The Trump economy. How big? How beautiful?

0:08The people of America have spoken loudly and their choice is very very clear. They want Donald Trump as their next president. So high tariffs and mass deportations are the nation's explicit choice of economic policy, possibly with a little executive branch influence over interest rates to boot. That smells pretty inflationary from here. So today on the show, we're going to make some economic and market predictions that we hope will not make us look silly in a few months' time. And if they do, we'll just deny this podcast ever happened. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:46I'm Katie Martin, a markets columnist at FTHQ in the relatively calm, serene London. Join down the line from New York City by the Unhedged newsletter crew, Captain Robert Armstrong and first able deckhand Aidan Reiter. Listeners, as a reminder, if you get confused, I'm the one with the English accent, Aidan is the young and clever one, and Rob is Rob. Guys, how's it going? It's going well. I'm not one of these people who gets all emotional about presidential elections. New York is very eerie right now. It's like something's not right, but nobody's changing their behavior. Let me tell you what is right.

1:29The good ship USA got this election done and dusted nice and quickly this time. No, it was good. And I think that is a huge relief. regardless of what you think about the person who won and the person who lost man, the decision was clear, it was clear quickly the system worked, no fuss no muss. Yeah, in the pundit square of when there would have been huge upset, if Harris had won all of Trump's supporters would have thrown a fit. If Trump had won the electoral college but not the popular vote Harris' voters would have thrown a fit this was like the only outcome where everything is calm, I guess Yeah.

2:07Yeah. This is clear as day. And so, you know, Rob and I, we chatted about this actually the other day on the pod about how markets just don't like these kind of, I don't know what's going on kind of situations. They like this kind of certainty. So just that is enough to add a certain amount to the stock market. But then also, let's just have a quick kind of rattle through what markets have done since Donald Trump got reelected. So that's yesterday. What happened yesterday. S &P 500 was up two and a half percent. The Russell, which is small caps, was up six. That's broadly as expected. Trump wants to cut.

2:39That's a lot. Yeah. Stocks like this. Trump wants to cut corporate taxes in America. And if that happens, earnings go up and so stock prices should rise. And it explains the difference between the small caps and the big caps. The Russell 2000 rose so much because they're more domestically focused. So more of their revenue will be taxed at this lower rate we are currently imagining is going to become the corporate rate. Yeah. And there are certain sectors of stocks that did particularly well. So bank stocks, sword, particularly Capital One and Discover because their merger seems to potentially go through in the Trump administration.

3:15The Fannie Mae and Freddie Mac stocks, so stocks that theoretically Trump wants to give the profits back to shareholders also jumped. And then, And, you know, dollar stores did terribly poorly because they import Chinese crap. Right. And the Chinese tat tax, as you might call it in the UK, is the crap tariff. The crap tariff is set to go up. Yeah. And home builders did terribly. Home builders did terribly. Because mortgages are probably going to go up if you get inflation. Well, that brings me on to my next point, which is what we've had in addition to a really good day in the stock market. I refuse to talk about Bitcoin, but I'll just briefly note that it hit a record high.

3:57Trump likes crypto, whatever. This stuff doesn't matter. But what we've also had is a really decent jump in the dollar and a big jump in bond yields, right? So bond prices have gone down. The yields have gone up. That is because the market thinks that Trump is inflationary. So my question to you guys is, is Trump inflationary? I would frame the question slightly differently. There's one point. I'm asking the questions here. Okay, okay. But just hear me out. Part of it is, is he inflationary? And part of it is just, is he a higher yields guy? Is he a person of big tax cuts with no cuts in spending?

4:37And that means bigger deficits, sustained large deficits at the very least. And the result is that the long yield goes up. Long bonds go down because the fiscal situation of the United States is worse. And then you can kind of pile the inflation point on top of that. If he does that kind of thing, this kind of thing tends to be inflationary too. And in theory, if he does follow through on what he's been saying he's going to do, which is to deport lots of migrants, then, you know, that starves the labor market of a source of really cheap labor for jobs that, frankly, a lot of other people don't want to do.

5:15and that should push up wages as well. So that's also inflationary, right? So there's a few angles where markets think this is going to play in. Here's my thing though. Say he puts in these tariffs on the sort of scale he's been talking about. He's been talking about massive tariffs globally, particularly for China, but also globally. If you assume that the dollar runs higher at the same time, will that cancel out this effect? Good question. You have a TV that's made out in South Korea, right? You get a 20 % tariff slapped on top of that that the buyers in the U.S. have to apply. But if the dollar is 20 % higher, does the consumer notice?

