The Ice Begins to Break

The Ice Begins to Break

Michael Grant

US elections of early November have fueled a range of inevitable commentary, including its likening by some observers as an "earthquake." Of course, this belies the fact that conventional analyses "never saw it coming." This is why the mainstream media is going the way of other legacy industries and why fewer and fewer people pay attention: its entire framework of representation is outdated.

Love him, hate him, or simply put up with him, Donald Trump is a genuine political phenomenon. This is not because he has reassumed the US presidency-someone does that every leap year-but because he has created a political narrative that will bind those who follow him. Donald Trump has moved the consensus on numerous societal issues that are bound to remain with us long after he has left the stage. This is rare in political life.

Investors normally prefer to speak in the language of plain economics; the primacy of the business cycle implies we should downplay political and social commentary. However, today's circumstances are different because so much of this is not about Trump-it is about the forces that created him, of which he is the expression. Investors need to understand those forces because they are playing out across the West, and they signal where we are going.

Trump: Consequence, Not Cause

Over the past year, we have described an important shift in the investment landscape-one where the old world of monetary domination is giving way to a new one of fiscal supremacy.

In light of the election, this narrative might be framed better: fiscal supremacy is just one aspect of a more fundamental force at work in Western societies. Here we refer to the re-enfranchisement of those who view themselves as disadvantaged and invisible to those who inhabit the metropolitan spheres. These groups reject the trends associated with globalization and its numerous offspring. The election results suggest the ice is finally breaking.

In this interpretation, Trump is not some kind of modern pied piper as he is facilely caricatured by the media. Instead, he is the creation of the political awakening of those who see themselves on the periphery. Correctly or incorrectly, the narratives of de-industrialization, financialized capitalism, cultural liberalism, and mass migration are blamed for this marginalization. Trump's political skill is to have understood and captured this unstoppable wave of re-possession of the public space.

Investors should assume that what remains of Western working classes will not disappear quietly into the night. The strikes at Boeing and the dockworkers are not flashes in the pan. Some kind of new post-liberal world is emerging, and it will challenge the orthodoxies that have underpinned financial markets through the current century. It is a new era of protectionism, industrial policy, defense of borders, and protection of purchasing power. Fiscal dominance should be viewed from this perspective.

Today's narrative of fiscal dominance goes well beyond government economics. Trump's messaging is built around the themes of expansion, of investment, of jobs and prosperity. Notably, this is a difficult world for central bankers because they no longer lead. In the prior era of deflation, the Fed was the savior. But in an inflation setting, the Fed becomes the target for blame. Its dual mandate becomes problematic because expansion and inflation move coincidentally in the same direction.

Wall Street's bullish applause following Trump's victory reflects recollections of 2016 when this movie first premiered. Yet, there are numerous contrasts between then and today starting with what J.D. Vance told the Republican convention: "We won't cater to Wall Street. We'll commit to the working man." Populism is skeptical of big corporations, and Vance argued against further reductions in corporate tax. He has staked out other positions against big business as well.

Most investors were caught unprepared for Trump 1.0. Trump himself improvised and delivered the easy wins, such as cutting corporate taxes. In 2.0, the winning side is more prepared and more experienced in challenging bureaucracies. Trump has developed a more aggressive agenda while watching from the sidelines how pernicious inflation can be for politicians. Most importantly, Trump 2.0 will emphasize the protection of the purchasing power for the average worker. Trump's success or failure will be defined on this basis.

On tariffs, the big showdown will be with China. China will turn further inward while Europe will try to buy Trump off with more US gas purchases and defense spending. Politics demands a degree of re-industrialization, and that must exclude China in some form. The decoupling narrative between China and the West has a long way to go, and many corporations have only just begun to understand these shifts. In our view, US tariffs on smartphones produced in China are inevitable.

Trump is portrayed as personally unpredictable, yet his political narratives are remarkably stable. For this reason, today's market consensus that Trump is "good for the economy" is probably right. We know what he intends to do. The conundrum is that he is shifting the economic rules in fundamental ways, and the implications for markets are complex and will take years to interpret. Timeframes will matter as investors assess the good versus the bad of his policies. This is the true source of his "unpredictability."

Meanwhile, the starting point for financial assets today is strikingly different from 2016. Everyone is fully invested, everyone is bullish, and risk premiums are historically low. While some of Trump's policies like deregulation are akin to the supply-side reform of the early Reagan years, the relative positions of capital versus labor are completely reversed. Reagan's reforms pointed to a bull market in returns on capital. Trump is aiming to do the same, but for labor's share of the economic pie.

Trump 2.0: A different kind of winning

Source: Macrobond.

As we highlighted in September, US long-term bond yields were already vulnerable before the election. Whatever form it takes, the gist of Trump 2.0 is that inflation and borrowing costs will be higher relative to baseline. If Trump World is a success, it will be because Main Street rather than Wall Street wins big. The corollary is that financialized capitalism will be second fiddle for the first time in decades. Investors need to consider a very different kind of financial landscape in the coming years.

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