Decoding Trumponomics

0:06Pushkin. He's back and he's busy and I'm not talking about Rob Armstrong. Donald Trump is the leader of the free world all over again, and he has a punchy platform of policies on the economy and on America's place in the world. This is still the number one issue for investors everywhere. It will throw up risks and opportunities, whether you're a have-a-go amateur investor or a big fancy hedge fund manager. So, week one, what have we learned? What do we know? Are we any closer to figuring out what he's actually going to do? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:45I'm Katie Martin, a markets columnist here at FT Towers in London, watching the news from the US with, let's say, great interest. Joining me from Trumpland are, from the Unhedged newsletter, Robert Armstrong and his younger, more glamorous sidekick, Aidan Reiter. Team USA, how has your week been? I think it's been great, man. And as a journalist, this stuff is catnip. I mean, I don't know. There hasn't been much to cover yet. Yeah, but there's been a lot of noise. Yes. And it's fun. The noise is fun. And speculating about the noise is fun. And, you know, it's just, for journalists, it's going to be a great four years.

1:22Yeah. Or at least a great two. I'm already tired. I'm happier being on my side of the fence than I would be managing other people's money for a living. That much, for sure. Correct. So, you know, he said a lot in the campaign. He came up with a lot of ideas. They didn't all necessarily all make sense lined up against each other. But still, there was a lot of stuff coming around. And the idea was he's going to get inaugurated and then we're going to get some clarity on what's actually going on. So tell me, please, what do we have clarity on now? Nothing. Cool. Well, we have clarity on some things, but not many things that have direct flow throughs to the market.

2:00Yes. So he's pulled out of the World Health Organization. He has issued a raft of executive orders freeing the January 6th rioters and a whole bunch of other things. He's taken steps to end birthright citizenship, which actually could have some long-term implications for the market. But in terms of the big things that we talk about, tax, tariffs, immigration, we haven't gotten the full picture yet. No. Well, what we got is some hints. Yes. So hint number one from Donald Trump. Tariffs were not imposed on day one, which is something that he had said. That is something that he had said he would do on day one.

2:41I will X, Y, Z. Well, on day one, he issued a strongly worded memo and made some threats. Well, he called for a memo. He called for an extremely strongly worded memo. But I will say at least it seemed like he wasn't going to do a whole raft of tariffs. But then literally in the last hour, in the 11th hour, he said, oh, and by the way, on February 1st, Canada, Mexico, let's say 25 percent. Yes. So. Yes. So I don't get that. I, you know, his beef is with China. No. So why is he not talking about tariffs on China as loudly as he was? But why is he flip this? We like Mexicans and Canadians here. It is a little, you know, what is that all about, Aidan?

3:24There's a couple potential, if we have to dive into the psyche here, which is always hard to do, there's a couple of potential interpretations. First of all, we should note that calling something for February 1st is more gradual than he said he would be. So he gets a little credit from the market there. But various people around him have said he does not wish to negotiate with China. He did not feel like in 2018 and 2019 they negotiated in good faith. So this could be the start of the negotiation round, and China might be the bigger hammer round. By giving Canada and Mexico 12 days, the Canadian-Mexican prime ministers have already been in contact with Trump.

4:02Theoretically, he's starting that one-by-one negotiation phase. And it would make sense to start with Canada and Mexico, because if your goal is to completely reshape world trade and completely reshape trade in a way that benefits the US, It's actually Canada and Mexico that are the larger U.S. bilateral trade partners. Right? So it's about - Which makes all the sense in the world. They are next to us. And we have a free trade agreement with them. It's called NASDAQ. So of course, of course, they're our biggest trading partners. Yeah. We get a lot of specific goods from these two countries. I mean, there's a lot of debate, and we wrote a piece about this yesterday.

4:35But there's a lot of debate on what the impact of tariffs on Canada and Mexico would be on the U.S. But it's fair to say there will be some sectors that are actually going to be impacted, whether that's lumber with a flow through to house building, oil with a flow through to everything or food. So he started there. It makes sense that he starts there, but it was a little surprising because my bet was that he would start with China. And Mexico, he seems to have a bee in his bonnet about the importance of Mexico to the U.S. auto industry, that we're making cars for our market there. They send so many parts to us and et cetera.

5:08And we know that he and other people in his administration are focused on cars. Howard Lutnick is obsessed with cars. Obsessed with cars. So either because they're symbolically important or just maybe they like cars. That's an important issue for them. And Howard Lutnick now is his economics advisor or does he have a – what's his role? He is the nominated secretary of commerce, which oversees trade. I will say, though, that he really focused on fentanyl in the statement. and I'm unaware of the overlap between Canada and fentanyl. I know there's conversations about Mexico. For whatever reason, in his actual statement, he didn't talk about cars.