5:55Good point. Excellent point. Well, it will depend. I mean, the dollar going 20 % higher would be an epic move. And also the rest of the world would implode. Yeah. So, I mean, it's a stretch. But I think what's right about the argument you just made is that there are a lot of counterbalancing forces that could come into play here. Do you know what I mean? The global economy is very dynamic. So it's not like Trump turns the tariff switch and prices just mechanically move higher by that amount. There's all kinds of repercussions and feedback loops that you have to kind of think through. Yeah, but I think it's fair to say that at least on the government spending point, so the bond yields, absolutely, that is his plan.

6:41And it seems like he's going to get a Republican Senate and a Republican House. So it's likely that he will be able to pass the tax cuts, increase the spending that he wants, so the bond yield should rise on the deficit point. On inflation, immigration, and tariffs, as Rob said, it gets much hazier. Yeah. But, you know, at a simple level, it's like you take workers out of the economy, wages should go up. That's what they taught me back in supply and demand school. And if you make products more expensive, then prices go up. Yeah. And, you know, you can argue about to what degree this is a one time effect.

7:21So it's a step change versus you you trigger a self-reinforcing cycle where you have persistent inflation. I think you can have that debate. But like at the most basic level, of course, these things are inflationary. And in the case of immigration, it's designed to be inflationary. The whole reason that we want immigration down or those who want immigration to fall want immigration to fall is because they want pay for domestic workers to go up. We call that wage inflation. And when we were kids back in school, they told us that wage inflation is the kind of inflation that tends to persist and build on itself.

8:03I also I get so frustrated with that step change versus not shift change argument, because at the end of the day, the prices will be higher. As we've learned in this election, Americans hate higher prices. So whether or not it's a step change or persistent inflation, they're going to not like it. That's exactly the point I was going to make. Like, you know, so he's painting himself into a corner, right? Inflation is bad. He's won this election in no small part due to inflation that kind of got embedded during the previous administration. but possibly going to make inflation worse. And also he might seek a, you know, semi-official or official role of some kind relating to the Federal Reserve, might want more influence over interest rates.

8:44Help me out here. There is a important player in this drama who we haven't mentioned. And while this person may not actually exist, she is worth mentioning. And she is the Bond vigilante. And one thing that I don't think we tried to think through in the column yesterday, Aidan and I, but I think is interesting. So if all this stuff is true about Trump that we just went through, he's inflationary, it's higher rates. How do markets respond to that over time and how does Trump respond to the markets? So he just won an election and fair enough by pointing out that there was a lot of inflation under Biden and that equals a bad economy.

9:34So what happens if the Trump is inflationary crowd is right and we have a significant increase in inflation and bond markets freak out and maybe stock markets don't like it all that much either. right and suddenly trump who likes to measure his success against the market suddenly he's in a situation of being criticized by the market how is he going to respond to that how is he going to respond to that i don't know i have no idea i mean i think he has a pathological inability to accept blame so i'm sure someone else would be blamed for it yeah but uh will will whoever he blames verbally, will his behavior and the behavior of the administration change?

10:17Like, would a proper bond vigilante freak out and an accompanying disturbance in the stock market, would that scare a Trump administration into conventionality? I'm not saying that's the most likely scenario, but I'm just putting it out there as something we ought to think about. Because he, you know, As we pointed out in the column yesterday, he had a nice ride from markets 2017 to 2021. Stock market, very agreeable, rates low. It was pretty plain sailing. You can argue about whether he caused that or not. I'm always a little skeptical about the relationship between policy and markets. Fine. He had it good.

10:58How does he act when he has it bad vis-a-vis markets? Not that I'm saying he necessarily will, but these things have been known to happen. Yeah. And what we wrote about in the column yesterday is also the immigration and the tariff pieces also could not be as inflationary as the market's expecting. And that depends, again, on how they actually go about doing this. There's a lot of vagaries on the tariff policy. It might just be a negotiation tactic, in which case, theoretically, tariffs would become lower. I don't think that's the case, but that is what some people in his orbit say. And then the immigration stuff, right?

11:27If there's massive unrest and if people aren't happy, if the Republicans are unhappy that the person manicuring their lawn is no longer there or is demanding more money, how is that going to blow up in their face? So there's a bunch of stuff that we don't yet know around how this immigration policy is going to actually play out, how this tariff policy is going to play out. Let me throw at you another thing that we don't know. Is Trump a strong dollar guy or a weak dollar guy? You know, so if we get to the point where all of this stuff is inflationary, it means that higher for longer is back. It potentially means we start to have a conversation again about U.S.

