The Brewing Trump Trade
Taxes, Rates, the Dollar...and the path forward for the empire
Reading Time: 16 minutes
Prediction markets and polls notwithstanding — this election will be extremely close. No one knows what will happen so I will add layers that apply to both candidates even if will focus on a Trump victory.
So… how will the landscape change in a Trump 2.0 Presidency?
Investors are looking for clues from:
What Trump/Vance are saying
What Donald tried to do last time
And what actually happened last time
For me that’s not enough — you need CONTEXT. And so to do this I will tackle this thematic from the following angles:
Politics
Geopolitics
Economics
Sentiment
Context Reading
Big Picture Context
The US is on the cusp. Global competition from other “hegemons” has been increasing for decades. The Eastern bloc (basically, the BRICS) is consolidating power and uniting against the West in all sorts of ways.
Instead of seeing the Big Picture (addressing systemic problems and global competitiveness) the powers that be in the States are wasting energy on “Peak Empire” domains like divisive domestic politics and short-term solutions with no substance. Typical!
American Politics sees how far society has fallen — and they understand that shooting for long-term solutions means a pain that modern society has no will to endure. And so, they dangle in front of thm short-term solutions that will only amplify the problems — but a bit further down the line!
Kicking the can down the road… This is the mindset that got us where we are.
I think Trump sees this — I think he understands the position of the US on the global arena and is willing to make geopolitical (and not only) concessions for the sake of becoming more economically efficient.
This is the business-minded approach, right?
The thing is, Donald is forced to play the political short-term game too. But even worse, he is forced to rule (if he wins) the country in a much worse state than when he took over in Trump 1.0.
—> The cure is worse than the disease.
Following the 4 layers mentioned above, let’s analyse the setup with the intention of uncovering traps, risk and opportunities from a Trump 2.0 Administration.
Let’s dig in…
1. US Politics
Let’s start locally. What would happen within the States if Trump/the Republicans are elected? What are they telegraphing?
I think Florida Senator Rick Scott sends a message that all Republicans agree with — that Bidenomics must be stopped. The problem is, the economy will take a long painful time to adjust out of the incessant fiscal pumping of the last few years (and yes, that includes Trump’s $2 trillion Covid-era stimulus package).
US Senator Scott revises what’s happened in the past few years, I highlight a few excerpts I think are important for context. Read his 2-page letter here.
Biden and the Democrats hijacked the COVID-19 pandemic to force America into a new era of super-government control and, with it, unbelievably reckless government spending. Under the Biden administration, the national debt has skyrocketed by nearly $8 trillion and is now nearly $35 trillion.
You would think that in the face of these terrifying numbers, Biden would reverse course. Instead, he’s doubled down and recently proposed a $6.8 trillion budget.
Let’s put this into perspective: the population has increased by only 2% since 2019, but spending has increased 55% during the same time. When you think about it, that is $400,000 in government spending per new person in the population.
The cost of this spending and debt is skyrocketing inflation and a historic burning of tax dollars on federal interest expense. These are the consequences of this administration’s failed Bidenomics agenda, and if it is not stopped it will destroy our country.
Inflation has skyrocketed since Biden took office. The cost of eggs is up 84% and beef is up 47%. The cost of rent is up 21% and the price of gasoline is up 63%. These high prices are piling up, and living day to day now costs families in my home state of Florida an extra $1,203 a month. This means that to live the same life they did before Biden took office, folks have spent an additional $28,812 in after-tax dollars over the past three years.
Our government’s massive debt and reckless spending caused this, and people in every state are rightly furious that so-called leaders in Washington are fueling the problem.
A Return to Central Planning
George Soros protégé and former CIO Scott Bessent is extremely critical of Bidenomics. This is a copy of a speech he made this June.
The Biden administration chose to put central planning at the heart of its economic agenda. The resulting economic calamity was the predictable result.
Bessent, an economic historian, gives us some great historical context.
He explained that Reagan took several years to unwind excessive government interventions of the previous Democratic administrations, and by doing so unleashed the “productive capacities of the U.S. economy”.
That state of affairs held until…
But the Obama administration featured a return to heavy government intervention in the private sector, particularly through its turbocharged expansion of the regulatory state, delivering an economic constipation similar to that which plagued the U.S. before the Reagan revolution. The Trump administration’s pursuit of tax reform, deregulation, and fair trade produced noninflationary growth that generated the fastest increases in real wages in a generation.
