IN-DEPTH: TRANSCRIPTION - LONGWave -11-13-24 - NOVEMBER - The Trump Trade
SLIDE DECK
TRANSCRIPTION
SLIDE 2
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
SLIDE 3 – COVER
The 2024 Election is now (almost) in the books and the one thing we know is that there is a new Sheriff in Town! A Sheriff that believes full throatately that he has been given an unquestionable mandate to clean-up Dodge!
The problem is a little half of the town doesn’t believe there was a problem, are completely against him being Sheriff and don’t believe in his way of doing things!
I suppose it is as the Chinese aptly lament: “May You Live in Interesting Times!”
SLIDE 4 – AGENDA
The questions both sides of the town are asking are:
- Will this new sheriff be successful?
- What type of town will we become?
- Will I want to still live here when he is finished?
I suspect, like this early American metaphor we won’t know until the shoot-out is finally over at the “OK Corral”!
As such I would like to discuss the outline shown here.
SLIDE 5
The first indications of what may be ahead is that the concerning spike in US Sovereign Risk has shocking collapsed with the election. The Financial Markets are showing their relief in a very visible way!
Credit Default Swap pricing stunningly shows, since Trump's Red sweep that the market was using short-dated USA sovereign CDS to hedge the possibility of the Democrats and Kamala/ Watz winning!
Clearly the financial markets had a preference for winning or are suggesting that any path may be better than the one we were on?
SLIDE 6
The election results are still being interpreted in any numbers of ways.
EXIT POLLS SHOWED: A whopping 72% of Americans understood that their country was on the wrong path.
What is clear is that the issue with the town folks was:
- Not immigration,
- Not crime,
- Not equity,
- Not abortion,
- Not climate change,
- Not guns
... in the end the only thing that mattered was inflation!
The town folk only saw the cumulative and continuing rise of the impact of Inflation over the last four years and not the fact that the rate of rise of rise was falling. Wall Street’s and Washington’s view were misaligned!
SLIDE 7
Let’s first start with quickly recapping what our new Sheriff promised the town folk.
Promises Made: But can those Promises be Kept?
- The “Old Timers” cynically believe that political campaign promises are never kept.
- A little less than half the town folk hope and pray they won’t be,
- All the other say they better be or there will be hell to pay at the next mid-term elections!
SLIDE 8 - Immigration
The number one promise made was to fix the mass Illegal Immigration problem believed to be somewhere from 15 to 25M immigrants.
This will mean a potentially very disruptive process in primarily in major US cities. The focus will include:
- Securing the Border
- Mass Deportation
- A War with Mexican Cartels
- Rounding up immigrant criminals, gangs, subversives, sex traffickers and drug
This is not going to be well supported at all by those who don’t even believe there is a problem!
SLIDE 9 - Tariffs
The promise of 10% Tariffs (or higher) was a big part of the campaign which will now involve direct conflict with Mexico, China and the EU!
The markets see this as potentially reigniting a smoldering Inflation problem!
SLIDE 10 – Drilling
The often spouted campaign rhetoric of “Drill Baby, Drill” now flies completely in the face of the cornerstone priority over the last four years of fighting Climate Change and implementing policies of sustainable energy.
We can expect:
- A massive cut in Federal Regulations regarding oil and natural gas exploration,
- Reopening of ANWR
- Removal of the US from the Paris Accord
- Revitalization of the US Energy and Fracking Complex to achieve the US becoming energy independent and a net exporter energy,
SLIDE 11 - Taxes and Regulations
We can expect Tax cuts and roll back of regulations limiting job creation. De-Regulations implemented by Trump 45 but re-implemented by the last administration. We are in an on-again – off-again world of regulations that is tough to run a business in!
SLIDE 12
The net of all these campaign promises is shown here which I chronicled during the campaign.
They total $11.5T IN REVENUE TAX CUTS over a 10-Year Revenue period:
- Extend the 2017 Trump tax cuts: $5.350T
- Exempt overtime income: $2.000T.
- End Taxation of Social Security benefits: $1.300T.
- Exempt Tip income: $300B.
- Exempt Income of Firemen, Policemen, Military and Veterans: $2.500T trillion.
It is hard to believe these will get through congress but they are on the table of Promises Made, Promises Kept!
SLIDE 13 – Social Programs
We also have a raft of social program changes ranging from:
- The elimination of the Federal Department of Education,
- To Purging DEI programs in colleges and schools,
- To stopping Transgender Competition.
SLIDE 14
What should be obvious from this recap of stated changes supported by the majority of the popular vote and a red wave is that people want and demand change!
They are afraid the American Way of life is disappearing and they are desperate to keep the American Dream alive and possible for themselves and their family!
