Source: Xue Tao Macro Notes
Author: Tianfeng Macro Song Xuetao
The market's perception of Donald Trump's second term has formed increasingly fragmented expectations in terms of policy implementation and specific policy impacts; currently, the market consistently expects next year to be better, which requires caution.
In the month following the election, from the unexpectedly strong cabinet selections to the sudden announcement of considering tariffs on Canada and Mexico, the uncertainty and complexity of Trump 2.0 were fully displayed. This has increased the difficulty for the market in predicting the implementation and impact of Trump 2.0 policies, creating some increasingly fragmented expectations.
The first type of expectation gap is that the contradictory nature of policies leads to results falling short of expectations.
During the current wait for Trump to take office, the market has huge imaginative space for policies; however, when actual implementation begins, it will be found that Trump's policies contain contradictions.
For example, regarding tariffs, Trump's demands through tariff coercion include three points: promoting the return of manufacturing, maintaining the dollar's status as an international reserve currency, and repairing the trade deficit. Each of these three demands has problems and contradicts each other.
For instance, the return of manufacturing has been promoted since the Obama era, and Biden's three major bills in 2022 have clearly boosted growth in manufacturing construction expenditures, but so far, the output level and overall efficiency of US manufacturing have not significantly improved, and competitiveness remains limited.
For example, maintaining the international reserve status of the dollar contradicts the reduction of the USA's trade deficits with major countries. If US commodities and services do not possess stronger competitiveness, then the main way to reduce trade deficits is through trade isolationism, causing a decrease in other countries' demand for the dollar.
The second type of expectation gap is that adverse economic factors may appear earlier.
The first type of expectation gap is merely the difference between reality and market expectations, while the second type presents the possibility of a complete reversal. For instance, excessive internal reforms could lead to a premature initiation of recession expectations, or the nepotism of Donald Trump could lead to political turmoil within the party and chaos in the USA's administrative system. The US economy becomes more 'chaotic' due to reforms, rather than better.
The perspective that the US economy will improve by 2025 actually lacks logical support, but it stems from linear extrapolation: ample leverage space in the private sector, with the continuity of cycles between enterprises and households. However, it cannot be ignored that the deficit level in the USA's fiscal year 2024 is once again increasing, with the deficit rate still above 6%.
The support of US government spending for the economy is apparent, especially through transfer payments to lower-income individuals via Social Security, Medicare, and veterans' insurance, which are important means to help cope with high inflation. However, many operations during Donald Trump's second term will break conventions, with the most noticeable being that the efficiency department led by Musk will promote reforms in the USA system.
We previously mentioned that Musk's reforms represent a significant bet under Donald Trump 2.0, but even successful reforms are unlikely to avoid painful adjustment periods. Moreover, the USA is about to undergo an unprecedented reform: layoffs leading to a chilling effect, how the private sector will absorb government labor, and internal pulls between government departments leading to 'letting it be,' thus exacerbating efficiency losses and creating new issues.
At the same time, Musk's spending reduction plan may appear to have limited scope when viewed from the bottom up; it is difficult to reach the 'two trillion' dollars scale Musk once mentioned, but this does not mean it is 'impossible' to implement. If Musk excessively reduces spending (on defense, Medicare, etc.), combined with concentrated layoffs in government departments, it could trigger a small artificial recession, and the US economy may become more chaotic.
The third type of expectation gap is the overestimation of the economic impact of deregulation and tariff policies.
One example is that the market may have overestimated the boost to the USA economy from deregulation. The relatively small obstacles to the implementation of deregulation are also one reason why the market remains optimistic about 2025, building on the current resilience of the USA economy. If broad deregulation occurs in the Energy, Financial, AI, and other Industries (along with Musk's efficiency reforms), including easing restrictions on traditional fossil fuel extraction, traditional energy use, and vehicle emission requirements, the innovative vitality of the USA economy will be further stimulated.
However, whether the animal spirits thus stimulated can bring an immediate boost to the real economy is a question mark. Historical data from 2017 shows that the deregulation measures taken after Donald Trump was elected had a significant effect on soft data, but after a series of deregulatory executive orders were signed, the hard data on USA growth did not improve.
Furthermore, after further deregulation in the Financial Industry and other Industries such as AI, the ability to resist risks will be weaker, which is a double-edged sword. Attention should not only be focused on the higher ceilings opened by deregulation, but also on the vulnerabilities.
Another example is that the market may have overestimated the impact of tariffs on USA inflation. Even during the last round of trade friction, in cases where commodity prices increased in certain Industries, the overall price level across the USA did not rise significantly. Compared to the last round, there are two different macro backgrounds currently faced:
1. The corporate profits of the three commercial sectors in the USA (retailers, wholesalers, and manufacturers) are at a historical high Range, and the Net income of large retailers with Assets exceeding 50 million USD is nearly twice that of 2018, which can absorb some of the impacts of tariffs.
2. China's more Global layout (going abroad and re-exporting), coupled with Donald Trump's abandonment of global common tariffs, means that the extent of China's indirect Trade with the USA will be less affected, in other words, the direct trade significance of tariff impact is decreasing.
At the same time, we have observed that USA households have begun to hoard large durable goods to avoid potential price increases brought by tariffs. From this perspective, price changes in the tradable sector will be smoother, and the one-time price jump brought by tariffs is not significant.
There are no large expectation gaps in Other policy areas, for instance, tax cuts are part of Donald Trump's political legacy from his previous term, coinciding with the expiration and renewal of the TCJA Act next year, and it is relatively easy to implement, requiring little effort: firstly, extending the TCJA Act from 2017 until the end of 2025, and secondly, continuing to lower the corporate tax rate to 15%.
Whether it is the establishment or the MAGA faction, there is no disagreement within the Republican Party regarding tax reduction policies, which helps to promote the development of the USA economy. Although tax reduction policies are a high priority, the process may take a long time; however, it is believed that tax reduction is one of the easiest policies for Donald Trump to implement.
The three main expected discrepancies mentioned above are not reflected in the pricing of the USA stock market and the US dollar.
The USA stock market is currently pricing in a better economic outlook under Donald Trump 2.0, achieving greater dreams (AI + reform) in a better economic situation. However, the public's perception may experience pain and chaos from reforms before prosperity arrives, which could exacerbate the current 'atmospheric recession,' leading to an artificially created small recession expectation. Meanwhile, real technological progress is unafraid of the impacts of macroeconomic recession, and the grand narrative of AI has reached a moment of truth.
Risk Warning
The USA has unexpectedly cut interest rates, the pace of implementing Donald Trump's policies has exceeded expectations, his trade policies are more aggressive, and there have been non-linear changes in private sector debt in the USA.
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编辑/jayden
