Will the Trump-trade fly?

Feel free to reach out to PSG Wealth Manager Schalk Louw directly.

Take, for example, South African-born Elon Musk during the most recent US presidential election. Musk threw his full support behind the incoming president, Donald Trump. Sources like CNN reported that he donated $119 million (over R2.1 billion) to Trump’s campaign, while Fortune suggested the figure was at least $132 million (nearly R2.4 billion).

For those gasping in disbelief, thinking Musk might be poorer today, you’ll be surprised to learn that his stake in Tesla grew by a staggering $71 billion (almost R1.3 trillion) in just 16 days — from the election’s close on 4 November 2024, to the writing of this article on 20 November 2024.

Let’s put that into perspective. This increase in his wealth is equivalent to nearly one-fifth of South Africa’s entire annual GDP and roughly the size of the entire annual GDP of countries like Uruguay and Croatia.

What’s driving this breathtaking surge? Simply put, investors believe that Musk’s support for Trump will, in turn, be rewarded by what has become widely known as the "Trump trade." This month’s article will focus on this very phenomenon — the Trump trade — and how, at present, all roads lead not to Rome but to higher inflation.

Beautiful Tax Cuts

One of the key points emphasised during the Trump campaign was his strong focus on aggressive tax cuts. Proposals included

• Reducing the corporate tax rate to as low as 15%,
• Eliminating taxes on social security and tips, and
• Even suggesting the complete abolition of federal income tax under his presidency.

While the latter statement might seem far-fetched, his commitment to the other points leaves little doubt that such tax cuts would significantly boost both disposable income and corporate profits. But at what cost?

Numerous economists have already highlighted that these measures would likely result in a substantially larger federal deficit. A budget deficit is nothing new for the US. In fact, the country has not achieved a budget surplus in the past two decades. However, Trump’s first term began with the US already running a deficit exceeding $500 billion. With the conclusion of the 2024 fiscal year in September, his second term starts with a deficit surpassing $1.8 trillion. The first month of the new fiscal year alone recorded a staggering $257 billion deficit.

US Fed Government Budget Balance: (Datastream)

Furthermore, US public debt as a percentage of GDP has risen from 103% during Trump’s first term to over 120% at the start of his second term. This significant increase is difficult to ignore. Even if these tax cuts were successfully implemented, any resulting economic “boost” would almost certainly come at the expense of higher inflation.

Immigration

Trump plans to deport millions of undocumented immigrants, aiming to boost job availability and housing opportunities. However, numerous economists have raised concerns, warning that such actions could create labour shortages, particularly in industries like agriculture and construction, where immigrants make up a significant portion of the workforce. These shortages could lead to higher wages and production costs, potentially exacerbating inflation, especially in housing and food prices.

Tariffs

Of course, there are the tariffs he plans to impose. These include a 10% minimum on all imports to the US and a 60% tariff on Chinese goods. The idea behind these proposed tariffs is sound, aiming to promote local production in the U.S. However, if history has taught us anything, it is that these tariffs have had limited success in the past. In fact, they have generally had a more significant inflationary effect.

US Inflation – Late 70’s versus Now Source: (Datastream)

Regardless of how one views the Trump trade, inflation is a looming concern. The spectre of stagflation from the late 1970s also inevitably resurfaces. Can the US truly afford to go through something similar again?

In summary, while Trump's policies may provide short-term economic stimulation, they also carry the risk of higher inflation due to rising costs and labour disruptions, which could hinder efforts to maintain economic stability. Be extremely cautious of following big promises during significant price movements in the markets, especially before Trump has clarified his policies. If his policies do turn out to be inflationary, it may be necessary to avoid taking on new debt for now and instead use elevated market prices, particularly in the U.S., to rebalance portfolios rather than chasing the next "pot of gold."