YES — context always matters, Biden took over during the peak of Covid/Post-Covid era with geopolitical risks exploding — while Trump ruled mostly during benign times. Obviously inflationary risks are different…but that’s not the crux of the matter: Bidenomics is an abomination.
Yet the Biden administration actively chose to disregard the roadmap for economic dynamism that Presidents Reagan and Trump left behind. Instead, the Biden administration reached back for the Carter model. “Bidenomics,” or under Treasury Secretary Janet Yellen’s more nomenclative framing of “modern supply side economics,” is neither modern nor supply side nor economical. At its core, Bidenomics represents a return to the discredited economic philosophy of central planning.
President Biden’s economic team hoped, in the words of former National Economic Council Director Brian Deese, that the Bidenomics experiment would result in a “new equilibrium of higher productivity, higher wage growth, [and] higher GDP growth as a result of this set of policy interventions.” But like all prior attempts at central planning, it failed to deliver prosperity, and instead generated a substantial upward price-level shock, accompanied by an insidiously persistent inflationary environment that has eroded standards of living in the United States. Continual economic anxiety has replaced abundance and prosperity.
Domestic Politics Conclusion: There will be a push to unwind Bidenomics — but with the economy having “adjusted” to post-Covid and subsequently Bidenomic stimuli; there are downside risks to that unwinding.
“My optimism is tempered by the insight that the time when past excesses are corrected is the period of greatest risks.” —George Soros
Dollar Reserve FX and US Manufacturing
VP Candidate JD Vance seems to want a weak Dollar.
He mentions his tough childhood growing up in an Ohio struck by the loss of manufacturing jobs — as Eastern competition rose to take rural America’s loaf of bread.
JD Vance (and many around him) seem to feel that having the world’s reserve currency is a burden to the US economy. Their reasoning is that a strong dollar means expensive prices —> making it impossible to compete with foreign markets.
Philo’s Take: First-level thinking tells you economies with cheap currencies benefit from boosted exports. But if it were so simple, any country with a falling currency would be benefitting from increased exports.. That isn’t the case.
—> There were other things happening that caused manufacturing job losses in the US. Primarily, the rise of China and its entry into the WTO in 2001 — a much more competitive exporter, while the US was losing its competitiveness. Business is tough!
In actuality, a strong dollar means the US can borrow on the cheap, using the money to spend within its economy and sustain jobs. If it couldn’t borrow at beneficial rates, it would have to curb government spending —> and that fiscal contraction would probably bring a recession.
So, let’s see if Vancenomics manages to bring down the dollar by intervention, and how that will affect the US’s ability to fund its deficit on the cheap from foreign lenders... More context here: Peak American Empire
We’ll get to the conclusion in the end.
Now let’s move on to potential effects on clean energy, oil & gas, legalisation of cannabis, education, taxes, Big Tech and more.
Dirty Energy
The Democrats are very pro-Clean Energy. The Republicans are the opposite.
Drill, Baby, Drill!
With a Trump White House we are looking at a reversal of green-energy related subsidies and a loss of jobs in that front. We are also looking at increased oil & gas drilling, which would benefit oil & gas stocks.
But don’t read too much into it, if the market conditions aren’t ripe for more capex in drilling — it won’t happen. Administrations tend to take unfair credit for what happens in the oilfields..
As for clean energy — expect it to get decimated across the board under Trump/Vance. There are of course particularities — as Elon Musk says he doesn’t mind if Trump cancels Biden’s EV tax incentives.. Let’s see.
The Marijuana
Kamala Harris is openly pro-legalisation of cannabis, but Trump/Vance aren’t. Expect tough times for cannabis companies if Trump/Vance get in.
Vance has said that he believes cannabis should be regulated at the state level — Trump said that too before he was elected, but later reversed his stance..
The Mary Jane is still not legal in the US — but legal for recreational use in 24 States.
Read Shrub’s piece on the setup from this January.
