Markets were rattled by policy under Trump 1.0 by his unpredictable and chaotic nature. Trump 2.0 promises to be more of the same. Other than the transactional nature of Trump’s deal making, what’s his ultimate end game?
It’s to undo the effects of globalization. The political backdrop can be explained by Branko Milanovic’s famous “elephant chart”. The graph charts percentile of global income distribution, or how rich you are on a global scale, on the x-axis, and the changes in real income between 1998 and 2008 on the y-axis. The winners of globalization were the emerging market countries whose population were lifted out of poverty and the elite of the industrialization countries, who engineered globalization. The losers were population in subsistence economies and the middle class of the industrialized countries, which has sparked populist backlashes such as the Make America Great Again movement, the AfD in Germany, the National Front in France, and so on.
Trump rose to power by tapping on the deep political discontent of globalization of MAGA Americans. Here’s what this means for investors.
Globalization: Benefits and Costs
Let’s begin with a brief analysis of the pros and cons of globalization. The most obvious has been a dramatic improvement in life expectancy. Higher incomes and wealth from a combination of industrialization and globalization which pushed up life expectancy.
The price in the industrialized countries was a widening of income inequality. Income inequality rose in the G7 countries. Even though U.S. and Italian inequality continued to rise in the 21st Century, inequality flattened in the other G7 countries. These results are consistent with the Milanovic’s elephant chart conclusion that the elite in the industrialized countries were the winners of globalization.
The Reshoring Strategy
Trump has been lamenting the U.S. trade deficit since the 1980s and the trade deficit is a particular focus of his global view. To address the problem, he has implemented an approach of harvesting the goodwill from U.S. alliances since the end of World War II, and through the implementation of trade barriers and economic pro-growth policies in order to return manufacturing to the U.S.
The big picture roadmap was laid out in a past
paper by Stephen Miran, who is now the Chair of the Council of Economic Advisers, called “A User’s Guide to Restructuring the Global Trading System”. More recently, a
Bloomberg podcast with Jim Bianco of Bianco Research partly explained the broad strokes of the Miran proposals.
First, reduce the federal debt, or reduce the trajectory of the debt. Over the years, much of the debt was accumulated by the U.S. military since World War II as a bulwark of the global security order while allies were free riding under the American nuclear umbrella. Trump 1.0 called on NATO allies to adhere to their defense spending targets of 2% of GDP. Trump 2.0 raised the ante and raised the target to 5% of GDP. If allies can spend more on their own defense, U.S. military spending can fall and so will the fiscal deficit, all else being equal.
Second, tariffs can raise revenue, incentivize manufacturers to return production to the U.S, and indirectly weaken the USD. Trump’s focus on NAFTA participants also puts downward pressure on the trade-weighted dollar, which is more heavily weighted to the Canadian dollar and the Mexican peso, compared to DXY, which is more heavily weighted to the euro.
As well, implement policies to boost American competitiveness, such as tax cuts, deregulation, fiscal consolidation and rate cuts. It is therefore no surprise that Treasury Secretary Bessant focused on the 10-year Treasury yield as a key metric for the Trump Administration.
In short, the strategy can be summarized as an approach of harvesting the goodwill from U.S. alliances since the end of World War II, and the implementation of trade barriers and economic pro-growth policies in order to unwind the effects of globalization and reshore manufacturing back to the U.S.
Other measures include a clampdown on immigration and taking a harder line on deportations, the withdrawal of government from deemed non-essential functions, as well as a retreat from foreign aid and other global institutions in the name of fiscal consolidation.
The combination of these measures accounts for the Trump Administration’s message of short-term pain for long-term gain. There will be an adjustment period before the long-term benefits of these policies are realized.
The Price of Reshoring
The price of Trump’s reshoring policies are being felt more immediately. It began at the 2025 Munch Security Conference with the speech of Vice President JD Vance. Instead of speaking about the European security framework, which was expected, Vance focused on European failings, such as the annulment of the election results in Romania and problems of mass migration in Europe. He further asserted that “it’s important in the coming years for Europe to step up in a big way to provide for its own defense”.
