This is an audio transcript of the Unhedged podcast episode: ‘The Trump trade’
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Katie Martin
The US presidential election is heating up and finally, markets have decided to stop paying attention to Trump 2.0. So today on the show, we’re asking, is the Trump trade on and what is it anyway? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a market economist here at FT towers in London and I’m joined — hooray, he’s back! — by Robert Armstrong, who’s back from his holidays. Did you miss me, Rob?
Robert Armstrong
I did miss you. And I think, given the theme of today’s podcast, a good way to start would be we sing a duet of the US national anthem.
Katie Martin
Cool, cool, cool. (Laughter) But I gather that on your holidays you witnessed a terrible omen.
Robert Armstrong
Yeah. I was in Vermont with my wife, enjoying some peace and quiet while the kids are away at summer camp. And I saw an actual, as opposed to metaphorical, bear. As a Wall Street writer, that is the universe trying to tell you something. I also saw a coyote, but I don’t think a coyote has a specific Wall Street meaning, so I just ignored that one.
Katie Martin
Two questions. First of all, did you also see any black swans? And second of all, were you very, very frightened of the bear?
Robert Armstrong
(Laughter) The bear was far away and not interested, and at a great distance a bear is quite cute. But it’s when you’re close to it that . . . And black bears, which are what we have in the north-east, are not dangerous, but . . . Not that you wanna go punch them in the face or whatever. I did not see any black swans. I didn’t see any hawks, I didn’t see any doves. And I think that exhausts the metaphorical animals of Wall Street for today.
Katie Martin
But bears are about. Watch out. So look, the issue of the day is not the wildlife of wherever it was that you were. It is the Trump trade. Now, so for my sins, I go to lots of briefings at investment management houses, investment banks, and every single time, like the whole of this year, someone always puts up their hand at the end of the session and says, what do you think about the US election? And pretty much every single time, my experience is that people sort of shuffle in their seats and look a little bit awkward and say, oh, well, you know, the fiscal stance is roughly the same between the two main candidates, so I don’t think it really matters.
Now, this has changed. Suddenly, people have decided that there is a bit of clear blue water between the two leading candidates and that this is something that is tradable. But what is the Trump trade? Like, the peak of people banging on about the Trump trade happened when?
Robert Armstrong
After the first debate, Biden looks like he’s too old to be president. Trump is in a dominant position, and…
Katie Martin
And then he gets shot there. There is a distressingly large amount of precedent in the US for a politician getting shot. Nonetheless, there’s not enough to say whether this is good for his chances of being president again or not. And then he picks JD Vance as his vice-presidential running mate. So all of a sudden, a lot of things coalesce into the point where we start to see markets moving around a bit. And you were here…
Robert Armstrong
It focuses the attention.
Katie Martin
It focuses the mind. To your mind — and I know you were on holiday when this happened, looking at bears — what is the Trump trade?
Robert Armstrong
The consensus Trump trade is that Trump will be a bit inflationary and that therefore long rates, long Treasury yields will rise.
Katie Martin
What does that mean?
Robert Armstrong
So the idea is he says a lot: I like low rates. He says a lot: I like tax cuts. He does not say a lot: With these tax cuts, I will also cut expenditures. So we’re talking about unfunded tax cuts, which are considered to be inflationary. There are talks about what kind of policy he would encourage at the Fed. So the idea is he’s a real estate guy. He’s a loose monetary policy guy. He’s a spend money and borrow guy. All of this equals reinflation in the United States. And indeed, after the debate, obligingly, the yield curve grew steeper. The 10-year rose a little bit relative to the two-year. And so there was some confirmation in the days immediately after Biden’s absolutely disastrous performance that the market thinks of Trump as inflationary.
Katie Martin
Yeah. Because if there’s one thing bonds don’t like, particularly long-term bonds, it’s inflation, right? This is just like kryptonite.
Robert Armstrong
Hate.
Katie Martin
So like . . . Do I not like that? So yeah, that pushes down prices of bonds which pushes up their yields. But why does it create this steepening effect where you have different types of bonds with different maturity behaving differently.
