With less than two months left before Trump officially begins his second term, there are mixed opinions in the market regarding the economic situation after Trump's inauguration. Analysts from Ping An Securities, Zhong Zhengsheng, Zhang Lu, and Fan Chengkai, stated in their report 'From the Reagan Cycle to the Trump Cycle: Constants and Changes' published on November 29:

'The Trump Cycle' may be even more unstable, and whether the us economy can continue to maintain a pattern of 'no recession, no inflation' remains to be seen, especially the repeated risks of inflation are worth being vigilant about.

In terms of asset performance, Ping An Securities believes that during the Reagan Cycle and the Trump 1.0 Cycle, the commonality of asset performance was that us rates rose first and then fell, us stocks were generally positive, the usd was relatively strong, and gold was weak first and then strong.

Looking ahead to Trump's second term, inflation risks may lead to higher us rates, increased volatility in us stocks, while the escalation of trade protection may strengthen the usd in the short term, and the forces of 'de-dollarization' are expected to support gold prices in the medium term.

A review of the 'Reagan Cycle.'

Ping An Securities points out that the 'Reagan Cycle' refers to the economic landscape of the usa during Reagan's administration from 1982 to 1985, characterized by a strong economy, a strong currency, a large budget deficit, and a massive trade deficit that reinforced each other. During this period, the usa achieved economic growth without inflation.

At the time Reagan took office, the usa was experiencing 'stagflation,' with a severe economic recession. He promoted the recovery and expansion of the us economy through policies such as tax cuts, reducing government spending (especially in non-defense areas), deregulation, and implementing supply-side reforms. Specifically, the 'Reagan Cycle' has several key transmission pathways:

1. Reagan's tax reduction policy believes that appropriate tax cuts can stimulate economic growth and expand the tax base, potentially increasing tax revenue. This tax reduction policy slowed the pace of deficit expansion and provided the usa government with more sufficient spending space.

2. Under Volcker's leadership, the federal reserve strictly controlled the money supply and promoted interest rate increases, thus attracting foreign capital inflow, supporting a strong dollar, which in turn encouraged further capital inflow, creating a positive cycle.

3. The growth of consumer demand in the usa naturally drives the growth of import demand; under the support of a strong dollar, imports increase and the trade deficit further expands.

4. The Reagan administration increased defense spending to counter the Soviet Union, exacerbating the fiscal deficit. However, defense spending can boost domestic demand and consolidate the position of a strong dollar.

5. The growth of demand itself creates upward inflationary pressure, and the tightening policy orientation of the federal reserve helps stabilize inflation expectations, suppressing rapid price increases. A strong dollar also helps alleviate domestic inflationary pressure.

During the late Reagan administration from 1986 to 1989, the usa continued to maintain an economic environment of 'no recession, no inflation', heralding the beginning of a twenty-year 'great stability' era. However, the 'Reagan great cycle' could not be sustained, as 'high interest rates' showed signs of easing in the second half of 1984, and the turning point for the 'strong dollar' occurred, with the usd dropping below 100 in 1987; the usa deficit ended its expansion, and the usa trade deficit also narrowed.

The degree of the 'Trump 1.0 great cycle' is clearly weaker than that of the 'Reagan great cycle'.

So what are the similarities and differences between the policies implemented during Trump's presidency and those during Reagan's? Ping An Securities stated that like Reagan, Trump adopted a combination of "tax cuts + strong national defense" in both domestic and foreign policies, while both administrations displayed a combination of "loose fiscal + tight monetary" policies.

However, although both Reagan and Trump aimed to expand exports, Trump adopted a more aggressive and direct (tariff) approach to trade protection. Regarding the attitude toward the usd, the two were "superficially different but essentially similar;" both largely allowed the usd to strengthen naturally but were also concerned about the negative impact of a too-strong exchange rates on trade.

Analysts believe that Trump 1.0 exhibited economic conditions similar to those during the "Reagan cycle" period; however, in terms of deficit expansion, high interest rates, strong usd, and trade deficit, the degree of the "Trump cycle" was clearly weaker than the "Reagan cycle." Specifically:

During both Trump's and Reagan's terms, the economy remained relatively strong, and neither fell into the recession range defined by the National Bureau of Economic Research of the usa, with the average GDP growth rates being 2.6% and 5.2%, respectively.

During both administrations, the usa government's deficit rate rose, but the expansion of the deficit during Reagan's era was more significant.

