Trumpflation
Macro Outlook
The Economy
The US election will shape relative winners over the next 2-4 years. The message from the Republicans throughout the campaign was to protect American interests and our highlight of Donald Trump’s acceptance was : “I will govern by a simple motto: Promises made, promises kept. We're going to keep our promises. Nothing will stop me from keeping my word to you, the people. We will make America safe, strong, prosperous, powerful, and free again.”
Let’s look at type of policies likely to be implemented by the second Trump administration:
Immigration
The first order of business of the Trump administration is likely to be very stringent border control and potential mass deportation to discourage immigrants from coming to the United States.
Tariffs
Traditionally, Congress holds the primary authority to regulate tariffs but, over time, Congress has delegated authority to the President in cases of national security, unfair trade practices or economic emergencies. Since the Congress is expected have a slim republican majority for the first two years and the President is very keen on tariffs, we should expect swift and powerful action, especially against China, in the first few months of the Presidency.
Regulation Cuts and Environmental Laissez-Faire
Another item that will be high on the priority list will be to eliminate regulations, especially on the energy side. Drill, Baby Drill to make America, the global energy powerhouse is one of the stated objective. Leaving the Paris Agreement should also come early and some portions of the Inflation Reduction Act could come on the chopping block.
Tax Cuts
Lower taxes of all kinds were part of election promises. These should take longer to implement and their size will depend on the behavior of long term yields: if rates stay at current levels or lower, budget restraints will be low and tax cuts could be large, but if the bond vigilantes revolt against higher fiscal deficits, the extension of their 2017 package is the default position
Wheeling and Dealing
Another aspect of likely policies is the transactional nature of Donald Trump. The Biden Presidency had lots of industrial policies where subsidies, credits and regulations tilted the balance for certain industries, we should expect policies that more explicitly tilt the balance directly to certain countries, companies and individuals.
Expected Results
Less immigration and potential deportation will reduce the labor pool, especially for low wage jobs at a time where more baby boomers are retiring than GenZ are entering the workforce. Higher tariffs will temporarily disrupt supply chains and stimulate the repatriation of industrial and manufacturing activity. Less regulation and less environmental support could lead to more heavy industries coming back to the United States, especially with the relatively low cost and abundance of natural gas. Lower taxes should help smaller companies that cannot arbitrage their tax domicile and encourage local investments. The transactional nature of the new administration will bring surprises. All in all, less labor, more industrial activity and more investments point to strong demand for low wage workers, automation and building material.
The Opportunities
Long Climate Adaptation
While the US environmental policies will be dialed down, climate change will not stop. Infrastructure hardening: repair, design, build and everything that is needed to adapt to a changing climate will see strong demand.
Long Inflation
Reshoring with a smaller pool of labor and continuing global conflicts should keep inflation higher than the 2% target of the Federal Reserve. Companies with pricing power or those that produce commodities in demand should do well.
Short Interest-Rate Sensitive
High inflation and uncontrolled deficits call for higher interest rates. Under these circumstances, highly-levered companies or those that cater to clients that finance their activities will be under pressure.