This message and subsequent American signals to its allies of a withdrawal of U.S. military protection sparked a dramatic reaction. Germany’s incoming Chancellor Fredrich Merz engineered a €1 trillion plan of defense and infrastructure spending outside its fiscal debt brake. Portugal cancelled its F-35 fighter jet order, citing American political unreliability as a reason. Europeans already saw how the Biden Administration restricted Ukrainian use of American weapons and European weapons with U.S. components and worried about how future administrations in Washington might restrict their use, or refuse to supply and support U.S. weapons systems sold to allies. The
Financial Times reported that the EU rearmament fund excludes the U.S., U.K. and Turkey companies as suppliers. Canada is reviewing its order for F-35 fighter jets and it’s in discussions with European suppliers. In Asia, it has imperilled the AUKUS deal of Australia’s purchase of U.S. submarines.
So much for the revival of American manufacturing in defense exports.
More shocking was the report from
Independent Singapore about a speech at the Munich Security Conference by the defense minister of Singapore, which is one of the staunchest pro-American allies in Asia. He first “cited the inaugural speech of President John F. Kennedy from over 60 years ago, wherein he said that ‘an iron tyranny’ would not take the place of colonial control – ‘that was the moral legitimacy in which U.S. presence was in our region.” Now, “the image has changed from liberator to great disruptor to a landlord seeking rent”.
He concluded, “Who, if anyone, any one country or region or bloc, can step in if the U.S. declines to protect the global commons and how effective, and against what resistance?”
The American message of “you’re on your own” was received loud and clear.The well-publicized blow-up between Ukrainian President Zelensky and U.S. President Trump at the White House sparked a groundswell of desire by the Japanese citizens to arm Japan with nuclear weapons. It would be no surprise that South Korea and others in Asia go nuclear, which would create geopolitical instability in the region.
In addition to the withdrawal of the U.S. military power, the withdrawal of soft power in the form of American aid to poor countries and news services such as the Voice of America and Ratio Free Europe have left openings for countries like China to step into the vacuum.
To be sure, the U.S. remains a pre-eminent economic and military power in the world. It can use its hard power to pressure individual countries to bend to its will. Trump has voiced his desire to control the Panama Canal, annex Greenland, make Canada the 51st state and remake the Gaza Strip into a resort. Taken individually, each of those threats reveals the asymmetry of U.S. hard power.
Taken together, however, the aggregate costs of these policies are considerable.
Investment Implications
I am not here to make a judgment on whether Trump’s reshoring policies are good or bad. We try to remain apolitical in my investment analysis. Michael Cembalest of JP Morgan Asset Management said it best when he recently wrote:
Here’s the interesting thing about the stock market: it cannot be indicted, arrested or deported; it cannot be intimidated, threatened or bullied; it has no gender, ethnicity or religion; it cannot be fired, furloughed or defunded; it cannot be primaried before the next midterm elections; and it cannot be seized, nationalized or invaded. It’s the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation and predictable rule of law.
Nevertheless, investors have to consider the costs and benefits of Trump’s initiatives, which consist of certain short-term pain for uncertain long-term gain.
The U.S. security umbrella has provided Americans an array of benefits over the last 80 years. It includes downward pressure on inflation, from an untariffed globalized supply chain, and lower interest rates as current account surplus countries recycle their USD back to the U.S., and higher asset prices from a lower cost of capital as foreigners recycle their trade profits by buying U.S. stocks, bonds and real estate.
The withdrawal from global geopolitical leadership reduces the dominance of the USD and its “exorbitant privileged” position as a reserve currency. Reuters reported that some European officials weigh if they can rely on the Fed for dollar liquidity during times of financial stress. Remember that European banks play a big role in USD liquidity intermediation. Their U.S. subsidiaries received support from the Fed through liquidity swaps during the GFC and global financial stability would be under severe threat if such facilities were to be withdrawn. More importantly, financial markets would undergo unprecedented turmoil if the market began to price in any hint of default risk of U.S. Treasury paper.
Already, the global financial system is starting to fracture along geopolitical lines. Countries may have to face a strategic trilemma. Pick two choices: Maintain USD access, preserve policy flexibility or choose a side in the Sino-American rivalry.In addition, shutting the door on immigration deprives the U.S. a valuable source of innovation and productivity growth.
Forbes reported in 2011 that 40% of Fortune 500 companies were begun by immigrants or their children. As a prime example, don’t forget that Apple founder Steve Jobs was half Syrian.
The immigration restrictions, just by themselves, could have a chilling effect on the progress in total factor productivity in the long run.
Stocks for the Long Run?