Robert Armstrong
Yeah. So the yield curve is simply the shape when you map the rates at the different maturities, from three months out to 30 years, right? So the curve is the shape the different rates make. And if you think there’s gonna be inflation, a higher kind of general inflation rate in the long run, you’re gonna wanna pay less for bonds. So you’ll get a higher yield from the bonds to protect you from the wealth-eroding effects of inflation. But the short end of the curve, your three-month to two-year bonds, those are controlled by Fed policy. There might be a steepening at the long end because of inflationary expectations. But if you think in the short term Fed policy is gonna is gonna become looser, the short end goes down and you have a steeper shape. So the Wall Street jargon is Trump is a steepener. The Trump trade is a steepener.
Katie Martin
Yeah. One of the reasons, though, why the steepener trade gets a little bit kind of lost in translation and why the Trump is inflationary narrative gets lost in translation. There’s a couple of reasons. One of them is US inflation is actually quite well behaved at the moment, according to the latest data. Like, it’s really coming under control.
And second of all, if you take Trump and Vance policy at its word, what, you know, whether we should take it seriously or literally, I can’t remember any more. But if you look at what Vance has said in the past about Ukraine, he’s not up for continuing to support Ukraine. If you look at what he said about China, he says — what was it? — it’s the world’s biggest threat to the US. So it’s a reasonably kind of chest-beating geopolitical stance. All things being equal, that makes people want to own safe assets. And guess what they are? This is where we always end up in the same place with US markets. Investors end up back in US government bonds again.
Robert Armstrong
This is the terrific irony, privilege/irony about US assets, is if you assume the US adopts a policy that will be . . . Even a policy that is destructive to itself as well as other economies, overall, that forces the prices of US assets up rather than down. Because even when the US is the problem, you wanna be in the biggest, deepest, most liquid, hot, most high-quality asset market in the world. And that’s the United States.
Katie Martin
Yeah. So checkmate. Yeah, yeah.
Robert Armstrong
So it’s very difficult to say. I would also say, Katie, that it’s not like Biden has been a shrinking violet about unfunded spending.
Katie Martin
I mean, to that extent, yeah. The talking heads are right when they say, look, fiscally, these candidates are more or less equal and that if you swapped, you know, Joe Biden for Kamala Harris, who certainly looks like she’s going to be the Democratic nomination, then Kamalanomics is basically Bidenomics, right?
Robert Armstrong
Sure. And I also think Trump has a history of having a bite that is slightly less severe than his bark. You know, he fancies himself a negotiator. He strongly believes in talking big and landing somewhere in the middle. And so I think it is important to avoid hyperventilation when talking about some of his rhetoric.
That said, he sure does have a lot of tariff rhetoric. And he sure does in particular have a lot of rhetoric about how he hates the trade deficit, the fact that America buys more stuff from other countries than other countries buy from America. And he hates the fact that the US dollar is so strong, which he thinks contributes to that deficit.
So part of this discussion we haven’t had yet is, will he really do something about the trade deficit and what will that mean for investors? I think that’s the next step after . . . We all have inflation on the brain after the last four years. But it might be wise to have trade deficit and trade deficit policy on the brain in the years to come.
Katie Martin
Trade on the brain. I tell you something that is a cleaner read before we get into that, though. Is that …
Robert Armstrong
Alright. Please do.
Katie Martin
Trump is also seen as being good for stocks, right? He is a potentially corporate tax-cutting president. He is a potentially deregulation-minded president. And you can see that playing out, right, you know, to the extent that stocks are still broadly speaking, motoring higher. And I also wanted to pick your brain on how much do you think the Trump trade is mixed up with what we’ve seen in small-cap stocks recently, because they have gone off to the races?
Robert Armstrong
Let’s start with the small caps thing, which I think is very interesting. There is a general problem with interpreting what the market is doing now as an effect of Trump’s position in the presidential race, which is that something else really big and important has happened in markets at almost the same time, which was the extremely benign recent CPI inflation. So we were talking about the steepness of the curve. Well, a very soft inflation report forced the short end of the curve down, which caused a lot of the steepening we saw. So that wasn’t Trump. That was just great inflation news. And similarly, when rates are lower, small caps benefit more. Small companies in America tend to have more debt and they tend to be more economically sensitive. So rates coming down helps the economic outlook. It means they will be paying less to their banks. So that helps small caps more than big caps. And of course, in like a week ago, for about a week, small caps went completely bananas. I think it’s the technical term for what we saw in the markets.
