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Your guide to what the 2024 US elections mean for Washington and the world
Call me a Cassandra. Many have done so. But I’m already dreading the slowdown that will surely come at some point during Donald Trump’s presidency. Yes, the near-term peak of deregulation and tax cuts is already upon us. But, judging by history, the United States is long overdue for a recession and a sharp market correction, and the risk vectors at play with Trump make this 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 built by President Joe Biden and that Trump will inherit will continue to expand. There is currently positive real income growth, as well as productivity improvements, 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 will surely lead to an M&A boom, and you have good reason to see another year or two of gains in American assets. This seems especially true in areas like technology, finance (banks are gearing up for all these deals), crypto (every time billionaire investor Elon Musk tweets about Dogecoin, it gets a boost), private equity and private credit.
And yet, even if Democrat Kamala Harris had won the White House, I would think carefully about what’s really driving this market. As TS Lombard said in a recent note to clients, “this economic cycle has always seemed ‘artificial’ and has been fueled by a series of temporary or one-off forces, such as pandemic reopening, fiscal stimulus, excess savings, revenge. spending and, more recently, (higher) immigration and labor market participation.”
Indeed, one could argue that the market environment of the past 40 years, with its downward trend in interest rates and massive bursts 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 looks like. Per minute rates increased even just a little bit a few years ago, you saw the dominoes fall – think Silicon Valley Bankor the rise in bond yields during the crisis that ended Liz Truss’s very brief tenure as Prime Minister.
While I don’t really think Trump is going to fuel an inflationary fire with massive, across-the-board tariffs (his administration’s Wall Street contingent wouldn’t accept the resulting market collapse), you’ll probably see him use the American consumer market as a kind of voucher to be exchanged for various economic and geopolitical gains. Is Germany not aligning with US policy towards China? How about higher tariffs on European automobiles? This type of transaction is inherently risky.
I highly doubt Trump will deport millions of migrants, as he has promised to do; once again, people on Wall Street will object to inflationary effects. But this fundamental tension between what the Maga want and what private equity and big tech want is itself a danger. This will inevitably create points of instability and unpredictability that could cause markets to move in one way or another.
Unexpected political divergences could easily combine with some of the more usual sources of financial risk to create a major market event.
Highly leveraged loans and private equity investments are of course a danger, given that Trump is likely to abandon an already lax regulatory environment at a time when these assets are becoming a larger part of retirement and investor portfolios individuals.
This, coupled with an expected reduction in bank capital increases, is one of the things that worries Better Markets President Dennis Kelleher. “I think we’ll have a sugar high for two years under Trump, but ultimately we’re heading into a potentially catastrophic correction – something much worse than (the financial crisis of) 2008. That’s because we have a financial system that is essentially extractive.
Crypto is another potential trigger. It may have no inherent value, but Columbia University law professor Jeffrey Gordon worries that as real-world assets and liabilities become increasingly denominated in crypto, they will have a channel to the real economy. “Stablecoins can dip significantly below average,” says Gordon. “We’ve seen this movie before, with blue-chip money market funds.”
But if there is a liquidity crisis in cryptocurrencies, there is no lender of last resort. You would simply see much of the imaginary value disappear, giving way to collateral calls and real funding shortfalls.
I would place Musk himself among other financial risk factors. Electric car maker Tesla is in tears over the tech titan’s relationship with Trump. But at some point, 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 could impact Musk’s ability to manufacture 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 oppose Musk’s influence. Either way, Tesla’s stock price could take a major hit and bring with it the biggest froth in areas like artificial intelligence.
As someone still heavily invested in US stocks, I don’t want this to happen. But I wouldn’t rule it out either. Washington has a very crazy 1920s vibe these days.