Return of Trumponomics: Risks and Opportunities

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• The potential return of Donald Trump to the U.S. presidency could lead to significant volatility in global markets, particularly through aggressive economic policies that export inflation and impact emerging economies.
• Meanwhile, European countries might need to reassess their defense and economic strategies due to possible shifts in U.S. foreign policy and the implications of a less independent Federal Reserve under Trump. Alfonso “MacroAlf” Peccatiello says investors should seek strategies to navigate the uncertainties and risks associated with a potential Trump presidency and its economic implications.
• What are the potential risks and opportunities of Trumponomics? Would a second term usher in a new era of global market volatility?

Our world has never been more connected and interdependent. The implications of significant political shifts, especially in major economies like the United States, have reverberating effects throughout the global geopolitical landscape. Recently, the U.S. Supreme Court issued a decision that extended broad immunity to presidents, including former ones, from criminal prosecution for actions taken while in office.

That decision, along with incumbent President Biden’s lackluster debate performance, sparked discussions about the possible return of former President Donald Trump to power. And of course, such a possibility raises questions about the impact of a second Trump term on the U.S. and global markets.

“The U.S. is the reserve currency of the world … and T-bills are the most used collateral in any type of leveraged transaction at any level,” says Alfonso Peccatiello (also known as “MacroAlf” on social media), founder of The Macro Compass. “And the repo market in the U.S. is the biggest in the world because we know the US policymakers normally play by certain rules.”

Those “rules” — some legislative, some just “norms” — are what sets the U.S. apart from autocracies, like the rule of law and “a bunch of stuff we take for granted by now,” Alf adds. “And this is one of the reasons why we have managed to build a gigantic leveraged system around the dollar and dollar collateral. That’s why it works.”

However, if we “start shattering the foundations of that, the story is very different,” he says. (Cue concerns about Trump 2.0 from even the most fiscally conservative among us.)

Alf joined me and Cem Karsan for a Global Macro Edition of Top Traders Unplugged to break down today’s challenging macroeconomic environment — crushing levels of debt, skyrocketing wealth inequality, polarized electorates, disruptive technologies like AI, rising interest rates and inflation — and what impact a Trump presidency could have on the global economy.

From the Supreme Court to global markets

It’s not hyperbole to imagine that the Supreme Court’s decision on presidential immunity will transform the political landscape in the United States. This decision would undoubtedly give Trump, if elected, more power than he had during his previous term. This power dynamic could enable him to implement policies with a greater degree of control, which could lead to volatility in global markets — especially if the GOP wins majorities in both houses of Congress.

Cem notes that this scenario bears resemblance to the economic turbulence of the 1960s and 1970s, in which the U.S. inadvertently exported inflation and economic instability to other parts of the world through assertive power politics.

“In the 60s, there was this growing generational divide,” Cem explains. “There was populist rhetoric and … with JFK’s assassination, it led to a release of policy, which is what LBJ did. He took that sentiment and passed the Great Society program here in the United States. Some people will still point to the Great Society program and say it was an incredible piece of legislation… but it released this populist push.”

He adds that populism led to protectionism, the emergence of the Cold War and eventually a hot war in Vietnam — which led to more protectionism and the OPEC crisis of the late ‘70s.

‘Power politics’

One of Cem’s key concerns is how a Trump presidency could influence the U.S. relationship with the rest of the world. Because Trump will likely “exert a lot more influence than he did last time around,” Cem thinks that the former president’s “power politics” might lead to “considerably more disconnect between the United States and emerging markets, allow the U.S. to export some of this inflation to tax the rest of the world, even though [inflation] is a structural global phenomenon … and cause significant volatility.”

The implications of such a policy approach could be far-reaching, affecting currency values, trade balances, and overall economic stability in emerging market economies.

Cem wonders if Trump might “export some of these problems through pure power politics.”

He thinks Trump is “willing to do that and will likely try his best to do that,” volatility be damned.

“But I do think that makes for interesting macro trades and an incredible opportunity,” he adds. “You don’t necessarily have to get that trade right in the direction, but you can get it right in the form of the distribution of volatility.”