Both administrations established a cycle of "high interest rates, capital inflow, and strong usd," but the increases in interest rates and the strengthening of the usd were notably higher during Reagan's time.

Both periods experienced an expansion of the trade deficit, but the speed of expansion during Reagan's era was significantly faster.

From the performance of assets, during the two "big cycles", the trend of the 10-year t-note interest rates was similar, both rising first and then falling, closely following changes in monetary policy, experiencing the Federal Reserve's shift from rate hikes to rate cuts; the overall performance of the us stock market was also very positive, with technology stocks shining, and the annualized return of the s&p 500 index reaching as high as 12-13%. However, towards the end of the "Reagan big cycle", the "Black Monday" of 1987 occurred, where the dow jones industrial average fell by 22.6% in a single day.

Regarding the usd and gold, from 1983 to 1987, alongside the formation and dissolution of the "Reagan big cycle", the gold trend closely followed the usd, displaying an inverted V-shape. In 2017, during the beginning of Trump's term, the usd index declined, and between 2018 and 2019, during the "Trump big cycle", the usd strengthened, but to a lesser extent than during the Reagan era, with the explanatory power of the usd on gold prices weakening; gold prices first fluctuated and then strengthened, with the Federal Reserve's rate cuts having a more apparent uplifting effect on gold prices.

"Trump 2.0 big cycle" may be even more unstable.

Regarding Trump 2.0, Ping An Securities believes that the "Trump big cycle" may be even more unstable, as the benefits of tax reduction policies might be less evident. If tax reduction policies lead to a significant drop in tax revenue, it naturally increases the pressure for deficit expansion, which might ultimately limit the government's spending capacity, weakening the cycle between deficit expansion and economic growth.

At the same time, the pressure for fiscal deficit expansion will also be greater. Currently, the deficit level in the usa has reached historically high levels. According to OECD estimates (including forecasts), the general government deficit rates for the usa in 2024 and 2025 are projected to be 7.6% and 7.7%, respectively, higher than during the Reagan era and the Trump 1.0 era. The Tax Foundation estimates that Trump's tax reduction policy is expected to ultimately expand the deficit by $3.8 trillion over the next 10 years.

Additionally, the degree of trade protection may be deeper, making trade deficits harder to expand. As of September this year, the cumulative trade balance in the usa has expanded by 12% year-on-year, and has expanded by 52% compared to the same period in 2019. The new tariff policy revealed by Trump during his campaign is significantly more aggressive than during his first term. According to PIIE estimates, in the scenario of "10% baseline tariff + countermeasures from trade partners", it may reduce the trade deficit's share of GDP by 0.5-0.7 percentage points from 2025 to 2028.

Furthermore, the risk of inflation rising under Trump 2.0 is higher due to trade protection raising costs, and the independence of monetary policy may weaken. Currently, us inflation is more similar to that during the Reagan era, having significantly fallen from its peak, but still above the 2% target. However, Trump's previously expressed vision of intervening in monetary policy may increase the risk of inflation fluctuating due to premature monetary easing. If prices cannot stabilize, the risk of economic fluctuations in the usa will rise, potentially undermining international capital's confidence in the usd, which will further weaken the foundation of the "big cycle."

In terms of asset performance, Ping An Securities expects that under the Trump 2.0 administration, the interest rates on 10-year t-notes could still exhibit a "high first, low later" trend. As the boundaries of fiscal expansion's support for the economy become evident, along with the cumulative negative effects of high inflation and high interest rates on the real economy, the "Trump economic cycle" may face an ending or even a reversal, prompting the Federal Reserve to increase interest rate cuts in a timely manner, driving the interest rates on 10-year t-notes back down. The general direction of the usa stock market remains promising, but the risk of "recurring inflation" may increase volatility in the usa stock market, while excessively high interest rates on 10-year t-notes could negatively impact the usa stock market.

The usd may continue to remain strong, but there are also limitations. If trade protection policies trigger recurring and uncontrollable inflation, the credibility of the usd may face greater challenges, and changes in Trump's statements regarding the strength and weakness of the usd may also exacerbate fluctuations in the usd exchange rates.

Gold prices may initially weaken before strengthening. In the short term, the strong usd exchange rates and high interest rates on 10-year t-notes may pressure gold prices temporarily, while the impact of factors "outside the usd system" on gold prices has also increased. Trump's new round of fiscal expansion and trade protection may provide additional support for gold prices. After the "Trump economic cycle" comes to an end, a decline in interest rates and a weakening usd may further boost gold prices.

Editor/Lambor