From 'Iron Lady' to 'Iron Man'?
What may seem to many like sporadic moves with no meaning whatsoever, Donald Trump's agenda and Margaret Thatcher-like views have never been so easy to read.
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As the world moved into chaos following President Trump's global tariff announcement, there has been no end to memes about how Trump is not even sparing the penguins inhabiting an island off the coast of Australia. Those are the perils of using a “formula” to announce blanket tariffs, one does not have time to check the map entirely!
It is easy for the media to paint the "Orange Man" as bad and a narcissist, and tariffs causing lower GDP growth and higher inflation, the simple playbook, is the easiest explanation. However, when one looks at Trump 1.0, the same playbook caused neither of the two during his term. Many are unable to look past the obvious and certainly not even consider the lateral implications. But let us explain.
Most investors applauded President Biden as the markets were smooth sailing and 401(k)s doubled during his term. But that came at a cost, as the Biden administration just kept printing $1 trillion every 100 days, with the debt being on an unsustainable path, and an extremely bloated public sector and a diminishing private sector unable to grow.
President Trump is doing exactly what he promised during his campaigns: lowering the cost of living and inflation and creating more jobs. Three months into his term, Brent Oil is down to $72 from highs of $82 when Biden left office, and U.S. 10-year bond yields are down at 4%, when in January the bond vigilantes were talking of 6% to 7% yields due to endless Treasury issuances, killing the consumer. The U.S. dollar was threatening $110 on the DXY, and now it is down to $100.
The Fed has a dual mandate, protect the labor market and keep inflation at a 2% target. Until either was broken, they were unable to justify any cuts. But as we saw with the Challenger Jobs data and DOGE, and now with falling goods prices, the Fed can take its pick which side of the ledger it wants to protect.
The U.S. debt/GDP was above 120%, which means that any new administration had very little wiggle room to promote fiscal spending or tax cuts lest the bond market would collapse. When a country is looking to raise funds, it looks around to its neighbors. The U.S. has run a trade deficit for decades, getting cheap imports from around the world.
The U.S. accounts for about 30% of the total global consumption. Being the super power does mean you can bully nation states, including allies, into paying. NATO is one example as the U.S. has spent more defending Europe's boundaries than they have. What may seem like sporadic headlines with no meaning whatsoever, Trump's agenda has never been so easy to read. He is doing a U-turn for the U.S. to get it to dominate once again.
If history serves correctly, Margaret Thatcher, dubbed the "Iron Lady," inherited an economy riddled with high inflation, more than 25% even, and one of her tasks was to bring that down at the cost of growth. She too embraced tough policies to U-turn the U.K. economy out of its funk.
Thatcher abhorred the European welfare state, and the power controlled by unelected Brussels bureaucrats, who had more or less forgotten NATO by the mid-1990s. Call it a coincidence but the Trump seems to share the similar view and is perhaps equally iron fisted. He has already gotten commitments of $3 trillion worth of investments into the U.S. following his aggressive tariff proposals as companies are moving production or making plans to do so to the U.S.
Change is never easy, and certainly not when one tries to change the existing establishment that has been in places for decades. We are embarking on a new global world order. America is looking for ways to reduce its debt and grow its economy without printing or doing more QE, and that means levelling the playing field with its allies. This won’t happen overnight.
Investors may not like the volatility, but if it was not for Trump, OPEC+ would never have agreed to release its oil now after holding it back for three years, artificially inflating prices. Inflation will not be a problem and the forward 5y/5y breakeven markets know it, they have plunged to 2.07% from highs of 2.4% at the end of last year. Those markets never lie.
There is a plan, one just needs to ignore the media's sensationalist headlines. As we say, short-term pain for longer-term gain.
