably carries with it both an assessment of the probability of a Trump win and one of the likelihood that Trump will hold to his campaign promises. During his time in office, for example, Trump failed to follow through on his pledge to shore up the country’s aging infrastructure. He did place tariffs on agricultural exports to China, but these mostly hurt the US, which lost business to South American competitors.

–It seems to me that one straightforward beneficiary of a second Trump term would be the oil and gas sector. Yes, he tried unsuccessfully to lower gasoline mileage standards when he was in office. But he seems to be saying that he would attack the other side of the coin–subsidies on the purchase of electric vehicles–during a second term. He would presumably also try to block the proliferation of charging stations. His deep ties with Russia and Saudi Arabia, both highly dependent on sales of oil and gas, and the immense amount of money his orbit has received from the Saudis in recent years (leaving the Clintons in the dust, as one domestic news outlet put it) argue that this would be a high priority

–real GDP growth comes from two sources, working population growth and increases in productivity (output per worker). In very rough terms, the maximum sustainable GDP growth in the US is about 2% per year, half each from increase in the number of workers and from productivity. Of new workers, maybe a third are immigrants. Something like three-quarters of all agricultural workers, a third of construction workers and a quarter of medical and science workers are immigrants.

Trump efforts to halt immigration, and to detain and deport immigrants already here, could easily, by itself, I think, clip 10%-20% off the trend rate of economic growth in the US. This would be an annual loss in GDP of about $125 billion.

It’s hard to compare growth under Trump from growth under Biden. The raw numbers say the Biden years have been much more economically fruitful, vs. close to zero for Trump. The pandemic was a major depressant during the Trump years, however, and I find it hard to separate the negative effects of the disease itself from the harm done by Trump’s decision to deny it was happening. My guess is that the second was worse than the first.

–one of the more striking aspects of Project 2025–a document Trump is now trying to distance himself from–is its proposal to return the Federal Reserve to its pre-Paul Volcker policies, which were heavily influenced by partisan political considerations (basically, money policy was loosened dramatically in presidential election years to aid the incumbent–Ford didn’t and was defeated–but never adequately tightened post election). This ultimately resulted in a half-decade of out-of-control, explosive inflation which reached 8% annually, with 11% in prospect, before Carter appointed Volcker to tame runaway price increases. Under Volcker the Fed Funds rate quickly rose to 21%, with short-term bank loans at 26% and the long Treasury at 20% before inflation began to come under control. It’s hard to imagine the damage to the economy, apart from that it would likely be 1970s-ish, if a Trump administration followed the Project 2025 playbook, written by his acolytes.

the role of crypto tomorrow

caveats

I’ve been a subscriber to Morningstar’s stock analysis service for a while. To my mind, it has a very solid value-oriented approach to the US stock market, with information that’s solid and can be relied on. Analysts don’t appear to me to be steeled by the daily trial-by-fire that tempers their brokerage house peers, but they also don’t have the attached baggage of the need to maintain investment banking ties with the companies under coverage.

I should probably also mention that in the late 1980s, Morningstar summarily rejected my offer to buy 10% of it, and that I’ve received awards from Morningstar for the investment performance of my equity funds.

the politics part

In a newsletter today, Morningstar recounts a study by the Bespoke Investment Group. Starting with $1000 in 1953, you’d have:

–$27,000+ if you held the S&P 500 when Republicans were in power and switched to cash when Democrats controlled Washington

–$61,000+ if you held the S&P 500 when Democrats were in power and cash under Republicans

—$1.7 million if you held the S&P throughout.

the counterarguments, i.e., that this time is different.

There are, I think, two:

–Holocaust scholars/survivors point to parallels between conservative politicians and the religious right in today’s US and the national socialists in 1930s Germany

–the large amounts of money that appear to be flowing into Trump family enterprises from foreign countries (leaving the Clintons in the dust, as one commentator put it); and the unresolved question of whether the seizure of secret documents from Trump was triggered by the realization that the information in some of them had come into the hands of hostile nations.

According to the internet, Michael Hartnett, the well-known Bank of America strategist, was the first to use the term “Magnificent Seven” last year to describe a group of leading large-cap stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla) in the US market. The term has captured the fancy of reporters in the financial media, bringing Mr. Hartnett considerable publicity.

Media personalities are making frequent use of the term, sometimes shortened to “Mag Seven,” because it’s a way of signaling or validating their supposed insider status–a sign that they have deep contacts in the professional investment community and/or that they themselves have knowledge and skills equal to those of the first rank of professionals. It’s a bit like sports play-by-play announcers whose credentials are validated by the former players who sit in the booth with them–except that the financial markets personalities seem to be making the (questionable? highly dubious?) claim that they are/have been/could be players themselves.

What do market professionals get out of all this? That’s the weird thing, to my mind. The track record of an investment firm or a star manager means far less when individuals are trying to figure out who to trust to manage their savings than a financial media endorsement–meaning either an appearance on a financial markets show or even a mention of the manager/firm name in media commentary. This is sort of like going to a Dodgers game, not because of Shohei Ohtani or the team’s many other stars, but because the local TV sports reporter suggested you take a game in.

Still, it’s the case, and the reason that finding a good catchphrase is a weird, but important, part of the retail investment management business.

Do these catchphrases always work out? The answer here is clearly “no.” This is perhaps easiest to see with the 2001 coining of “BRICs,” the quartet of emerging economies Brazil, Russia, India and China. I have no direct experience with Brazil. The other three, however, have histories of not being welcoming to foreign portfolio investors. You may have to own proxies rather than actual share themselves. Financial reports don’t really reflect what’s going on in companies. And the firms offered as investments for foreigners are just as likely as not to have already been rejected by locals. All in all, a hot mess. Owning government debt in these places may have been a better choice than equities–I don’t know. And the BRIC countries themselves did adopt this as a name for their own multinational organization. But the coolness of the term BRICs hasn’t meant these have been great places to put your equity money.