12:02interest rates having to pick up rather than carry on falling. If this keeps pumping up the dollar, will he like that or will he discover pretty quickly that that's actually bad for American exporters and actually try and turn it on its head? Let me make a apparently meaningless and empty terminological change. It's what you specialize in. This is what I specialize in. Trump will not perceive a stronger dollar as a stronger dollar. He will perceive it as other countries manipulating their currencies downward. And that is how he will frame that, right? So he likes, you know, he probably likes the word strong, right?

12:43and especially when it's associated with American things. And the dollar is an American, is the paradigmatically American thing. However, you know, a weak euro, a weak yen, a weak RMB, these will be seen by him as evidence that other countries are cheating in their affairs with the United States. And I'm not saying, I'm not imagining this. This is, in fact, how he talks about this and has already talked about it. Yeah, he did this when he was last in office, like the European Central Bank cut interest rates for whatever reason, you know, as everyone expected they would. And he lashed out at them for manipulating the currency.

13:18Now, we know that a strong dollar and weak currencies elsewhere are just the same thing. Right. But that's not how he's going to frame it. And that's he won't act on that assumption. And, you know, because he doesn't really value the independence of the Fed or as we're led to believe by a lot of his comments, I don't think he'll value the independence of other central banks in the same way. Yeah. So I think he is probably de facto a weak dollar guy, but that his policies are probably strong dollar. And also he has said, even though he wants to be a weak dollar guy, he's constantly touted how he wants the dollar to be at the center of global commerce, as if it weren't already the center of global commerce.

13:57But he's constantly said that. So that would imply a strong dollar policy. There's so much going on here, you guys. So I'm going to boil it down into a series of silly questions. Oh, goody. For you to answer. That's my favorite kind of question. Yes. So on this issue of whether Trump is genuinely inflationary, you know, the dollar plays off against tariffs and is it all a wash? Da, da, da, da, da, da. Give me a prediction. Where is the US inflation rate at the end of 2025? You may pick your preferred inflation measure. I'm going to say core PCE. PCE inflation stands for inflation in personal consumption expenditures.

14:36and it's the measure that the Fed prefers. It's currently 265. 2.65 core PCV. I will say a year from now, it's going to be, I think the over-under is actually 2.65 because I think if Trump is inflationary, it's going to take some time. And we're in a drifting down part of inflation and we are not going to have an inflation problem in the next year. This is what I fearlessly predict. I don't understand your answer though, Rob. So where is it end of next year? So it's about where it is now. It's above two and below three, right? You know, maybe a shade above two. If you want a number, I'm going to say that it's at 2.3 at the end of the year.

15:202.3, that's a radical take. Aidan? Well, given that it theoretically could already be starting to reinflate now, I think that's going to be a little too low. I'll take the over, but maybe even significantly over. To me, what it depends on is I think these policies will be inflationary to some extent. The question is how fast can policies actually be put on the ground? Correct. The tariffs – if we really do believe these tariffs are part of some master scheme of negotiation, that will take a long time to negotiate every single tariff with every single country. Yes. So I imagine that might – So we might want to be asking – if I might be rude and reframe your question, what do we think is the peak inflation rate in Trump's next term?

16:00Ah, there we go. How do you like that question? Aiden, first of all, let's turn the question back on Katie. Katie, what is the peak year-over-year U.S. core inflation rate under Donald Trump 2025 to 2029? I will take 3.8. So you're basically on my side. It's warm but not super warm. I'm going to go for 4.6. Wow. So if – okay. Now – And that's core. I think if you include oil, which I think will stay low for a long time. Yeah, yeah. That's core. Then that's going to be much lower. But core, which is unfortunately not what the American media pays attention to, will be much higher. Will be much higher.

16:41Okay. Now, I'm with Katie. I think it's going to be cooler than that because I think in the end, a lot of these policies are not going to get done. Okay. That's my – I think that's the central hypothesis. I think there's a 60 % chance there's a huge amount of hot air here. The other 40 % is a totally different picture. They may go bananas. But if Aiden is correct and inflation gets to 4.6%, that is going to be wild, right? Because then rates are high again. Mortgages are more expensive. The whole narrative that it's the Dems that caused inflation, that gets turned over. The politics is going to be massive.

