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Your guide to what the 2024 US elections mean for Washington and the world
Call me Cassandra. Many have done it. But I already fear the recession that will surely come at some point during Donald Trump’s presidency. Yes, the short-term sugar rush of deregulation and tax cuts is already upon us. But judging by history, the United States should have already suffered a recession and a major market correction, and the risk vectors at play with Trump make it more likely.
Why should I be so negative, so early? It can easily be argued that there are many reasons to be optimistic that the strong economy that President Joe Biden built and that Trump will inherit will continue to expand. There is positive real income growth right now, plus improvements in productivity, an expected recovery in global manufacturing, and rate cuts, of course.
Add to that things like Trump’s upcoming deficit spending and Biden’s rollback of antitrust policies, which are sure to mean a boom in mergers and acquisitions, and we have a good case for another year or two of gains in U.S. assets. This seems to be particularly true in areas like technology, finance (banks are gearing up for all those deals), cryptocurrencies (every time billionaire investor Elon Musk tweets about Dogecoin he gets a boost), private equity, and credit. private.
And yet, even if Democrat Kamala Harris had won the White House, she would be thinking carefully about what is really driving this market. As TS Lombard said in a recent note to clients, “this economic cycle has always seemed ‘artificial’ and has been driven by a number of temporary or one-time forces, such as pandemic reopening, fiscal stimulus, excess savings, the revenge. spending and more recently [higher] Immigration and participation in the labor force.
In fact, one could argue that the market environment of the last 40 years, with its trend of falling interest rates and massive bouts of monetary stimulus and quantitative easing after the great financial crisis, is artificial. We have a generation of traders who have no idea what a truly high interest rate environment is like. Per minute rates went up even a little bit a few years ago, you saw the dominoes fall; consider Silicon Valley BankThe bailout of Liz Truss or the rise in bond yields during the crisis that ended Liz Truss’s brief period as Prime Minister.
While I don’t actually think Trump is going to add fuel to the inflation fire with massive tariffs across the board (his administration’s Wall Street contingent wouldn’t tolerate the market collapse that would result), they’ll probably see him tap into the American consumer market. as a kind of voucher that can be exchanged for various economic and geopolitical gains. Is Germany not aligned with US policy towards China? How about higher tariffs on European cars? This type of agreement is itself risky.
I highly doubt that Trump will deport millions of immigrants, as he has promised to do; Once again, the Wall Street crowd will reject inflationary effects. But this fundamental tension between what the Maga crowd wants and what private equity and big tech want is itself a danger. It will inevitably create points of instability and unpredictability that can move markets in one direction or another.
Unexpected policy divergences could easily combine with some of the more common sources of financial risk to create a big market event.
Highly leveraged loans and private equity investments are, of course, a danger, as Trump will likely roll back an already lax regulatory environment at a time when these assets are becoming a growing part of pension portfolios. and retail investors.
This, along with an expected reduction in bank capital increases, is one of the things that worries Better Markets president Dennis Kelleher. “I think we will have a sugar high in two years under Trump, but going forward, we are looking at a potentially catastrophic correction, something much worse than [the financial crisis of] 2008. That is because we have a financial system that is essentially extractive.”
Cryptocurrencies are another possible trigger. It may have no inherent value, but Columbia University law professor Jeffrey Gordon worries that as real-world assets and liabilities increasingly become denominated in cryptocurrencies, it will have a channel into the real economy. . “Stablecoins can fall substantially below par,” Gordon says. “We’ve seen this movie before, with prime money market funds.”
But if there is a liquidity crisis in cryptocurrencies, there is no lender of last resort. We would simply see a lot of imaginary value disappear, leaving real-world collateral and financial deficits.
I would put Musk himself as another financial risk factor. Electric car maker Tesla is in trouble due to the tech titan’s relationship with Trump. But at some point the markets will realize that China can make its own electric vehicles for much less than Tesla. Beyond that, tensions between the United States and China may still affect Musk’s ability to make green cars in China. I would also be surprised if the big American oil barons, who are the real muscle of the Republican Party, did not fight back against Musk’s influence. Either way, Tesla’s share price could take a big hit and drag down the froth in areas like artificial intelligence.
As someone who is still heavily invested in US stocks, I don’t want any of this to happen. But I wouldn’t rule it out either. Washington these days has a very cheerful 1920s vibe.