Education as a Subsidy
JD Vance feels very strongly against University Endowments benefitting from lower taxes — with a Trump Presidency, endowments could get killed on capital gains tax: From a 1.4% Tax → 35% Tax! 😱
Senator Vance announced Thursday that he will introduce a bill that would tax the capital gains of college and university endowments at a whopping 35 percent, up from the meager 1.4 percent rate the endowments currently pay. The bill is tailored to only affect America’s largest higher education institutions.
JD here is explaining that some “Woke” universities got TOO strong, and they are pushing their weight around in social causes that he calls “insanity”. They can fund their causes, but not with US government subsidies…
“The endowments at Penn, Harvard and MIT have a combined $95B+ in assets — yet only pay a 1.4 percent tax rate on net investment income,” Mr. Vance wrote on X on Thursday. “Then they use these funds to push DEI and woke insanity. My bill would tax the largest endowments at 35 percent — it’s going to the Senate floor right now.”
—> Earlier this year Biden unveiled a program to cancel student debt, with a cost of well over $100 billion. The announcement states the debt relief would affect 30mln Americans. Press Release.
Just wow… 🤦🏻♂️
TAXES
Under Trump, taxes were reduced. The act is still ongoing, even under Biden.
The Tax Cuts and Jobs Act (TCJA) was a big change to the tax code, signed into law by President Trump on January 1, 2018.
This law brought the biggest changes to taxes in 30 years, affecting both regular taxpayers and business owners, mainly through tax cuts. However, many of these benefits for individuals are set to expire in 2025.
MASS DEPORTATIONS
Trump pledged “the largest deportation in history” if elected..
Here’s the quick and dirty 👇
Estimates of the undocumented immigrant population vary widely, with Trump claiming 18 million and some suggesting up to 30 million. Total US population is >330 million.
Skepticism & Logistical Hurdles: ICE officials and experts point out that mass deportation is extremely complex and resource-intensive, requiring not just planes and travel documents, but also coordination with host nations. This is obvious!
The Cost: Deportation of this magnitude would involve astronomical costs, from transportation to detention. Current budgets and resources would need to be massively expanded.
Political and Ethical Concerns: The proposal raises ethical concerns, especially regarding the deportation of families and children, and the strain it would place on local law enforcement and federal agencies.
In short, while the idea of mass deportations is being discussed, there are significant doubts about its feasibility, cost, and potential impact.
The Downside: Illegal or not, immigrants (the ones working) increase supply in the jobs market — usually taking on jobs that many Americans shy away from.
As in the case of Post-Brexit UK, there will possibly be a massive lack of supply of “hands” wreaking havoc in the economy and increasing the cost of hiring…
As with any political decision, there are financial/economic costs to bear. No decision comes with no cost and all reward.
2. Geopolitics
If you think the position of the United States in the global arena is the same as it was 30 years ago, or even 10 years ago…let’s just say we strongly disagree. The signs are everywhere.
Donald knows this too, and all he wants to do is stop making stupid mistakes that are digging a bigger hole for the US to crawl into. In this short video from Louis-Vincent Gave of Gavekal, Louis states that the main personalities around Trump 2.0 are ANTI-war and not pro-war.
I agree with Louis here that Trump would look to pull back decades of US intervention across the world, and try to repair US relationships with the world.
Ukraine
The writing is on the wall that a Trump 2.0 Admin would force Ukraine to find a deal with Russia to end the war. We don’t have any more visibility about the details of this, but we know Russia has signalled a willingness to negotiate as well.
This is very bullish for the EU (and the Euro), which have been both suffering from the conflict next door. The war forced Europeans to cut ties with Russia, sanction it and try to adopt energy-saving policies to reduce reliance on Putin’s Russia and hurt it economically. Note: It doesn’t seem to be working.
But energy security aside, the idea that the EU isn’t really behind the conflict with Russia, doesn’t have its own army, is financially reeling and is politically torn into pieces — isn’t exactly bullish for the future of the European project.
—> Read this for more context: Is the Euro here to stay?
Israel and the Middle East
Both candidates have the same approach towards Israel — as much military and financial support as required. Therefore, I don’t expect any sudden changes in policy, regardless of who replaces Biden.
But I am not sure that the US is willing to up the stakes — that is to say, fight a war with Iran and its proxies. I think the US wants a stable Middle East because its interests in the region expand further than the territory of Israel. e.g. The Kingdom of Saudi Arabia.
