Blain’s Morning Porridge 8th November, 2024: A Bonfire of Regulations and the US Market Threat Board.
“Après Moi le deluge..?”
Let’s be dispassionate about the US election result. What kind of upside will a Bonfire of Regulations and Surging Confidence bring to markets? What are the risks of Trump’s new start for US markets? The next four years look… interesting.
OK – It’s Friday, and I promise this is last time I write about US election, this week….
How is it all going to pan out for markets over the next few years? First thing I did when I got home from Washington y’day was throw my crystal ball in the wash and give it a full factory reset after my spectacular wrong-call predicting a Harris win. Lots of readers have reminded me to remain dispassionate about the result. I suspect the next 4-years will be far less bad than Democrats and other Lefties predict, but still… interesting in the Chinese sense of the word. Will a Trump boom inevitably lead to a Trump bust?
Let’s be honest: Trump crushed it. That should not have been a surprise – although I called it wrong. Incumbents across the globe have been gutted this year. The most telling thing about Harris’s campaign is that in every single one of the 3144 US counties that voted, Harris underperformed Biden’s share of the vote in 2020. That shows just how much the electorate weren’t buying her message – inflation and higher interest rates were what mattered. There are a thousand-and-one reasons Harris lost – and the Democrats need to understand and absorb every one of them by 2028.
Let’s move on..
If you have ever wondered if there is any real connectivity and causality in the intersect of markets, economics and politics, (the stuff I spend my early mornings writing about), then the market moves since Wednesday confirm just how important they are in terms of market confidence, direction and hopes. The S&P is up 5%, the 10-year treasury soared from 4.26% to 4.47% at one point, but is now back to 4.33% after the Fed and Bank of England both eased rates by 25 basis points. Individual stocks with narratives attached to Donald Trump have soared. Tesla is up 22% – much to my chagrin.
Remarkable days indeed. To understand it, and the threats such confidence may raise, we need to be utterly dispassionate about the election result, and grasp that sentiment is everything in markets (which are just voting machines!) Compare and contrast the infectious enthusiasm in the US market this week following Trump’s win, versus the downbeat reaction of UK markets to Labour win in July and the recent miserable Budget Announcement.
That struck me as very interesting – in the UK, the mood is distinctly how-much-worse-will-it-get after the electorate shrugged off the incompetent Tories and replaced them with miserable Labour. In contrast, US markets are on fire and excited. To get UK markets as excited as US traders, you’d need a very large tank of happy gas – and a Government with something to smile about. (Kemi Badenoch understands it.. confidence drives upside.)
The bottom line is many US investors got what they wanted – they see enormous upside in the economy and markets from what a Trump win brings with it. They are not particularly concerned about Trump’s personality or propensities. That confidence may be misplaced, but confidence what is utterly lacking in Europe and the UK. Even though I was in Washington a very short time this week, I was struck by the positivity of buoyant market folk versus the despair my academic and Democrat chums were expressing. (US readers kept telling me Washington DC is not a place to take the pulse of America, and it voted overwhelmingly Blue.)
If there is a deeper theme to the US election that’s driven the reaction of markets, I believe it was this: the Democrats want to regulate and cosset the economy, while the Republicans want to liberate it. I’m therefore extremely interested to see just how much of a boost the US economy gets from the anticipated Bonfire of Regulations Trump and Musk have promised us. (That comes with a health warning: too much of a boost is dangerous, and deregulating markets is oft followed by a crash. I am concerned that frothy markets and deregulation of areas like private markets and crypto will drive a surge that financial gravity dictates will be followed by a crash.)
I suspect slashing regulations will create an economic boom that’s going to open the eyes of Governments across the West to just how thick the Bureaucratic crust holding back economic growth has become. It will create .. consequences. That will be especially true in the USA where the wealth inequality between the richest in society and the working poor has been papered over. A major success of the Trump Republican party has been to coalesce the illusion the goals of Tech Billionaires (Thiel, Ackman, Mush, Vance et al), and MAGA voters are somehow aligned!
There is a general consensus the Trump victory will juice Stocks, but is less positive for the Bond market.
Upside in the real economy is likely to be one ongoing thread for the next 4 years. President Trump (there, I have said it), will be boosterish on growth, on stocks and will be pressuring the Fed to ease rates. Funny how the first thing most reports on the Fed ease yesterday started with was how Jay Powell didn’t use it as an opportunity to announce he was stepping down. Trump’s choice of Treasury Sec will be critical.
Let’s start with the good stuff – what it means equity markets. As always when it comes to stocks, I chatted with my great buddy and colleague at Shard Capital, Julian Wheeler for his perspectives.
Our outlook is not one-way or simple, but boils down to:
- Oil and Gas – Buy Drill Baby Drill – US fossil energy is a domestic, self-contained industry and should not suffer much from tariff inflation or new supply chain issues that might result from tarriffs. Deflation from falling oil prices may limit tariff inflation – but will push profits at US oil and gas producers down – possibly closing Pennsylvania frackers down. Demand for gas and the strategic reserve will help.
