Today is liberation day!!!!!! Finally, America is finally standing up to unfair trade practices and tariffing the entire world. So, what is the US President’s plan?
As investors, we are lucky to have a President and his entourage who says exactly what he is going to do. So what is his plan? It is as follows:
Lower rates
More people to buy US debt
Bring manufacturing back to America.
Part 3 is a little more complicated and I will discussing this further in another piece. For now, let’s focus on part 1 and part 2. Both are interconnected and crucial. If you have been reading me for the past few years you would know that I was in the firm belief that the Fed has to pivot. Many who thought Powell is Volker but he unable to channel his inner Volker. The US Debt/GDP is 123% and the overall US economy is heavily indebted. Thanks to hyperfinancialization and the post-1971 Dollar system the US moved away from making things to financial engineering. Building and making actual products was replace by private equity, investment banking, and speculating. Thanks to the biggest bond bubble in history, savers lost and speculators lost. So here are some some of the major changes that will define this decade and how you should realign your portfolio:
End of Carry
This is something Adam Rozencwajg has discussed numerous times in his piece. Another version of this is the end of cheap financing. After 2008, instead of reforming the system, the all administrations after the Fed decided to cut rates to zero and make the money printer go crazy.
Courtesy: St. Louis Federal Reserve FRED
As you can see above, Most of the 2010s, the so-called economic recovery was just a pumped up inflated bubble thanks to cheap credit and easy money. We also cal this era the era of ZIRP. But this era is coming to an end.
One reason why the ZIRP was possible was because there were creditor nations willing to subsidize US fiscal deficits. But thanks to weaponization of the US dollar and confiscating of Russia’s reserves, global Central Banks have lost faith in the US dollar and US Treasuries. Combined with China and the oil producers slowly reducing the purchase of US Debt, the fed has not choice but to restart QE. There was already stealth QE thanks to Yellen issuing more short term paper to purchase more long term dated debt and the bailout of SVB.
Courtesy: PortfolioLabs. GLG vs TLT. As you can see above, after 2022. gold started to spike immensely while TLT (longterm US debt ETF) stayed the same.
It is clear that the Fed and both the Trump and Biden administrations in the US can care less about inflation and need lower rates to refinance US deficits and save Wall Street. Thus, some way or another, the administration wants rates to go down and the US dollar to go down as well. Simply means, brace for more inflation.
Lack of cheap capital means the end of the carry trade. As Japanese JGB rates go up and the value of the Japanese Yen goes up agains the USD, less money for traders to boost US high risk assets. Carry trades is not limited to borrowing from Japan. The biggest carry trade during the ZIRP era has been when private equity and hedge funds used ultra low rates to create the largest asset bubble in history, which is slowly unwinding. As the party comes to an end, this means a big decline in risk assets and huge trouble ahead for private equity.
Our Commodity, Your Problem
If you are a follower of Macro Essays, you would know that the PetroDollar system has been unwinding for sometime. The PetroDollar really went downhill once the US confiscated Russia’s FX reserves. Now it has become our commodity, your problem. US is loosing the ability to procure cheap energy, which is key for the 4th Industrial Revolution. Thanks to the PetroDollar and the Scale Oil Miracle (which funny enough was one of the reasons behind the destruction of the PetroDollar), US was able to enjoy the fruits of deflation and have a booming 2010s. Now, the shale oil is struggling and in terms of cheap energy (i.e. nuclear), China is winning the game. Let’s also not forget that unlike the software eat the world era of the 2010s, AI is hardware heavy and requires a lot of energy. This, the electrification of the world, and Central Bank gold buying, is going to give investors 2020s and 2030s a commodities super cycle.
Finally, RIP American exceptionalism
The rise of AI gave us the Mag7. Everyone and their grandma was putting their money into the Mag7. US the was leader in AI and China was “un-investable”. But Monday, January 27th, changed all of that with the release of DeepSeek. DeepSeek was built with one tenth of the cost of OpenAI was built by a quant hedge fund manager who did it as a side project. For anyone reading Macro Essays should not be surprised by the creation of DeepSeek because I wrote a whole article about China has an upper hand on AI innovation on the US. DeepSeek validated my article. It is not just DeepSeek, per the think tank ASPI, China is ahead of the US in 37 out of the 44 critical emerging technology sectors. American exceptionalism is not limited to China beating the US in global tech. One reason why US tech was the go to investment was due to the strong USD and capital favoring US markets. But now with US going inflationary while China having more room to stimulate its economy, combined with a devalued USD and inflation, money is going to flow out of US to emerging markets and developed market value equities. This is going to further compress US equity prices.
Overall, we are headed to a new era. Rise of China, commodities and real assets being important than paper, USD and US debt losing interest among sovereign buyers, and US headed towards inflation (and possible stagflation), your portfolios need to realign.
What would a Macro Essays portfolio will look like:
Commodities: Bet on commodities. Physical commodity ETFs (like Sprott Uranium) are one example. The commodities I am excited the most are Uranium, copper, and gold.
Bitcoin: Hard assets like Bitcoin and Gold will be crucial to hold as we are headed to a world of inflation
Emerging Markets and Developed Market Value: As more money is going into emerging markets and developed market value, combined with these markets creating welcoming capital market environments, consider adding some of these equities to your portfolio. My favorite emerging markets are China and Brazil while my favorite developed market outside of the US is Japan. I just dumped one of my Mag7 stocks to buy Mitsubishi UFJ and Petrobas.
Fixed Income: Avoid developed market fixed income due to inflation and bad fiscal habits to emerging market fixed income, which have better balance sheets and have strong trade with China, which will benefit from China’s second deflation shock. As China goes up the value chain, countries that embrace this change are going to go through the most deflation. This is why EM fixed income is a must own.
Courtesy: Portfolio Labs
As you can see above EM fixed income has outpaced US Treasuries. This will be the case for the coming years.
Feel free to combine REITs, physical real estate, and long EM currencies and JPY/USD.
In many ways per the Trump Administration, the post cold-war neoliberal order is dead. No more US absorbing all the excess USD and exporting US Treasuries. The US wants to build things again, bring manufacturing home, and be a saver nation. Just listen to the President’s inner-circle, Vice President JD Vance, Chair of the Council of Economic Advisors Stephen Miran, and US Treasury Secretary Scott Bessent, this is what they have saying for months now. This is why today Trump decided to tariff the whole world. This combined with Trump’s effort to purposely weaken the economy to cut long term rates and re-start QE, is going to create a stagflation. The era of 60/40, Mag7 long US trade, and even the old school Swenson model (which allocated a lot of money to alternative investing vehicles like Private Equity) is coming to an end. The portfolio which also include, developed market value (this include US value stocks as well), EM fixed income, commodities and currencies (my favorite are select EM and JPY/USD) are going to win the decade. We are in an exciting time of global macro geopolitics. Much more updated to come.
None of this is investment advice. I write this for educational and entertainment purposes. Please consult a professional. Investing involves risk. I am not perfect and I get things wrong.
if we could only invest into the MAGA excuse economy.
prior attempts at retrospective attribution of trump's actions to some genius have flopped.
'game theory' is not a trump book on how to bankrupt casinos.