'MAGA' or 'MEGA' Is Suddenly an Interesting Question for Investors
Who knew that Trump's tariff negotiating tactics would end up making Europe great again?
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For years European growth and its central bank policy have failed to garner a sustained economic expansion. This is why most investors had been underweight Europe for years and piled into the U.S. markets, especially over the past two years where there was no place to invest but there.
Starting this year was no exception as retail and institutions were heavily invested in U.S. stocks, especially the large-cap technology stocks, as President Trump was hell bent on his "Make America Great Again" campaign. But who knew that his tariff negotiating (bullying) tactic would end up "Making Europe Great Again"?
There has been a lot of ink spilled on Trump and his harsh tariff tantrums, but if one were to take a step back and see the bigger picture, he is really trying to level the playing field for the U.S., and reduce deficit spending, which thanks to the Biden administration, was on an unstainable path.
The U.S. has been running a budget deficit of around 6-7% of GDP. Its interest expense alone is close to $1.2 trillion and counting, and it has now exceeded its own military and defence spending! If one looks back at history, this very specific point has been the downfall of many empires.
Trump is all too aware of how America is losing its greatness, albeit still beling a super power with a strong dollar reserve currency. The past four years under Biden saw the national debt get to in excess of $36 trillion, with the U.S. spending $1 trillion every 100 days, without any accountability.
Trump has spent the past four years trying to understand how to get control back. Tariffs are really a forefront to get other nations to do the right thing... well, the right thing for America of course. For decades, the U.S. has been footing the military defence bill for Europe, and now all Trump is doing is asking them to pony up as they will not be the only ones doing the heavy lifting being the "police" of the world.
This harsh rhetoric has convinced Germany to finally introduce a spending bill focusing on defence, and the parliament approved the 500 billion euro spending boost of infrastructure, military and innovation, something which they should have done years ago, to help them get out of their stagnation. Trump has essentially forced them to re-invent themselves.
As Germany and Europe, for that matter, is coming back from the "dead" so to speak, their markets have been the best performers year to date. The German DAX is up 15% vs. the U.S. S&P 500, which is down 5%. It seems all the countries Trump has placed tariffs on have outperformed the U.S., with China up 25%.
Meanwhile, Trump's daily tariff announcements have caused massive uncertainty as no portfolio manager is able to understand the motive or how long he is willing to play his bluff before a global trade war sparks a global recession. Being so heavily invested in the U.S., this caused money flows to exit the U.S. in a short period of time, and went towards Europe and China. The value proposition helped, as the latter have been cheap for decades, and for good reason. It is not the direction but perhaps the speed that is in question. If we indeed were on the precipice of a recession, these two markets would get hit too. This has just been one massive unwind.
Trump's focus is to get manufacturing back onshore. For that he needs a lower U.S. dollar, and in fact encourages it. To make his plan work, though, he also needs lower rates but the Fed cannot give that yet as inflation is still quite sticky.
If one were to take a step back from all the noise, Trump is actually doing exactly what he promised. This is, as others have said, a well-needed detox from all the spending and, most importantly, getting growth back to the private sector and out of the bloated public sector.
Trump's proposals are all business friendly but he is cognisant of the fiscal spending and debt limitations. But going tough on his allies, and getting them to pay up for all the work the U.S. has done over the years is just one side of the story. It is shaking the global world order, and that can be messy. But to call it a recession would be naive as never has one started when everyone thought there would be one, and more importantly, never with oil prices and dollar falling. U.S. interest rates are at 4.5% and down 75 basis since last quarter. The Fed's bar to cut rates is a lot lower than it is to raise.
Europe is known for its bureaucracy, so whether this all comes into full effect remains to be seen, but today “U.S. exceptionalism” is trading at 20% discount. Choose wisely.