What we are talking here are changes that border on what can only be termed a “Revolution”!
Changes to this degree come with unprecedented turmoil!
Can these sorts of changes actually be implemented?
What realistically should we expect?
SLIDE 15
The organization required, is itself alone, is a massive impediment to achieving something like this.
However, when we look at Project 2025 which is a Presidential Transition Plan we see some massive work that has been underway over the last four years by a consortium of ~50 conservative organizations to prepare for this degree of change.
Trump has been adamant that he has not even read this plan. But that is actually relevant?
The plan will deliver to his transition team over 3000 vetted and trained candidates ready to fill the political appointments required to be filled by a new administration. These candidates are certified as committed to Trump’s plans and leadership.
Apparently, they are trained in what they will face as obstacles by what is referred to as the “Deep State” which fought everything “Trump” in his first term . The expectant Deep State is 98% Democrat by political preference and personal voting.
There can be little doubt Trump’s transition team will fully endorse much, if not all, of this ready-made invasion landing force.
Just maybe there is a chance of Trump actually pulling off some of this mountain of change since he has swept control of Congress?
Based on this and Trump having already been President with a raft of experience from his first term (and 4 years of then sitting on the sidelines in an attempt to become Trump #47) he also has a full slate of loyal, competent and ready cabinet choices available on day one.
This is starting to look interesting – maybe even possible?
SLIDE 16
What might we therefore expect? It looks like the following are real possibilities:
1- TAX CUTS:
-
- A full extension of the 2017 tax cuts that expire at the end of 2025,
- Likely including reinstatement of some expired business investment incentives.
- Likely some modest additional tax cuts to accommodate Trump’s campaign proposals,
- Expect these proposals to be scaled down (would only cut taxes by a few tenths of a percent of GDP, primarily focused on individual income taxes and not corporate.
2- FISCAL SPENDING:
-
- With the Republican sweep federal spending growth will likely rise somewhat, particularly on defense.
3- REGULATIONS:
- Likely a lighter-touch approach, particularly with regard to energy, financial, and labor policies.
- While some aspects of antitrust policy might ease slightly, expect scrutiny of the tech sector to continue.
SLIDE 17
4- TARIFFS:
-
- We can expect Trump to impose tariffs on imports from China that average an additional 20pp.
- The10-20% across-the-board tariff that Trump has proposed is very possible with a 40% chance it will be implemented.
- Expect auto tariffs to come into focus on auto imports from the EU (though this could be applied more broadly).
- Estimates are that this combination of tariff policies would provide a one-time boost to core PCE inflation that peaks at 30-40bp and a modest drag on GDP.
- Trump Tariffs could derail the Fed cutting cycle. The Fed is likely to pause the cutting cycle if large tariff increases are announced, assuming the economy is still on solid footing.
5- IMMIGRATION:
- Expect reduced immigration to around 750k/year, slightly below the 1mn pre-pandemic trend.
SLIDE 18
6- EUROPE:
- Expects Trump’s policy agenda to affect the European economic outlook via several channels.
- First, renewed trade tensions are likely to weigh materially on growth. While the proposed 10% across-the-board tariff is a clear risk, expectations are that Trump imposes a more limited set of tariffs on European economies, targeting primarily auto exports.
- Second, Trump’s re-election will likely entail renewed defense spending and security pressures for Europe. Any resulting growth boost, however, is likely be limited by modest military spending multipliers in Europe, upward pressure on long-term yields from higher deficits and negative confidence effects from elevated geo-political risk.
- Third, Expect small net spillovers from shifts in US macro policy and financial conditions. Taken together, analysis points to a 0.5% hit to real GDP in the Euro area, ranging from 0.6% in Germany to 0.3% in Italy, with a moderate 0.4% hit to the UK. Expect the bulk of the growth hit to materialize between 2025Q1 and 2025Q4.
SLIDE 19
What have the financial market reactions been so far to all this? Actually, pretty good .. so far at least …
Markets are signaling expectations of:
- Higher growth,
- Lower volatility (as shown here) and inflation .. and
- A revitalized economy for all Americans.
SLIDE 20
- Trump’s election drove the largest single-day increase in the U.S. dollar in more than two years and third largest in the last decade. This is a vote of confidence in U.S. leadership internationally and in the dollar as the world’s reserve currency.
- The Russell 2000, an index of small-capitalization stocks, also rose by the most in two years due to investor expectations that the Trump economy will disproportionately benefit smaller businesses. An exchange-traded fund that tracks the Russell 2000 index saw its largest single-day inflow in 17 years.
- The rally in equities was particularly unusual given that interest rates also moved higher. The combination of the steepening yield curve, stable inflation expectations and the rise in stocks indicates that markets expect the Trump agenda to foster noninflationary growth that will drive private investment.