Katie Martin
But also adding to that was like some of the rhetoric coming out of the Trump camp around China and around semiconductors was also like really damaging some of those chip stocks. So again, you see this massive rotation out of like, Big Tech, yeah.
Robert Armstrong
Right. The big tech. Yeah. One huge question mark is what is Trump’s relationship to the Big Tech’s gonna be. So there seems to be a lot of lovey-dovey going on between Trump and Elon Musk. But Vance in particular has not said nice things about Big Tech and what it means for our country. And our economy does not like the fact that Big Tech has a lot of its sort of supply chain and abroad, etc, etc. So that relationship, I think, is a huge question mark. And that’s true. And when Trump says Taiwan should pay for its own defence, whatever that might mean, is Taiwan gonna be like, do you take a check? Anyway, that, you know, is gonna spook the big-cap tech companies, in particular, semiconductor companies that are the opposite of small caps.
But a lot of people ran out and interpreted the stonking small-cap rally as Trump is a tariff guy. Smaller companies in the US tend to have both their supply chains and their customers more domestic. They will do relatively better under a high-tariff regime. This is the problem with interpreting market moves. There are multiple interpretations available and it’s hard to sort out which one is right and which one is (inaudible).
Katie Martin
But nonetheless, I’m willing to buy that Trump is good for stocks.
Robert Armstrong
Let me say one thing about that though, Katie. One of the reasons we think Trump is good for stocks is because he was really good for them last time.
So he came in and everybody was like, oh my God, these terrible things are gonna happen when Trump goes in. And the terrible thing that happened when Trump came in in 2016 is that stocks went straight up for a month or two after he did.
However, things are different now. First of all, he’s not talking about a big further cut in the corporate tax rate. Mechanically, if you cut the tax rate on companies, they have higher earnings. And so all else being equal, their stocks go up. You know, he’s talking about taking another per cent off, which is like, symbolic. It’s funny, he said in an interview he did in Bloomberg recently that the corporate rate is 21 per cent, and he was thinking of lowering it to 20 because he likes round numbers.
Katie Martin
It’s as good a reason as any.
Robert Armstrong
It’s as good a reason as any. And he said, you know, cutting it all the way to 15 would be hard. So that move has already been made and can’t be repeated.
And also, stocks have gone up a lot under both Trump and Biden and so now, they’re much more expensive. The higher stocks go, it gets a little harder to push them still higher. Risk premiums are already stretched. Valuations are already stretched. People have already made a lot of money in the market, you know. So it’s . . . I think broadly, you’re right. Trump is good for stocks. He’s a pro-business guy. He’s an anti-tax guy. He’s a deficit guy. All this stuff helps stocks. But it won’t be like last time.
Katie Martin
No. So we need to come back to the issue of the dollar. Like you say, he doesn’t like a strong dollar.
Robert Armstrong
No.
Katie Martin
All things being equal, unless like inflation goes Turkey-style, higher inflation is supportive for the dollar.
Robert Armstrong
It is. When inflation is a bit higher, rates have to rise as well. And those higher US rates attract capital into the United States, so it strengthens the dollar.
Katie Martin
It’s the same issue as with the US government bonds right? You know, if we do get a geopolitical shock coming out of the back end of a potential Trump 2.0, then all things being equal, that is supportive for the dollar as well as it is for (inaudible).
Robert Armstrong
Yes, this is what Wall Street calls the famous dollar smile. So when the US economy is very strong relative to the rest of the world, dollars flow into America, the dollar goes up. That’s one half of the smile, one edge of the mouth that is going up. But weirdly, over history, when the US economy is very weak, everybody panics about the world economy. And where do they wanna go? Into the US dollar. So a weak US economy actually raises the dollar as well. It’s only when America is doing fine and the rest of the world is doing fine that the dollar tends to weaken. That’s the middle of the smile.
Katie Martin
Yeah. Now, the kind of absolutely radioactive potential issue with a potential Trump 2.0 is monkeying about with the Federal Reserve. This is the bit that investors tell me they’re like, really kind of properly worried about, because there’s not a huge amount of recent precedents here for trying to change personnel or change policy or whatever it is at the Fed.