- Financials – keeping US out of Basel 4, freeing up their capital, and cutting regulations will boost banking profits. Margins should improve.
- Tech – The billionaires will be happy as regulatory threats recede, but money needs spent on domestic chip production. Some Big Tech – Meta and Google – is seen as anti-Trump. China issues could weaken Apple et al – which is what I think Warren Buffet spotted when he dumped the stock.
- Defence – Nato is dependent on US sourced weaponry. Medium Term that will reduce as Europe become increasingly self-reliant, but meeting 2% spend target means more orders from the US in the short-term! We may see a pivot away from Defence Primes to new Tech firms and the new Tech billionaire aristocracy – a new military industrial complex in the making.
- Industrials – Company profits are set to balloon as corporate taxes are cut. This will be balanced by cuts in the Inflation Reduction Act green spending which will be curtailed.
- Health and Welfare – Federal and state programmes are likely to be cut.
- Energy and Infrastructure – Trump’s advisors will make him acutely aware of the potential energy deficit as the Tech sectors thirst for AI and Data Centre power multiplies. He may even be persuaded renewables have a place in that to drive his chum Elon’s Powerwall business.
- Retail – Tariffs will drive inflation and impact the economy and voter wallets substantially – and it is likely to impact consumption.
The Bond market may prove more difficult. Trump will push the Fed to ease, baby, ease but with tariffs creating an inflationary pulse, while his tax cuts raise borrowing. According to some US research the US debt could rise to 144% of GDP in the next 10-years, triggering serious repayment crises. Bloomberg sees it rising to 116% by 2028. James Eagle of EEAGLI noted: “For every dollar the US economy produces, the country now owes a dollar in debt.”
I suspect the denouement of the bond market will be delayed a few years. Till then, the new Trump consensus will blithely ignore it, and may be right to do so if growth picks up and revenues rise.
The potential downside to the bright rosy picture I paint above of US markets is the US remains a divided and polarised political entity. There will be problems and dissent. Trump does not have a magic wand about to make everyone rich and prosperous, and there will be much bitterness. How much that is ameliorated depends on who he surrounds himself with: rationality or does he let the lunatics take over the asylum? I am assured the former, and the jovial threats of retribution won’t happen. But there will be lash-back on wokery which will impact the USA’s soft culture and academia.
Globally, Europe is nervous. They see NATO under threat – one of my contacts is a senior geopolitical figure and he described NATO as Toast. Tariffs on European goods will cause a reassessment of Europe’s outlook.
The next 3 months till the inauguration are going to be intriguing.
Out of time, have a great weekend, and back to the day job..
Bill Blain
Author of the Morning Porridge, founder of Wind Shift Capital
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“There are a thousand and one reasons Harris lost and the Democrats need to understand everyone of them by 2028”
Why do they need to “rebuild ” themselves??..Let them continue to be out of touch progessive elitists with no grasp of the vast middle.
A ” new ” Democrat with an inclusive message is the last thing we need or want
I posted this earler on why Trump won. Their secret sauce recipe is now clear:
I’ve just done a wash-up with one of the smartest advertising minds on the planet, head of digital marketing at a major consumer firm. He’s made it clear to me my call on Harris to win was based on confirmation bias – a common trait across the lefty commentariat. I can read whatever I want in the NYT, the WSJ, Bberg, Washington Post, the Atlantic – safe in the knowledge only people like me are reading it. The electorate were not.
He made the point celebrity endorsements are newsworthy, but irrelevant in terms of opinion forming. The electorate might be impressed, but don’t care and were not listening.
What the voters were listening to were podcasts like Joe Rogan where Trump and Vance sat for hours and answered every question. Young men and young women were listening and paid attention. In the space of a week Rogan got 9 cumulative hours with a trifecta of Trump, Harris and Musk!
Harris accumulated some 14 million views related to her comments on TV media appearances.
Trump scored over a billion views vis streaming sites though podcasts and such.
It’s no wonder he won the attention of his voters. Trump’s team absolutely understand that media is consumed in an utterly different way today than just a few years ago. The Democrats are living in a past that no longer exists thinking TV appearances and endorsements matter. All that matter is that the electorate is engaged with the product – the candidate.
Trump’s team understood perfectly that to win they had to be in conversation with their demographic targets, who felt they got to know them on the long, lengthy, engaging podcasts. Folk listening came away knowing exactly what the candidates stood for… They engaged the electorate in conversation.
To this moment, most Democrat voters still know nothing about Harris. She never revealed herself the way Trump and team did.
Politics and the Game of Elections has utterly changed. The Democrats, The UK’s Labour Party, and politicians across Europe have some mighty lessons to learn.
Or, they understood better, how, to converse in this new world. They understood the medium better . Fireside chats have evolved