An analysis of the evolution of equity markets shows the share of U.S. market capitalization has risen from 14.5% in 1900 to 60.5% in 2023. When you combine the potential loss in factor productivity with lower capital cost effects of the “exorbitant privilege” of USD dominance, the outperformance of U.S. equity markets will retreat as the U.S. retreats from global geopolitical leadership.
The results of any historical studies of past asset returns, as well as studies of return patterns like “what happened to the market when ___ happened” become virtually useless. Long-term charts, like this accompanying chart of historical returns, are only interesting as historical relics and should not be relied on for investment planning purposes. The next 100 years will not look like the last 100 years.
In addition to the long-term implications, short-term implementation risks of Trump’s reshoring plan are considerable. What Trump may have miscalculated is the U.S. net investment implication of -75% of GDP exposes the U.S. to foreign selling of U.S. assets. The rest of the world can fight back against tariffs by selling down assets rather than weakening their currencies.
Trump also has a limited ability to accelerate the timing of the post-detox and pro-growth phase of his plan because of the thin Republican majority in the House. As well, the Fed vigilance about the effects of rising tariffs and imported inflation from USD weakness could add to inflation and an easing cycle could lead to a catastrophic revival of the 1970s experience of the Arthur Burns Fed.
The
UCLA Anderson School of Management published a note that it is on recession watch should the full effects of Trump’s policies of tariffs, DOGE cuts and mass deportations be enacted. It added: “implementing [these] …supply shocks in what mirrors the sequence of supply shocks that led to The Great Inflation of the 1970s…[But if] this administration has expressed its desire to reign in the independence of the Federal Reserve…[and] succeed in influencing monetary policy decisions, it will likely lead to interest rates that are too loose to quell inflation, yet too tight to counter the downturn, leading to a longer period of low growth and high inflation, i.e. a stagflation.”
The effects of Trump’s tariff regime could also backfire, according to Ronald Reagan:
You see, at first, when someone says, “Let’s impose tariffs on foreign imports,” it looks like they’re doing the patriotic thing by protecting American products and jobs. And sometimes for a short while it works – but only for a short time. What eventually occurs is: First, homegrown industries start relying on government protection in the form of high tariffs. They stop competing and stop making the innovative management and technological changes they need to succeed in world markets. And then, while all this is going on, something even worse occurs. High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars. The result is more and more tariffs, higher and higher trade barriers, and less and less competition. So, soon, because of the prices made artificially high by tariffs that subsidize inefficiency and poor management, people stop buying. Then the worst happens: Markets shrink and collapse; businesses and industries shut down; and millions of people lose their jobs.
Uncharted Waters
In conclusion, Trump’s ultimate game plan is to reshore manufacturing by reversing the effects of globalization. He has implemented an approach of harvesting the goodwill from U.S. alliances since the end of World War II, and through the implementation of trade barriers and economic pro-growth policies.
The long-term costs of these policies are the probable stall in productivity, and an increase in the cost of capital to U.S. companies through the removal of the USD’s “exorbitant privilege” as a reserve currency. Investors should therefore treat past studies of over 100 years of U.S. asset returns as irrelevant and re-visit portfolio return expectations using such data.
As a final note, some of Trump’s detractors have compared him to Hitler. For investors, whether he is another Hitler is irrelevant. My principal task is to help investors achieve superior returns. Even under Hitler, investors were able to achieve strong returns – until they didn’t. But the game has changed dramatically under Trump and the market is undergoing a regime shift of unknown proportions. Investors are going into uncharted waters. The phrase “past returns are no guarantee of future performance” will especially be true today.
Will “stock for the long run” resemble the U.S. equity history of the last 100 years, which would be the equivalent of projecting long-term returns based on the price history of Apple, or will it resemble the hiccups of the German market in the 20th Century? My expectation is that it will not be as severe as either, but be somewhere in between the two.
..but you remain long ?
Cam,
Thanks for this excellent article. The message of reducing exposure to $ assets (stocks, bonds and cash) across the board is crystal clear.
What is not clear is what one should invest in, if not US$ based assets? Are you making a case for adding exposure to unhedged non-US assets (Europe, Japan, Emerging markets)?
Towards the above goal, your multiple calls for buying gold were prescient. It is amply clear why gold should become a meaningful portfolio position. Thanks.
In the absence of other information, the neutral position should be to hold a diversified basket of global assets. That way you are protected in the case of any serious geopolitical fractures.
There is an assumption with Trump’s master plan that it makes economic sense to re-shore manufacturing. I am not so sure. The time, expense and opportunity cost of this upheaval will be immense and when all is said and done, we may end up with an outdated, low return on investment manufacturing base. The market may be awakening to this possibility.