And again, in that interview that Trump gave with Bloomberg, he was saying, well, you know, the Fed shouldn’t be cutting rates in September ahead of the election. And it’s like, well, first of all, you’re not the president. (Robert laughs) Second of all, even if you were, you’re not the chairman of the Fed so it’s not up to you. But it’s interesting that it sends a signal that he’s not afraid to, you know, stick his oar in around what he thinks the Fed should be doing.
Robert Armstrong
He was explicitly asked in that interview whether he would keep Jay Powell as his head of the Fed if he were elected, and he gave an absolute classic of a Trump answer. He said, I absolutely will keep him, especially if he’s doing a good job.
Katie Martin
I don’t think . . . I mean, you will know better than me, but I don’t think procedurally he can just turf Jay Powell out, right, even if he wanted to, which is a massive if.
Robert Armstrong
Yeah. You know, he can get him out, but then there has to be a replacement. It has to go through Congress. I mean, there’s a wave of politics there. But the big question is, even trying to do this, even if it’s a doomed effort, if his rhetoric about the Fed gets hot, that will have a major effect on markets. And I am sceptical that he will say a lot of things.
But I think the market will keep him on a pretty short leash. And this applies to a lot of the most dire prognostications about Trump and markets, which is, it is important to remember that Trump measures his success by the stock market. He loves bragging about how well the stock market did while he was president. And if it becomes apparent that he is gonna dam the inflation torpedoes and fiddle with the Fed to keep rates low, the market is going to flip, and not in a good way. And I think that presents a kind of guardrail.
Katie Martin
So no pressure, investors, but we’re all counting on you.
Robert Armstrong
(Laughter) We’re all counting on you. And similarly, there are various ways he could try to change the, you know, reduce the trade deficit by fiddling with the currency. My new colleague Aiden Reiter wrote about this today. There’s various ways he could try to manipulate the currency to weaken the dollar in relative terms and close the trade deficit. But those are extremely delicate in terms of market impact, too. So having a president who is vain about market performance under his watch, it has a natural moderating effect on policy, I would say.
Katie Martin
So your overall conclusion is don’t worry about it.
Robert Armstrong
Well, I just think the worst excesses of panic from investors about these issues — inflation, currency trade under Trump — I think they are overblown. I don’t think they’re nothing by any means. I just think there’s a little too much huffing and puffing.
Now, having said that, my world-famous reputation for being wrong about the future will probably kick in and that, you know, we’re gonna be living in bombed-out cars with the giant radioactive cockroaches in three years’ time, but there’ll be no podcast for me to be called out on.
Katie Martin
No podcast? (Laughter) I was alright with living in my car, but no podcast? (Robert laughs) That’s bad.
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OK, well, look on that grim note, I think we better wrap up before it gets any worse. We’re gonna be back in a minute with Long/Short.
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Alrighty. Now it’s time for Long/Short, that part of the show where we go long a thing we love, short a thing we hate.
I am long. I’m long sterling. Actually, you know what I’m doing? I’m crowing about the fact that I was long sterling like, a month ago, and that since then, sterling has done really well.
Robert Armstrong
I know it. Yes, you’re in the wrong business, Katie.
Katie Martin
Well, so on record…
Robert Armstrong
You gotta hang out in your shingle, manage some money.
Katie Martin
. . . on this very podcast as saying that the Fed would not cut rates for the fourth, third quarter 2024 like over a year ago. How people laughed at me.
Robert Armstrong
Yes. How they laughed.
Katie Martin
So if there were any big hedge fund guys out there looking for someone to manage a few billion for them, I’m right here. You can find me very easily. But Rob, what do you got?
Robert Armstrong
After the massive small-cap rally, I guess I’m short the small caps.
Katie Martin
You are. You think it’s gone too far?
Robert Armstrong
It’s a very hard call. I’ve been thinking about a lot, but I think that was a spasm rather than a change in trend. So those of you using the Armstrong contrary indicator, buy those small caps. Now’s your chance. Armstrong thinks . . . I don’t think we’re gonna see the shift to small caps I will say this year continue. Long-term, it’s a different question.
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Katie Martin
I look forward to marking that to market. (Robert laughs) OK. We better leave it there. We are gonna be back in your feed on Thursday, so listen up then.
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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer. I’m Katie Martin. Thanks for listening.
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