Fiscal Policy
In this BCA Special Report, we ask what policies investors should expect if Donald Trump wins the 2024 Presidential election. The answer is that a second Trump term would be much less positive for risky assets than the first. While the US will remain democratic and geopolitically preeminent no matter the outcome of the 2024 election, a second term Trump administration would likely oversee large budget deficits, continued wealth inequality, labor shortages, high import prices, and an erosion of checks and balances, possibly including at the Federal Reserve. Trade policy under a second Trump presidency represents the greatest cyclical risk to investors, and the sequencing of policies in general will be important to monitor. An early legislative priority of immigration over tax cuts, alongside the rapid imposition of new tariffs, would be the worst alignment for risky assets.
Seasonal weather and price variability in the first quarter will dissipate, which will reduce the agita caused by the recent inflation scare. This will increase the Fed’s comfort level in initiating a rate-cutting cycle in June with a 25 bp cut. With inflation well-behaved, real interest rates will move lower and gold prices will move higher. The rate-cutting cycle also will allow the USD to weaken as assets ex-US become more attractive; this will be bullish for gold. Physical demand for gold is expected to remain robust, along with safe-haven and central-bank diversification demand, due to heightened geopolitical uncertainty. We continue to expect gold to trade above $2,200/oz this year.
China will continue to suffer from a “triple crisis”. Though there could be a tactical bounce, cyclically we still recommend underweighting Chinese equities.
BCA Research presents a limited monthly special series about the Nuclear Renaissance.
Commodity volatility will continue its rising trend since 2014. The US is on the brink of a major election, the outcome of which could reduce its willingness to engage with the outside world. So, states seeking to carve out their own spheres of influence are incentivized to raise the economic costs to the US and discourage its influence in their regions. These states can do this by interfering in key trading routes in their regions. As a result, geopolitical threats to maritime chokepoints are a structural as well as cyclical problem and will persist due to the revival of superpower competition.
The market will eventually be forced to react to rising odds of a sharp US national policy reversal. Investors should overweight government bonds and defensive equity sectors.
The statement from last week’s Central Economic Work Conference indicates that Chinese authorities are still not considering large-scale stimulus in 2024. Odds are that a full-fledged business cycle recovery in 2024 is unlikely. Chinese share prices remain vulnerable, and strengthening in the RMB will be short-lived.
Political economy dominates fundamentals going into 2024, as states prepare for war and de-risk supply chains. Asynchronous global growth will elevate commodity-price volatility. We expect oil to trade above $100/bbl in 2024 and continue to favor equity exposure to oil-and-gas producers. Given weak capex, we also favor metals miners and refiners. We remain long the Gold, the XME and COMT ETFs We were stopped out of our XOP ETF with a 12.5% gain; we will re-establish it at tonight’s close.
Falling core inflation in the US over the short run will boost real disposable household income, which will keep consumption – ~ 70% of US GDP – strong. Over the medium- to-longer term – 3 to 5 years out – inflation risks rise as fiscal dominance becomes the Fed’s modus operandi, and economic fragmentation becomes entrenched. War and the expansion of war remains an inflation risk. In this environment, gold remains our preferred hedge.
President Biden is facing foreign challenges on three fronts and these challenges are coalescing around the critical states of the Midwest. Take risks off the table and stay defensive in 2024.