In a recent discussion, Joe Mallen, CEO of Modelist, sat down with Kent Peterson, CIO of Modelist, to discuss the state of the economy following Donald Trump's election. Their conversation explored fiscal policy, market dynamics, and the outlook for various asset classes. Here’s a transcript of their back-and-forth dialogue.
Joe Mallen:
What is the current macro and financial backdrop now that Trump has been elected President?
Kent Peterson:
That’s a great question. Trump is stepping into a landscape where fiscal policy is incredibly stimulative—think "wartime" levels of government debt. While this boosts short-term growth, it’s a long-term issue without a clear legislative solution.
The roots of this debt trace back to COVID. The government had to step in when private-sector demand fell off a cliff, spending big to stabilize the economy. The upside? The private sector—households and corporations—is now in a solid position. Households have drawn down savings but remain financially healthy. Corporations, too, aren’t over-leveraged as we typically see at the end of a business cycle.
Joe:
And what about monetary policy?
Kent:
The Fed has some breathing room now. With two rate cuts in the bag, they have the flexibility to raise or lower rates as needed. Inflation, while not at the Fed’s 2% target, has been trending down, with the latest CPI print at 3%. Employment is strong, with unemployment below 4.5%. Essentially, we’re in a "Goldilocks" scenario—fiscal policy is stimulative, inflation is moderating, and the job market is robust.
Joe Mallen:
How do you think Trump’s policies, especially with likely control of Congress, will affect the economy and markets?
Kent Peterson:
There’s a mix of clear positives and potential pitfalls.
On the positive side, Trump’s focus on deregulation and tax cuts should boost corporate margins and drive growth. These Reagan-era style policies are a win for stocks and business investment.
Joe:
What about the potential negatives?
Kent:
Two policies stand out: tariffs and immigration.
Tariffs are inherently inflationary. If import prices rise by 10-20%, it hits consumers, particularly those on tight budgets. The big question is whether Trump uses tariffs as a bargaining chip—something we saw in his first term—or as a long-term strategy. If it’s the latter, inflation could spike, forcing the Fed to hike rates.
Immigration restrictions could tighten the labor market, driving up costs for services and manufacturing. However, large-scale deportations or drastic measures seem logistically and financially unrealistic. So, while he might move the needle, sweeping changes are unlikely.
Joe Mallen:
Let’s talk markets. How will this environment affect stocks, bonds, crypto, and the dollar?
Kent Peterson:
Stocks: There’s room for gains, especially with deregulation and tax cuts in play. But valuations are already high, so the upside might be limited.
Bonds: Fixed income faces challenges. Inflationary pressures and the lack of a budget-deficit solution suggest rates could rise, especially at the long end of the curve.
Crypto: Bitcoin has surged post-election, likely due to optimism around deregulation and Trump’s support for the sector. But the broader crypto market struggles with counterparty risks, and without reliable infrastructure, growth could stall.
The Dollar: The U.S. continues to lead in growth and productivity, making the dollar an attractive asset. Higher rates and stronger growth will likely attract foreign capital, keeping the dollar strong.
Joe Mallen:
What’s your biggest concern moving forward?
Kent Peterson:
Inflation, plain and simple. If tariffs or immigration policies drive costs higher, the Fed might be forced to raise rates. Combined with high valuations in stocks, it’s a recipe for potential volatility.
Joe:
So, my least favorite statement, cautious optimism?
Kent:
Exactly. There’s plenty to like, but also plenty to watch out for. The next year will be critical in determining how these policies play out.
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