- Even amid the expected pro-growth agenda and the associated increased demand for energy, the price of oil fell. Energy stocks rallied at the same time, signaling expectations of more energy production and geopolitical stability.
SLIDE 21
What is clear and hanging over everything is what can best be described as some boundary condition realities:
- INFLATION RISKS will mount further from here, given likely tariffs and fiscal stimulus. Moreover, the backdrop is already one where central banks are easing policy, whilst growth data is surprising on the upside. So this is a prominent concern that could prompt a more hawkish reaction from the Fed. DB has warned about inflation risks in recent months and since the bank's most recent piece in September the 2yr US inflation swap has risen nearly 50bps.
- FISCAL CONSTRAINTS: The financial context is very different to Trump’s first victory in 2016. Fiscal constraints are tighter given higher Treasury yields and a higher federal debt, whilst asset valuations are much higher as well.
- DEBT CEILING: Assuming we get unified government (which Polymarket places at 99%), the risk of a debt ceiling crisis has just collapsed for the next two years.
- POLITICAL WINDOW: US politics is very volatile: In 9 of the last 10 presidential/ midterm elections, at least one of the White House/Senate/House of Representatives has changed control. So it’s entirely plausible the political landscape changes quicker than many expect today.
SLIDE 22
If all this so far is leaving you a little confused, a little concerned and overall perplexed – you are not alone among most of the town folks.
Maybe we need to stand back for a second and see things from Trump’s perspective. Frankly, it is currently the only thing that truly matters until the dust clears!
President Ronald Reagan got it and so did Donald Trump (sort of) in his first term.
There is a major difference between Government Fiscal Investment and Government Fiscal Spending. Both will potentially grow GDP, but the former in a powerful way, the latter through chronic deficits.
SLIDE 23
The Reagan Economic miracle took time and cost him his first term's mid-term elections, but it began to work and secured his second term. What was the Fiscal Investment that created the miracle? It was about investment in the people that power the economy. He built it on two cornerstones to empower Fiscal Investment:
- Reduce Strangling Regulations,
- Reduce Corporate and Personal Taxes
Trump did both of these in his first time to a large degree over an "anything but Trump" opposing congress.
What Reagan got (with a supporting congress) was the realization that the US government had grown to the point that it was now the problem! Government control, regulations, restrictions and taxation was strangling the US economic engine.
SLIDE 24
Reagan's understanding of the unorthodox Laffler Curve guided his thinking and Trump's.
An investment is different than simply the spending of tax money. Fiscal Spending is the allocation of tax money in the form of redistribution of wealth. Today tax money and deficit spending is allocated in a fashion that it goes to toward consumer consumption in the form of transfer payments. There is no investment, but rather the consumption of money.
Fiscal Investment is not about redistribution, but rather allowing those who have the money to keep it and use it to produce personal wealth. Their success, (let's call it personal greed, ambition or even vision), is the only proven sustainable factor to creating investment and wealth. That wealth grows taxation and increases jobs and wages. This in turn propels independence, positive sentiment, risk taking and consumer confidence. We go to a virtuous upward cycle from a downward economic spiral.
SLIDE 25
This may all sound academic but it isn't - it is reality of why real democracy and real capitalism works. We have been living under something that is best described as "Creditism" and it is anything but Capitalism!
Capitalism is fundamentally about Savings being invested into Productive Assets which increases the overall standard of living. Creditism is about Credit being created that is used for consumption. In a country like the US that now consumes much more than it produces, you are automatically trapped into a downward economic spiral.
There is only one way out and that is Fiscal Investment!
SLIDE 26
The problem in America is the growth in jobs is in government and consumer consumption services. Jobs need to be created in higher paying production of goods and services that are exportable.
SLIDE 27
Today, that is the domain of China since the US relinquished it to the globalists and exported 54 thousand US factories to China when they entered the WTO in 2002.
SLIDE 28
FISCAL INVESTMENT
Trump's Fiscal Investment is about using Tariffs to incent (or more apply - force) jobs and factories back into the US.
Trump's economic advisor Scott Bessent, who is being considered for Treasury Secretary, is already working on this.
Bessent favors a ‘T+X’ tariff plan that gives global firms, say, two years to build factories in the US to avoid sanctions, reducing most of their direct inflation impact, but getting all the capex, supply-side, and trade-deficit narrowing gains.
Samsung immediately said this is what they plan to do. That might mean new economic models are needed for US tariffs - if economists want to model the world as it is rather than as they (or their models) want it to be.
Trump Tariffs' will initially likely still elevate prices, but if successful in fostering a "reshoring" renaissance it may be the only way out of this death spiral.