The Euro factor

Cem argues that the impact of a Trump presidency would not be limited to the U.S. and emerging markets; it would also have significant repercussions for Europe.

“Because Europe acts as an ancillary to NATO and the United States … Trump might have some different ideas about … the role that the U.S. wants to play” in the realm of foreign policy,” he says.

The potential shift in U.S. foreign policy, particularly concerning defense spending and NATO, could force European countries to reevaluate their defense strategies and budgets. Unlike the U.S., European nations are more vulnerable to economic shocks.

“European countries …. are somehow fiscally sovereign, but to a certain extent they are not monetarily sovereign per se,” he explains.

The U.S., as the issuer of the world’s reserve currency, has greater flexibility in managing economic policies, whereas European countries face constraints due to their reliance on a shared currency and economic policies dictated by the European Union.

Trumponomics?

The potential for a Trump presidency to introduce policies that could destabilize global markets cannot be ignored. The U.S. dollar’s role as the world’s reserve currency means that any significant policy shifts in the U.S. can have ripple effects across the globe.

“There is a structural demand for the dollar because of the euro/dollar system and how we have created the world around the dollar,” Alf observes. “The U.S. can afford a lot more from that perspective, but places like Europe or the U.K. cannot … We have limitations by architecture, basically.”

For example, a more aggressive approach to trade and tariffs could impact global supply chains, leading to increased costs and disruptions in various industries. Similarly, changes in U.S. monetary policy — such as the potential for a less independent Federal Reserve under a Trump administration — could lead to increased market uncertainty.

Cem is concerned about the possibility of Trump adopting economic policies similar to those seen in emerging markets, like appointing loyalists to key financial positions or manipulating monetary policy for political gain.

“You hear about Erdoganonomics, right? I think there’s a Trumponomics that’s going to be akin, but scarier. It’s with the power of the reserve currency of the world. I think if he decides to run things incredibly hot, he can probably get away with it without some of the dramatic inflationary effects.”

The inflationary zeitgeist

Cem thinks Trumponomics would be inflationary.

“His number one focus and his zeitgeist is, Hey, we’re not charging the rest of the world. We are the most powerful country in the world. And yet we are seemingly, at times, benevolent. He wants to completely tax the rest of the world for the power of the empire. That’s his zeitgeist.”

Yet Trumponomics could have a negative impact on the long-term stability of the U.S. economy and global markets.

Investors are already considering the implications of these potential scenarios. Investing in safe-haven assets like gold or hedging against currency risks could protect against potential market disruptions.

Alf points out that T-bills are “collateral to provide dollar liquidity to the outside world when it’s needed because there is $12 trillion of foreign debt issued in dollars by countries that don’t have access to the dollar unless they have a liquidity swap line with the Fed and other ways to get their hands on the dollar.”

He argues that Trump doesn’t necessarily want to shatter the foundations of American monetary policy, but he risks doing exactly that — “because as Cem says, he’s a power-play guy and he might overstep. He might — or maybe he might not. We don’t know, but … what about these tails? How are they priced? What probability can [investors] assign to Trump overstepping one of his policy agendas?”

Alf thinks the probability is “close to zero” and notes that gold is currently hitting new all-time highs.

“So where is gold supposed to trade if Trump oversteps on one of these policies and therefore shatters the foundation of the Euro/dollar system or the reserve currency status of the dollar?”

Watch for the wildcard

For Alf, “macro investing is about looking at odds and looking at the expected value of your trade versus what you think the odds are. And hopefully, sometimes you’ll be better than the market in forecasting these odds, and therefore, you’ll make money.”

Right now, he thinks the market is “probably underestimating some of these tail-Trump policies.”

The potential return of Donald Trump to the U.S. presidency represents a significant wildcard for global markets. Because a Trump presidency’s economic and international relations policies could lead to a period of increased market volatility and uncertainty, it’s crucial for investors, policymakers, and market participants to closely monitor developments and consider the potential risks and opportunities that may arise in this evolving geopolitical landscape.

Whether it’s through hedging strategies, diversifying investments or staying informed about political developments, let’s prepare for a range of outcomes.

Expecting the unexpected is essential in navigating the potential challenges ahead.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.