5:45I mean, maybe you mentioned Lutnick and it's probably good to pause here and refer back to some work that Aidan and I did about the kind of total set of economic advisors to Trump. Yeah, who's who? The kind of Lutnick, Besant. Yes, so Scott Besant is nominated to be Secretary of Treasury. Howard Lutnick is nominated to be Secretary of Commerce. Commerce actually deals more with trade. Besant will be dealing more with the actual financial system. And you have various other people who are trade advisors, chairman of the Council of Economic Advisors. National Economic Council. If you were to make a generalization about this group of people, they all like tariffs, but they all like them in a kind of negotiated, well-telegraphed, gradualist way.

6:36They don't just love the idea of tariffs for tariffs' sake, right? They want to get something for the United States, and they don't want to upset the apple cart while they do it. Now, will incrementalism plus emphasis on negotiation translate into policy? Who knows? I mean, it seems like, but giving, you know, a 12-day notice and saying, where you're maybe going to do 25 % on Canada and Mexico, it seems like that is one of the day, right? If it were really the complete maximalist approach, you would have had a whole raft of tariffs on day one. So the markets, for their part, are kind of remaining calm about all this.

7:14Well, they are and they're not, right? You know, if you look on a sort of short-term basis at like the Canadian dollar, it's been like whacked around in one direction and then whacked around in another direction. Well, if you call your currency the loony, what exactly do you expect, Katie? That's a good point. The currencies have been moving. There's no question about it. What that should really say to Trump loud and clear is, OK, you apparently want a weak dollar. This is apparently what he wants. It's helpful to U.S. exports. Every time he turns up the heat on tariffs, the dollar rises. And every time he dials the heat down, the dollar falls.

7:51So that's the market's way of saying, OK, Mr. President, you can have one or other of these things. You can have a weak dollar or you can have really high tariffs on the rest of the world. I really don't know how that's going to pan out. But I would note that the one big currency on Earth that doesn't just kind of, you know, float around according to market forces, but that is set by authorities is, as we all know, Chinese renminbi. So this is China's kind of tool in its back pocket that it can snap back with. If it does get hit with big tariffs, it can just say, fine, we're just going to knock our currency by like 15%.

8:28So in that context, Aidan, I know you're a China watcher. You've shown off your Chinese speaking abilities on this podcast before. How are Chinese authorities looking on at this whole situation? What do they make of it? Yeah, well, I should note there's a pretty live debate on what they might do with the currency. A lot of people think they're going to let it fall past the floor that it already has. I haven't heard anybody saying, oh, they're really going to go for devaluation hard because that would result in even more retaliation from Trump. That being said, but, you know, I think it's still very high possibility.

8:59And it wouldn't just do that. I mean, a weaker currency. Yeah, China already is battling deflation. They don't want to make it worse. Apparently, they would let it surpass the eight yuan to dollar peg, which is like the bottom end of the band. and there's a lot of debate on to what extent they actually control it. That being said, we don't know a lot from China right now, right? Remember that China has its own economic problems, that it's struggling, and that they are concerned with the impacts of tariffs. Recently, they hit their 5 % growth target, something that a lot of people said they wouldn't.

9:31They did that, as we said, they might by really juicing infrastructure investment and exports in the final quarter of the year, which is something that, of course, will not make Donald Trump happy. So we don't know what they're going to do, right? A very generous interpretation of their unwillingness to issue a huge, massive stimulus, which a lot of people have been calling for, which they've been hinting at, is that they've been kind of saving that gunpowder for when Trump actually hits them with tariffs. So it seemed like they're kind of also in a wait and see mode. Yeah, waiting and watching.

10:01Waiting and watching. But it's unclear, right? And also, we are not totally sure what their true appetite for fiscal stimulus is, even though they keep kind of issuing small pieces of it and wringing their hands about how they're going to do it. So we don't, again, like just like all tariff things, we don't know what Trump will do. And we're unsure of how other countries will retaliate. We know nothing about anything. Well, I will say there are things that we know. We know how the market is reacting to the idea of Trump all in, especially over the last month. There has been notable changes in markets that suggest that equity investors at least have a certain view of what is going on.

10:45Let me tell you the top four performing sectors of the S &P 500 since the middle of December. They are energy, utilities, industrials, and financials. And what that says to me is growth. Those are cyclical industries that when an economy is growing, your energy, utilities, your industrials, your financials, those businesses are going to grow. And so, you know, and you see this in other areas. The National Federation of Independent Businesses Small Business Survey shows this big burst in confidence among small businesses. So there is a kind of growth mojo that is happening in the background. people feel like a Trump administration is going to be a good administration to do business under.