17:25He will have lost just because he's, you know, all presidents lose the House in the first midterm. That will happen. So he won't have Congress. And, you know, if in like, I don't know, 26, 27, we have core inflation coming up against 5 percent, it is going to be lively as hell. So, but wait, so what is your answer, Rob? No, I don't think – I think my central hypothesis is like yours, that it's going to be warm but not hot. If Aiden's right, it's going to be wild times. But here's the thing. I think that people's feelings about the economy are hot air when it comes to Trump. I don't think that – yes, I think there are a lot of people who have been really hurt by this economy and inflation has hurt a lot of households.

18:04And I think sometimes we do a disservice by talking about the average because there's people on the bottom of the average and the top of the average. But I really do believe that the media system and the politics of this moment are not ones that will hold Trump to account if the economy gets bad. And now we come to the point where Aiden and I fundamentally disagree. I think if there is a serious increase in inflation, I think Trump will massively chicken out. That all the stuff we talk about about him that is inflationary, when faced with the actual beast, it is my not very confident. I'm like 60-40, 70-30.

18:45He just massively chickens out. I think he chickens out on some of it. the immigration stuff a little bit, but he's staked his campaign. The entire core policy promises of the campaign are tariffs, deportation, and some form of tax cut. He's going to have to deliver on some regard on all three of them. The degrees might vary, but I really do believe it's more of a political statement than it is an economic concern at this point. I don't think Donald Trump really cares that much about his supporters and their wallets. I'm not the first to say it. Yeah, no. I mean, you make a good case, but I'm taking the other side of it.

19:21I want to move on to my next question. Everyone's talking about America all the time. Too much talking about America going on. I agree. But my next question, ironically, about America is, where does the S &P 500 end up at the end of next year? So it's had a good run on the back of Trump's re-election. It's now sort of 5 ,900 and something. where does it end up at the end of next year? First of all, I don't even want to talk about my track record at predicting the market. It is poor. It is terrible. Yes. But, you know, I just don't see any, I mean, I think the market is expensive and has in a long run.

20:01So another huge leg up seems unlikely to me, but I don't see any reason why valuations would crack or the economy would crack. So I think it's going to be up a kind of average amount. Another 10%, 6 % in real terms, something like that. I think the 2025 window also might be too soon, right? I'm sure they'll get tax cuts, which mechanically will feed into higher earnings. That'll be – that's like we – why have that cut priced in already? Yeah, that's true. I think if things were to hit the fan in terms of regulation and gutting the deep state in a way that actually feeds the market, that wouldn't happen until 2026.

20:38So I agree that it will be only regularly up in 2025, but I think there is a real possibility that there is some pharmaceutical crisis and or other crisis if RFK is in charge of all the health agencies. Couldn't you imagine some flow through to tech and some flow through to pharma companies? So give me a number. He also wants the fluoride taken out of the water. Yeah. And so the stock pick is like the company that makes dental equipment. You know, there's that cool, fancy, startup-y dentist place in New York City. Yeah, we have one next door here. You got to buy stock in that. Yeah. Beautiful.

21:15But so give me a number. I'm saying 6 ,500 and the next year. Okay. I'm just going to be slightly under to be annoying and do 6 ,300. 5 ,929 times 1.1 equals... Did you get 6 ,500, Katie? Mm-hmm. We all agree. 6 ,500. I'm taking the under just to be annoying. 6 ,300. Okay, great. Okay. My final question for 10 points. Where do interest rates end up at the end of next year? And I don't want you monkeying about with this question. End of next year, where are interest rates? Which interest rate are we talking about? Are we talking about the Fed fund rate? Exactly. So we're currently at, where are we?

22:00A little under 5%. The market has 3.7, I think. The futures market is telling us 3.7. I'll take one less cut than that and go four. How do you like that? Bed funds rate of about four. I'm going to believe in the wisdom of the masses and say 3.75. Are you? Are you? I'm going to say I don't want to agree with Rob, but I sort of agree with Rob. Yeah. Yeah. Yeah. Where are we now? Where are we now exactly? We're at 475, right? Yeah, I can see four cuts before then. And I don't think inflation starts kicking, you know, becoming an issue until a little later into a Trump term. And the other thing about going with the market rate is one thing we really learned in this market, in this election, is that markets are pretty good at predicting the future.

