With Trump's Return, the Risk of Recession Is Now Much Lower

Maybe during the U.S. presidential campaign it was possible to take what candidate Trump said at face value. Maybe you could even listen to edited soundbites and extrapolations that made what he said sound even worse. But that will not help you manage your portfolio.

I think there are some things the markets have right, and some where people might not be thinking straight, yet.

Rates and the Deficit

Bond markets returned to their senses after the election and after the 30-year treasury auction:

• The Trump administration “might” cause the deficit to skyrocket. There has been a lot of chatter of why that could occur, but the operative word is “might.
• It is far from clear what policies Trump will want to enact.
• It is unclear whether any of those policies will pay for themselves or not (this is applicable even thinking about some of what he has suggested, let alone tried to implement).
• I for one think they might be successful in getting “efficiencies” from the federal government. I’m not sure the radical end of Elon Musk’s ideas will get implemented, but it seems like it cannot hurt to see if we can squeeze down spending?
• Even if Trump wants some very aggressive policies, it is unclear what the senate or the house (which still hasn’t been decided as of Veteran’s Day) will pursue. Many of their members will need to get re-elected and may not support policies that they deem as going to far.

Watch bond yields from here, but I think 4.1% to 4.25% is a good range (it might remain a bit higher, for now, but should drift that direction). I will admit there is significantly more risk of another gap 50 BPS higher, than to a gap 50 BPS lower, but I don’t see that as a major risk in the next few weeks.

At the Very Least, Recession Risk Is Much Lower

I’m not sure I’m fully in the accelerated growth camp, but I do think the risk of even a moderate recession has been pushed out for a year or two. The Fed is still cutting rates and, presumably, any signs of weakness would be met quickly with fiscal stimulus from a Trump administration (assuming they have the senate and house).

I think markets are right to celebrate that recession risk is much lower, but markets might be going to far on wholesale growth.

The heavy outperformance of small caps and value make sense and I think energy and anything connected to re-shoring will do well under a Trump administration.

Tariffs

I see a lot of takes on tariffs and most seem incredibly simple and geared to stoke fear. Many of the fear stories are being stoked by those who fought them the first time, but remained quiet when Biden not only kept them in place, but added some over time. There's a lot of political rhetoric out there, with few trying to rationally see how it plays out.

I did get to bring up on Friday some thoughts on tariffs and protectionist countries in a segment Bloomberg titled "Tchir Says The Gloves Are Coming Off With China." I suspect this is a topic I will cover on Monday with Charles Payne on Fox Business.

Tariffs are complex!

If you golf, you might have seen on the shaft of your driver a label saying where the head was made, where the shaft was made and where they were assembled. I would argue that about 99% of the value comes from the head and shaft and only 1% from screwing the two pieces together (that are designed to be screwed off and on easily). Why does this exist? Because trade treaties have all sorts of loopholes and language designed to promote one sort of behavior over another. Unilateral, across the board tariffs are unlikely to work in the real world, the way they allegedly work in theory. Just something to keep in mind.

Tariffs are a negotiating stance.

If you want to bring someone to the negotiating table it is sometimes helpful if you threaten them with something you are willing to do (or, in Trump’s case, have already done once).

There is zero point in wavering before anyone has even sat down to discuss things. Why negotiate with yourself at this stage? You don’t.

The answer of who would ultimately pay for tariffs is not simple either. Many would say everything gets passed on to the consumer. Possibly. But if something from China costs, say $100, and incurs a 20% tariff, that would cost the importer $120 and it makes a difference what options are available. If there is an option from another country with a price of $110 all in, then the importer might go that route. Then they would still have to decide how much of that additional cost could be passed on. The Chinese company (assuming they are targeted with tariffs) may choose to subsidize their cost rather than losing the business.

This will be case by case and industry specific.

I would like to see tariffs nicely matched up with domestic manufacturing subsidies, as that could be most effective.

In any case, I think we are:

• A long way from knowing what tariffs get implemented. China, with their economy struggling, and muted response to their domestic stimulus, might have some alternatives that work once they are brought to the negotiating table.
• Then assessing the real world impact, as opposed to some ivory tower impact (and the ivory tower has been wrong on a lot of things), will take some time.

I do not lie awake at night worrying about tariffs stoking inflation to unreasonable levels, as I believe this is just the first salvo in a series of trade discussions with China, trying to level the playing field.

Bottom Line

To manage your portfolio, you really need to try and estimate what will happen. It isn’t easy with a president elect who often says extreme (and contradictory) things. It is not made easier by a media that is geared to make things sound even worse (or better) than what he said. But it is doable!

We can navigate this.

Neutral on rates, and prefer credit products (like investment grade, munis and high yield).

Mildly bullish on stocks, focused on small caps, value, infrastructure plays, energy, etc. Adding to China holdings here — FXI, not KWEB.

Mildly bearish on crypto here. I believe that Trump’s support of crypto may have been expedient and that he will not follow through with that. There is room for bitcoin to go higher, as new money floods in, so I wouldn’t fight this here, but I would take profits and am thinking about shorting at some level, in the not too distant future (once the current pump and dump seems to have run its course).

At the time of publication, Tchir had no positions in any securities mentioned.