11:40We can debate why and in what areas that may or may not be true. But clearly there has been good business vibes, especially over the last month. Well, on that note, let me ask you, we were all watching the inauguration and you could see right there in the front row, one of the key ceremonies here. You had basically the Magnificent Seven, right? You had the chief execs of the biggest tech companies on the planet. You had Tim Cook from Apple. You had Elon Musk. Although Tim Cook had to sit in the back. Yes. Did you notice that? Who was in front and who was in the back? Musk was in front. Bezos was in front.

12:20Yeah. Zuckerberg was in front. And Tim Cook had to find his way to the back of the platform. That could be because he's been less verbally in favor of Trump. It could be also because while he controls iPhone and he does have some control over Apple News, He's not really owning the social media apps or the actual media itself. Whereas Musk owns TikTok. No, not TikTok. He owns Twitter. He doesn't own TikTok yet. Yeah, not yet. Zuckerberg owns Meta, which is Facebook, Instagram and WhatsApp. And Bezos owns the Washington Post. So this is Trump effectively saying to the world, look, I've got some of the key media organizations in the country right at my side.

13:00Right. And richest, the richest men in the country are kissing the ring. Those three of them are the richest men in the world. Right. I think Gates is further down now. Yeah. Yeah. Yeah. So it's on. Let me say an unpleasant irony for those men in the front row there is that under Trump, their stocks are not doing that well. It's interesting that while energy, utilities, industrials, financials, but like while the kind of growth sensitive stocks are rallying, the magnificent seven stocks have actually underperformed over the last month or six weeks, which is an interesting change in dynamics. Weren't they swept up in the big run up right after and before the election?

13:41I mean, this could just have been a correction. It's true. It could just be that those stocks are too expensive. And they are. But, you know, it tells you that that is not the bit of the market where the excitement is right now. You make of that what you will. So let's move on from oligarchs, broligarchs, whatever you want to call them, and look at another big policy area that is really significant for markets. and that's around immigration because all things being equal, you know, one of the things that really succeeded in pulling down U.S. inflation was this like bumper flow of migrants coming into the country willing to do work for cheap.

14:19And he's talking about ejecting a lot of undocumented migrants out of the country. What kind of clarity do we have around exactly what his plans are looking like? Yeah, so we've gotten a little bit of clarity about his plans, but we still don't know what the implementation will be. The Justice Department has been ordered to investigate local jurisdictions that are not complying with eventual immigration crackdowns. So that seems to be setting the stage for something a little more severe. He has stopped even the, you know, paused the legal process by which people enter into this country through parole and through the southern border.

14:50So the Biden administration had already sort of cracked down on southern immigration in the last year. This was an even further step. So, you know, trying to get people to not come over the border. He's also trying to change the notion of birthright citizenship, which is the idea that everybody who was born in America becomes an American citizen automatically. That has longer term implications for the U.S. labor force. But I think the bigger picture here is we know that he's serious about immigration and he's clearly starting to take some of the early steps and that will have potentially large implications to the market.

15:20You know, and it has large implications through the labor market and inflation. So to the degree that he significantly changes the number of workers in the United States, it makes sense that wages should go up. That's what they taught me back in supply and demand school. And the other thing they taught me back in inflation school was that wage inflation is the kind of inflation that is most likely to lead to a price spiral. So you can argue until you're blue in the face about tariffs and inflation, whether that's a one-time adjustment the Fed will see through and blah, blah, blah, blah, blah. But in basic rules of inflation that we're always taught about, wages and prices are connected in a sustaining and self-reinforcing way.

16:10So this is a biggie. Other presidents have tried to stop the flow of migration. I think this is, it appears to be an even more severe step to not just stop people coming in, but reverse the flow and really, really change the size of the US labor force. This is much more severe than we saw in the first administration. I mean, this is just speculation. Are they just trying to scare people into not coming and to leaving? They're trying to do some things that message really strongly. Yeah, maybe. But again, it goes back to what we've said all along, which is nobody knows anything. Nobody knows anything.

16:40Trademark. And, you know, all things being equal clamped down on immigration that results in a clampdown on cheap labor means more inflation, means bonds go down, which probably means stocks go down too. But, you know, as we were saying, speculation. So one thing that is really interesting to me so far is Trump's been in the White House again for only a few days. It is very early days. But stock market is like fine, like it's going up a bit. It's not doing anything terribly exciting. The action appears to be in, first of all, currencies and secondly, to a slightly smaller degree, bonds. Like why is that?

17:18Okay, let's just review the facts here for a second. September 16th, when it's middle of September, we all start to realize he's probably going to win, right? So then the 10-year bond yield was at 3.63%. Now it's at 4.6%. So it's a big change. That one percentage point is big change in bonds land. So that's clearly a response. What it means, reading the meaning of changes in bond yields isn't quite reading tea leaves or bird entrails, but it has some things in common with those activities. So does that tell you inflation expectations are higher? Does it tell you growth expectations are higher?