A war with Iran would mean the whole region goes up in flames, and that’s a pandora’s box nobody wants to open. Sorry Bibi.
CHYYNA!
The Trump tariffs were extended by the Biden Administration, and I don’t think Trump 2.0 is going to repeal them! But in a dynamic globalised world, tariffs are a lose-lose..
This is what I meant when I mentioned short-term solutions that will only amplify the problems. Bullying China and applying tariffs to keep them down will probably not work.
It will especially not work when half of the US supply chain starts in China.. What the heck people??! 🙄
The more the globalised the world, the more the interconnectedness.
3. ECONOMICS & SENTIMENT
In the short-run, they tend to go together — right? Animal spirits and all.
—> Many in the States believe that a Trump/Vance administration would be very bullish for manufacturing and other industries. This will probably lead to increased investment in the real economy — which will result in green shoots and an economic boon.
The problem is when/if those greenshots don’t prove to be sustainable.
Big Tech & Regulation
It’s clear that the Democratic party and Big Tech are in bed together — while the Republicans are clearly not!
—> JD Vance has touched on Big Tech yielding too much power and using it to censor Americans. There are a number of antitrust cases open by the DoJ against Big Tech companies and I talk about them extensively on Philoinvestor.
I doubt that a Trump/Vance administration would antagonise increased scrutiny from regulators on BigTech..
Remember that Big Tech (like Zuckerberg’s META and Twitter before Elon) bullied and censored Trump. Now Donald and his clique want to take revenge.
Trump has called Big Tech “too big” and “too powerful” while explaining that he doesn’t want to destroy them.
Layering on top the antitrust cases open currently, I think Big Tech is facing a new reality whether Trump is elected or not. But in case of a Trump 2.0, I think anything goes in terms of Big Tech scrutiny.
—> The more Big Tech is seen as a villain, the more they become a target for politicians.
Fiscal Expansion
As I elaborate in Biden’s Techno-Imperial Cycle — the excessively brave fiscal expansion since 2020 made the US economy addicted to “helicopter” money..
The thing is, Trump’s advisors (like Scott Bessent👆) speak against all this spending and at a time where AI/Datacenter spend could moderate — the US economy could be slowing down while the batton is passed to monetary policy for stimulation.
Will it have any effects? Who knows. We will be here to assess but my hunch says the US will find itself in a position where they need to service their increasingly gigantic debt while tax revenues are moving sideways — OOPS! 😬
Note: fiscal deficits are already out of control.
Note 2: everyone is in denial about this.
The Almighty Dollar!
Vance may just get his wish — inflation is already turning down and the economy is showing signs of weakening. This means lower rates —> weaker USD.
Let’s see if the weaker dollar will support a revival of manufacturing in the US as some are looking for...
My view is that you need competitiveness to do that, not a weaker currency. And if you try to regain your competitiveness by simply applying tariffs one of your biggest trading partners — it probably won’t work out!
The problem with tariffs (both Trump and Biden used them) is that they are uneconomical. This ends up being a drag to the whole economy — making it less productive in the process. This video gets into the nitty gritty of tariffs.
The Wealth Effect & its Power!
In my view, one of the main reason the US economy (and top-50% US consumers) are so strong is the wealth effect. The haves are not only making big money on their cash, they made big money on their stocks (and property) as well.
US household wealth has doubled since the peak of 2008, and I doubt other major economies can say the same… *sigh*
This creates a strong psychological dynamic to the spending patterns of individuals — having a direct effect on the economy. When your stocks are falling or have gone sideways for 10 years, you won’t be spending the same way will you?!
—> My point is, the absolute level of the stock market has an effect on the economy…and the economy has an effect on the stock market 🔁
This process feeds on itself in a number of ways — but what are the effects when stocks drop and rates drop lower?
I think the seemingly-invisible upwards push of the wealth effect will truly become invisible when markets start correcting. Then we will get to see the true power of the US economy and the US consumer.
Conclusion
A Trump/Vance administration has a number of minefields to avoid, with cyclical connections and things totally out of their control. The NASDAQ could literally drop 25% from here simply if the market re-assesses the effectiveness of Big Cloud capex spend. Yes it’s so simple.
We will be here to assess events as they come. Join the Philoinvestor community chat for a further discussion.
For the course, philomastery.com
Sincerely,
Philo 🦉