Trump 1.0 vs 2.0//The Lame Duck Period//Russia-Ukraine Escalation//New Navigator is Out!
Two weeks after the US elections, we want to highlight some of the early signals coming from the incoming Trump administration; how Trump 2.0 might differ from Trump 1.0; some of the possible geopolitical developments between now and January 20th (known as the Lame Duck period); and some brief geopolitical highlights including energy security and Europe/Ukraine.
After an initial period of market euphoria, the reality of the inflationary impact of Trump’s proposed policies has now set in and market enthusiasm has cooled. How the incoming president will make good on campaign promises to not touch Social Security, and how Elon Musk’s new Department of Government Efficiency—which is tasked to cut $2trn from the federal budget—will fulfil its work are starting to collide. We are seeing this in the outlook for US Treasuries and the yield curve.
It is estimated that Trump’s campaign promises to extend tax cuts and other spending will add $7.75tn to the budget, according to the Financial Times, and with 65% of the US budget ring-fenced for entitlements for the poor and elderly and defense spending, the cost-cutting is bound to generate political blowback.
Trump 1.0 vs 2.0
Personnel is looking very political in the incoming Trump administration. President-elect Trump has moved quickly to put forward his nominees for key posts, a mixed bag in terms of talent, and clearly chosen with loyalty in mind, following the frustrations he experienced in his previous administration with perceived brakes on his authority. The more controversial choices such as Matt Gaetz for Attorney General and Tulsi Gabbard for director of National Intelligence also represent a loyalty test for the incoming Congress, which will be Republican-controlled but by a very thin majority.
Markets are eyeing positive signals for the Treasury Secretary pick, with hopes high for an industry-friendly choice such as hedge fund founder Scott Bessent. Both John Paulson and Jamie Dimon have stated they are not interested in the role.
Marc Rowan, the Apollo Global Management cofounder and Kevin Warsh, a former governor of the Federal Reserve Board, are also in the running, with Cantor Fitzgerald CEO Howard Lutnick now tipped to run the Commerce Department. The choice will be interpreted as an indicator of whether the “Trump Put” still stands. Our view is that the outlook is much shakier than during Trump 1.0.
One key point is that we now need to take Trump seriously and literally, though of course he won’t be able to enact all of the sweeping changes proposed. Nonetheless, he has a clear mandate, control of the White House and Congress, with influence over the Supreme Court, and his nominees reflect a desire to remove obstacles blocking his agenda.
This is most relevant with tariffs. Trump has threatened 60% tariffs on China for example, and 25% on Mexico, which Trump blames for immigration and fentanyl. Europe will also be the target of sanctions; recall Trump’s comments about how Europe is “almost as bad as China”. But is this just sabre-rattling? We suggest that Trump sees tariffs as a form of revenue-generation, and that while he is willing to make personalized side-deals, he does not believe in allies or the value of partnerships.
The reality of a global economy with a United States that does not believe in Free Trade has not set in our view. One by-product may be that the deal pipeline between now and January is likely to take off, as well as consumer behaviour in order to avoid tariffs on big purchases.
For more on what to expect from Trump 2.0, check out our latest issue of The Navigator below. Continue reading for our view on European energy security and the implications of the recent escalation between Russia and Ukraine.
The Navigator
He's Back: Getting Ready for Trump 2.0
Watch Tina Fordham discuss the aftermath of Donald Trump's return to the White House and decode the early signals for his second presidential term, in collaboration with LSEG.
The Lame Duck Period
Bearing in mind Trump will not take office until January 20th, 2025, President Biden still has 9 weeks to leave his stamp on the presidency. He made one such move on Monday in allowing Ukraine the use of missiles (50-60 km range) inside Russian territory. The reversal in policy was reportedly sparked in part by White House concerns that up to 100,000 North Korean troops would be deployed in Ukraine to fight on the Russian side.
This move is probably too little too late for Ukraine, which is struggling to maintain territory and has been on the receiving end of a renewed Russian aerial barrage. We expect Russia to continue to press its advantage between now and when Trump takes office in order to consolidate gains and increase its negotiating position.
The US move has also increased the pressure on Germany, which continues to object to increasing weapons to Ukraine. Chancellor Scholz’s phone call to Putin on Sunday was their first communication in 2 years, and has illustrated how German economic weakness, exposed by the collapse of the ruling coalition and new elections called for February, finds itself in a weak position.
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Russia-Ukraine Escalation
On our Radar: Could Germany give in and restart Nord Stream II? This is something we are thinking about. Germany’s moves certainly set up a fight between Brussels, Poland and the Baltic states, and Germany, which the Kremlin will be happy to exploit. Reports this morning of a severed undersea cable between Germany and Finland have highlighted our long-running concern about Russian “grey zone” hybrid warfare operations in Europe, with more likely to come.
Earlier today we published a Rapid Reaction covering recent "grey zone" developments and Putin's updated nuclear doctrine, which you can read via the link below:
Best,
Tina
Our Views in the Press
In days following Trump's election victory, Tina Fordham offered insights on market euphoria, long-term risks, the possibility of a trade war with China, and more.
Watch below!
Trump's Victory Sparks Market Euphoria: How Long Will It Last? // Tina Fordham on Bloomberg Radio
US Election Insights: What a Second Trump Presidency Could Mean for Leadership and Policy // Tina Fordham on Bloomberg's The Pulse with Francine Lacqua
A Red Sweep's Market Impact: Short-Term Euphoria, Long-Term Risks? // Tina Fordham on CNBC
Tariffs, Trade Wars, and Trump 2.0! // Tina Fordham on Bloomberg
Is Europe Trump Proofed? // Tina Fordham on The BBC
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