“My principal task is to help investors achieve superior returns”. Thank you for the thorough review of the potential storm awaiting! I have reprinted your quote to emphasize suggestions from you on what areas may be appropriate for reallocation of capital.
As always, I appreciate your investment mind!
Mike
The premise here seems to be that Trump will somehow turn the U.S. into a large version of Perónist Argentina. That can happen, but for me the more likely scenario is, since the U.S. has a mixed economy and can’t live off beef exports alone, that this is political suicide and Trump will fold at some point, like he always does.
Whether he folds before we get a bear market is 100% unclear but in the meanwhile, I’m keeping my powder (sadly, not enough as is warranted) dry in order to re-invest in a timely fashion. One remembers Ken’s recommended signal of hi-yield spreads which have been a useful risk-on/off indicator.
The world’s best economy is not simply ruined in three months, even when the best person imaginable to do so is President. Why, I’d even say the budget issues are solvable. GHW Bush and Bill Clinton showed us how.
First of all, Trump was elected by a solid majority.
We are all in this boat together.
I disagree with the elephant theory. There have been elites since Moses, and some countries were enslaved. So it’s not new.
Going back to the 30’s and the last wave of populism there was Daddy Warbucks and Oilcan Harry, but there was no globalization as we have these days.
Sure, we can bring industry back to America…which assembly line will win, the one with the stoner who does not do good work and wants 25 bucks an hour, or the one manned with robots that require cheap electricity?
We know how that will end unless the gov’t subsidizes totally the human assembly line even though most people will opt for the quality of the robotic product.
No guarantees, but where will this lead to, is high unemployment because the robots work better, for less, 24/7 and don’t go on strike.
So who will benefit? Those with assets.
What happened in the 30s was a flush of money when gold went from 20 an ounce to 35. That money ended up going to those with assets.
Same story since the 1980s the increase in money, communications making it possible to globalize more.
So car manufacturing shifted from Detroit to the southeast because of labor costs.
Fighting comparable advantage is shooting oneself in the foot.
What’s with April 2? is it because it’s the day after the day Trump can say April Fools! Well it’s next week, maybe I should get some way out of the money calls on the SPY with expiration April 4. The 590s are 4 cents.
Reagan was right because human nature is such that if you subsidize an industry you get complacency and people gaming the system.
Has anyone heard of the Fed Put?
So yeah, trump can shake things up, make noise etc. but he can’t stop technology, unless robots are outlawed in the US (yeah imagine the security paranoia of the Chinese making robotic warriors while robotics is a nyet here, not gonna happen. ), just won’t work as everyone else goes robotic.
When America industrialized, people moved from the farm to the cities because the workers were not as needed on the farm. Then we had factories that made stuff that we shipped to Europe that had been devastated 2 times (any luck there?). We had lots of oil back then, also good for us. So then we shifted more to a service economy which requires spending. Spending more than the stuff costs, but this made for jobs in the malls etc
So where will the service people migrate to next? I dunno, but my advice is to be creative, and make something people want….hmm we are back to the 1% or so.
The pendulum swings.
The US is not your sole investment opportunity. If you choose to concentrate in the US, you will live and die by it.
Trump is metaphorically bringing the legions home. Europe can take care of itself, etc He is splitting the world into spheres of influence. If the era of Pax Americana is over, you will have to live with the economic consequences, much like the way the British Empire reached its peak after World War I.
I’d put it differently. Pax Americana is over regardless of what the US does. Trump is defining and fortifying the US sphere of influence. Europe is screwed.
Hi Cam,
Thanks for your in-depth look at the ideological forces driving the Trump era.
Just a couple of points here.
1) We need to consider “feedback loops” to cover all the possible scenarios. Hopefully the picture you paint is a worst-case scenario.
I don’t live in the USA so I don’t have the “on the ground feedback” that most of your readers have but from what I see on YouTube videos most of the Trump supporters voted for a more benign Trump 1.0 not the more radical Trump 2.0 they are seeing now.
Therefore outside of the media the first real feedback loop is the Mid-Term elections next year which will affect the Republicans and ultimately Donald Trump. Therefore Trump has only about 1.5 years to implement his radical agenda.
Finally we have the fact that he only has a 4-year term.