18:03Does it tell you that uncertainty about the future of growth and inflation is higher? Those are just the first three items on the menu of explanations for what bonds are trying to tell you. And we should probably note that it's not all down to people thinking Trump will be inflationary. We've gotten some hot inflationary prints in the last couple of months. We've also had Democrats and Republicans starting to fight already over the debt ceiling. So that is a big part of the picture. Yeah. So I think there's elements of uncertainty. There's elements of growth. There's elements of inflation all baked into the interest rate pie, right?

18:37Yeah. So break even inflation, which is markets expectations of inflation have been going up. term premium, which is theoretically what you'd be asked to pay, like the uncertainty premium you'd be asked to hold in order to buy bonds. That has gone up in the past two months. So it's a mixed picture. But that's the thing to watch. If you're going to watch anything, the US 10-year yield is probably a good place to start. Yeah, always. It's my rule of thumb. One last thought, you know, we touched on this on the pod the other day, Rob, but like Trump likes to keep people on edge. He likes to keep his negotiating partners on edge.

19:14You know, he likes to keep China guessing about what he's thinking. That also seemingly applies to Canada and Mexico too. Markets don't like that overmuch, this kind of idea that you literally don't know what's going to happen or when. How long will this carry on with us? I mean, you have to talk to our... We don't know what's going on. You have to talk to the Washington team about when posturing becomes policy. It has to happen eventually. But as a place to start, unless the actual policies are really awful, I think markets on the whole will just be glad to have a policy rather than things the president said late in the day on a random Tuesday because a reporter was in the room.

19:58yeah right and then it's like you know markets people can deal with a lot uh as long as they know what it is they're dealing with yeah so yeah i we will all welcome that day although it will give us journalists less room to speculate wildly which makes the whole game he does say some some wild stuff like he was asked the other day about the BRICS countries right brazil russia india china and he was saying that the s stands for spain and spain is a member of the BRICS Hey, it's a member of the BRICS now. And it's also called the Gulf of America. And Mount McKinley. And Mount McKinley. And Greenland will now be called Texas or something.

20:43Called Texas? Called Texas. Oh, the best of days. Just, yes, every day I wake up and I am glad that I'm not managing other people's money. If you're listening to this pod and you are. It's kind of shocking that he hasn't proposed turning the United Kingdom into several more states. Do you feel neglected? Do you feel left out of the fun, Katie? You'd be surprised, but there are some people in the right-wing press in the UK that are mooting this as an idea. Oh, my God. It's a no from me. On that bombshell, let's wrap up there. We are going to be back in a sec with Longshore.

21:27All righty, now it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Chaps, what you got? I am long the Trump-Musk relationship, by which I do not mean that it will be a long relationship. What I mean is that it is hilarious and amusing, and I hope it goes on and on. So the other day, to the sound of trumpets and the great flapping of flags. Trump announced this big AI investment project by Oracle and a bunch of other companies and it was going to be$100 billion up front and another$400 billion later and this is proof that America is wonderful and everything else and there was clapping and so forth.

22:12And then like two hours later, Musk tweeted that the companies involved don't have the money. it's almost like he has competing interests yeah if this ain't funny i don't know what's funny so long may it go on you're just here for the drama exactly aiden i am short the mexican peso not that i don't like the mexican peso just that we've seen a lot more of the tariff responses in the currency market when trump threatened tariffs on canada mexico the canadian dollar and the mexican peso dropped pretty hard um it seems like claudia scheinbaum the president of mexico is not as obsequious, is not as, you know, servile to Trump as he would like.

22:50So I imagine they get hit with bigger tariffs than other countries. Yeah, she's not taking this lying down. Anyone who fails to genuflect is going to have trouble. Well, on a much more trivial note, I am long of The Traitors, which is on the telly. I don't know The Traitors, you have to explain. You need to watch The Traitors with specific reference to the British one, which is on the BBC. and it's this like game. You have a bunch of people in a house and two of them are traitors, which means they have to go around killing other people in the house. Not literally. Anyway, it sounds slightly rubbish and contrived and it is extremely contrived, but it's extremely good fun.

23:33And just the degree to which people will knife each other in the back is like absolutely astounding. It's very, very good telling. I feel like I'm living that show. I don't need to watch that show. Are you the traitor? I've got to watch my back. I'm totally, totally addicted. It finishes this week, so I should have recommended it earlier, but I love The Traitors. It's so good. Listeners, it's a rocky road out there in markets, but we will be back in your ears to hopefully guide you a little bit on Tuesday. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein.

24:13We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

24:47We'll be right back.