It is no doubt a calculated gamble, but maybe the only one left on the table for a country clearly headed down a road towards a dismal and inevitable debt crisis?
SLIDE 29
We are told that we are a service economy - which is true.
What we are not told is an economy can’t survive unless it exports those services to a greater degree than it imports goods.
The central issue in America is simple: We consume more than we produce and have for decades.
It mirrors our exploding trade deficit and fiscal deficits!
SLIDE 30
Trump has been extremely clear on the campaign for those actually listening!
ON TARIFFS
“To me, the most beautiful word in the dictionary is ‘tariffs,’”
Trump said in an interview with John Micklethwait, editor-in-chief of Bloomberg News, in October.
“It’s my favorite word.”
ON RESHORING
He added at the time,
“You see these empty, old, beautiful steel mills and factories that are empty and falling down,” referring to facilities that used to make goods in the United States.
“We’re going to bring the companies back.
We’re going to lower taxes for companies that are going to make their products in the USA.
And we’re going to protect those companies with strong tariffs,” Trump said.
SLIDE 31
If Trump is even mildly correct he could unleash and tap into the animal spirits of corporate deal making!
Trump and his economic advisors are well aware that M&A activity relative to GDP is well below-trend levels, leaving room for some serious acceleration before it becomes credit negative.
Further, given the level of rates, debt-funded M&A initially might see a more gradual uptick versus strategic activity, accelerating appreciably as we get closer to the end of the cutting cycle.
SLIDE 32
Trump is also acutely aware that the dramatic growth in private credit has been a major theme in credit markets.
The growth has been massive and has not yet been fully tapped.
This could propel an unlimited amount of investment!
SLIDE 33
Currently it has prompting talk about greater regulatory oversight and scrutiny.
This is exactly where Trump’s team can make some strategic moves.
The expected focus on deregulation in Trump’s second term dampens this prospect, which bodes well for the continued growth of private credit.
SLIDE 34
There may be no better time to take on China than now as foreign investment is plunging and has went negative for the first time – ever – or at least it came onto the global export scene!
There may be just a chance that Trump 2.0 may pull this off!
SLIDE 35
So what can we conclude?
SLIDE 36
The “Trump Trade” my actually be about the
“Trump Card”
that Trump now holds in his hands!!
The future of America depends on it!
SLIDE 37 – RE-PRIVATIZE THE US ECONOMY
While markets expect a reinvigorated American economy, the Biden administration’s mismanagement has created serious challenges that the new Trump Administration will need to overcome.
1- STOP FALSE & UNPRODUCTIVE ECONOMIC GROWTH
Economic growth has been propped up by the out-of-control federal deficit, which hit 7% of gross domestic product last year.
Trump has a mandate to reprivatize the U.S. economy through deregulation and tax reform to spur the supply-side growth that he delivered in his first term. That will be essential to restarting the American growth engine, reducing inflationary pressures, and addressing the debt burden from four years of reckless spending.
2- STOP THE DISTORTION OF CAPITAL ALLOCATION
The U.S. economy also faces the consequences of the Biden administration’s distortion of capital allocation. U.S. competitiveness has been weakened by destructive energy policies and the channeling of investment toward a quixotic energy transition and semiconductor fabrication plants subject to government mandates that render them uneconomic. Trump will deliver a renaissance in American energy investment and ensure that trade is free and fair, supporting long-term U.S. competitiveness.
Allowing the private sector rather than the government to allocate capital is crucial to growth. The U.S. must reform the Inflation Reduction Act’s distortionary incentives that encourage unproductive investment, which has to be sustained by a lifetime of subsidies. Overhauling the regulatory and supervisory environment will encourage more lending and reinvigorate banks.
3- RESTORE FAITH IN THE US ECONOMY & DOLLAR
Trump must also address government borrowing. U.S. interest expense exceeds the defense budget. Treasury Secretary Janet Yellen has distorted Treasury markets by borrowing more than $1 trillion in more-expensive shorter-term debt compared with historical norms. Terming out that debt in favor of a more orthodox borrowing profile may increase longer-term interest rates and will need to be deftly handled. The only way to return to a prudent borrowing strategy without upsetting financial markets is restoring investors’ faith in the economy and preserving the dollar’s global role.
Let me emphasize, without restoring faith in the US Dollar, Trump can never expect to beat Inflation
The failure of Bidenomics is clear. But Mr. Trump has turned around the economy before, and he is ready to do so again. Twenty-three Nobel laureates might not understand this, but the financial markets have clearly spoken.
The town folks need to now remember they are neither Democrats or Republicans – They are Americans
America‘s future may depend on Trump and the town folks fighting for America!
SLIDE 38
As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
SLIDE 39
I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