2) As alluded to by Ken in comments on an earlier post we need to consider the psychology of Trump to understand his actions. In my opinion Trump is a narcissist and most of his actions need to be viewed through this lens to understand what is going on. What you have portrayed in your article is an ideological framework for Trump’s actions but I think Trump’s narcissism ultimately outweighs this. To understand this better I thought it would useful to look at the traits of narcissist as outlined below (From Google search)
“A narcissist has an exaggerated sense of self-importance and a lack of empathy for others. They may also be manipulative and exploit others for their own gain.
Signs of narcissism
Grandiose sense of self-importance: An unrealistic belief of superiority
Need for admiration: An excessive need for praise and attention
Sense of entitlement: A belief that they are special and deserve special treatment
Lack of empathy: An inability to understand or care about how others feel
Manipulative behavior: Exploiting others to gain something for themselves
Preoccupation with power, beauty, or success: Fantasies of unlimited success, power, brilliance, or ideal love”
Does any of the above sound familiar?
For example, does Trump really care about Ukraine? Of course not. He only cares about a Nobel Peace prize or something similar which is why he is ready to capitulate on Russia’s terms.
Does Trump care about those who are suffering around the world? Of course not. (note “Lack of Empathy” above). That is why he cut USAID. And the list could go on.
So the bottom line is that everything Trump does is all about himself and nothing else. Therefore when things start to go bad this not good for a narcissist (note the “Need for Admiration” above) so I expect that there will be lots of “corrective actions” in the future so all is not lost.
At this point the war can only end on Russias’ terms. Ukraine had its chance in 2022, but they were not allowed to take it. Of course Trump, like his predecessor and the EU leaders, does not care about Ukraine. He’s trying to get out of a lost war while transferring the blame for it to others. I give him credit for reopening diplomatic relations and halting the escalation with Russia.
I’m not sure what “chance” they had in 2022 other than surrendering to Russia.
In my humble opinion the US and to some extent Europe in the past have been using the wrong strategy with Russia which is why it appears to be a “lost” war. Since the start of the war the “Allies” (supposedly) should have been giving maximum military assistance to Ukraine so that they could negotiate from a position of strength rather than weakness as it appears now. Instead what we have had is the USA actually withholding military support from Ukraine at times!
If they had given strong support to Ukraine I think they would have called Putin’s bluff. Militarily Russia is now not that strong as evidenced by such things as the need to call on North Korean troops.
Russia only has an economy the size of Italy so if the US had put its mind to it they could have easily helped Ukraine to win the war. They still can if they want to.
They had the chance to preserve their entire territory and save at least a million Ukrainian lives.
GDP is clearly not a good measure for the strength of an economy.
just trying to understand. What exactly should Ukraine have done in 2022 to preserve their entire territory? Capitulation would not have preserved their territory.
It’s really simple. Globalization’s beneficiaries were EM middle class and the providers of capital. Losers were developed market middle class. If DM middle class, the providers of DM labour wins, the providers of capital (stock and bond holders) lose.
You can dress it up any way you like, but that’s the simple truth.
The immigration topic is seriously distorted by media, for obvious reasons. US actually expanded a program to recruit all kinds of top talent from around the world, with no quota limit. The acquiring speed is unheared of. Just an example here. Last year I joined a few people to visit a fusion startup in a city located in east SF Bay. Its founder is a Lebanese in mid 20s, and its chief scientist is an Iranian, defected directly from Iran, in mid 40s. Their business model is similar to SpaceX’s. The facility looks like a smaller version of Skunk Works., at maximum security and direct line with DoD. We are not talking about the 10 Million who sneaked thru the southern border during Biden’s four years. They are a big burden, not assets, to US.
Scanning thru graduate schools of top colleges, this federal program also is actively recruiting foreign students. This program is expanded under Trump. Reading media headlines and all kinds of Internet outlets, you would think US is heading for a disaster. It is not. I even spotted a headline from Reuters: “When US attack Denmark militarily …” Stop wasting time on these useless legacy media outlets. Hidden agenda is not hidden at all.
so, the plan to annex Greenland is just empty talk? And even so, how is this the fault of legacy media?
Cam — in regards to your excellent Gold call, how do you manage its risk? Do you use a specific sell signal, or historical valuations, or something else? I’d feel uncomfortable buying something that may yet turn into a bubble, without a clear exit strategy.
It depends on your time horizon. The gold bull has a long way to run so I would hold a minimum core position. In the short run it’s extended, see my comments Sunday and I would be cautious in adding to the position.