22:52Not great, but they did really well on this election. And so once again, we have an opportunity to honor markets and all their forms. and their ability to aggregate many opinions into a sensible forecast for the future. Of course, they get tons of stuff wrong, but it's as good a mechanism as we have. Efficient markets, boys and girls. Now, on a related point, so my understanding is that whether he wants to or not, Donald Trump cannot unseat Jay Powell, who's chairman of the Fed, until his term is up, which I think is sometime in 2026. Early in 26. Yeah, February-ish. Yeah. Does he reappoint him?

23:30If Powell wants to do it even, does he reappoint him? He's a Trump appointee in the first place. I sincerely doubt Powell wants to do it again under Trump administration. But first of all, Trump apparently flirted with the idea of trying to fire him, but he was told that that was not legally possible in the first term. I don't know if flirted. Flirted is, I mean, what we heard, it was, he said, he asked somebody if it was possible to fire him. And I'm sure he asks a lot of questions. But if things have been a bit hectic in markets in 25, keeping him around might be something that they want to do.

24:06So it depends a little bit. If you see turbulence ahead in markets, they may see the virtue in keeping the guy around. But if we have a smooth year, they're going to put somebody in there. See, I think of it as there's two people who are flirted as contenders. There's Kevin Hassett, who we've interviewed, and Kevin Warsh. And Kevin Warsh is seen as the more straight and narrow. He's already been on the Fed. He's more of a normal, conservative guy. I feel like if things are good, he'll nominate Kevin Hassett, who will be a little more to his liking. If things are bad, he'll nominate Kevin Warsh.

24:36All right. The battle of the Kevins. Yes. Yeah. Yeah. I cannot offer any kind of scenario as detailed as that one. So I'm just going to shut up, which comes – it's very unnatural to me. But look, I think we've, you know, we've given some straightforward answers and some not terribly straightforward answers. One last thing. Do we get a recession during Trump's turn? If I knew how to predict recessions, Katie, I wouldn't be hanging around here talking to you, would I? Yeah, you would. You love it. Recessions are rare these days, right? I mean, it's just a historical fact that recessions seem to come around less often these days.

25:19The rational thing to do faced with this question, if you had to put money on it, is to say no. Because in an average four years at this point, you don't have a recession. Now, are there any reasons for us to push those odds up? See, in my mind, if there is a recession, I don't think it'll be from natural economic occurrence. I think it'll be from some unexpected Z factor. Exogenous. Exogenous effect like COVID or, you know, COVID, we had a mini recession, right? So I imagine there being not, I don't want this to happen. I don't think Trump will try to make this happen. I just, I feel like we're overdue at this point for something even worse.

25:57Yes. Yeah. Mr. Spooky. Yeah. It feels incredibly unlikely to me. I think you can't bet on it. But if, you know, gone to my head, I would say, nah, I can't see it. Me too. I mean, I feel like you're right. I just want to take the over. So should I hand you money now? I mean. We'll talk about the odds later. On the next show, we'll discuss our recession odds. Okay, look, we've put the world to rights here, but we're going to be back in a sec with Long Short.

26:30Okie doke, it's time for Long Short, that part of the show where we go long a thing we love, short a thing we hate. What do you guys got? I want to go first. I am short incumbents. So there's been loads of elections all over the world this year and the incumbents in pretty much every case have lost votes or outright lost elections. So you look at UK, you look at France, you look at Japan, you look at US. Moral of the story is inflation, man. Voters do not like him. Not one little bit. Not one bit. What have you guys got? I am short the tweed industry because I love tweed above all fabrics in all its varieties and permutations.

27:16However, it's November in New York and it's in the mid-70s. Global warming is real. Tweed is facing a very scratchy future. An existential crisis. An existential crisis. You know, it's like in order to keep wearing tweed, I'm going to have to move to like Sweden. You know? And I might actually just so I can keep wearing tweed. As it happens. Yeah. Yeah. Yeah. Well, I wasn't expecting that one, Rob. Good. So thanks for playing. Aidan? I am long the American project. A lot of people were disappointed by the outcome of this election and have concerns about this next administration. But I believe that Americans will hopefully put their voices forward and America will continue to be a nation where a lot of people want to live.

28:03And that gives people brighter futures than they otherwise would have. I will second you. America is awesome and will continue to be awesome. I'm hopeful. Good. Look, America being awesome. I can't take the other side of that. Listeners, that's it for today. But we're going to be back in your feed and it's going to sound a little bit different. No spoilers, but, you know, something exciting coming. So listen up next Tuesday. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio.

28:39Special 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.

29:10We'll be right back.