I have two sons. Of the two, I would say the youngest one is far more money focused. The other day, he asked how I made money. So I told him, I write a substack where people can subscribe for free. I then ask people to pay for the posts that are concerned with investing. On top of that for people who like what they see, they can invest in a fund based on the same ideas. He was suitably impressed by the 15,000 free subscribers. He then asked what the investment strategy was. I felt like the idea of pro-capital versus pro-labour policies would take too long to explain, so opted for the easier option, based on what we have seen so far this year. I said I was waiting for President Trump to crash the markets again. To which he replied, “good strategy”.
What exactly do I mean by getting President Trump to crash the markets? Well the bull market we have seen since 2009, for me, has in many ways had a “private equity” feel to it. What do I mean by that? Well until 2016, it was typical for US fiscal deficits to fall as employment and stock markets rose. “Save in the good times, spend in the bad times” mentality has been replaced with “If we can borrow cheaply, then why don’t we?” mentality. This used to be called running the balance sheet through the profit loss statement. Or short term gain for long term pain. But when does the short term stop, and the long term start?
One feature of this private equity mentality, is that corporate credit is basically seen as good a sovereign credit. Or high yield credit spreads stay at very low levels as the government is happy to ruin its fiscal position to keep corporate financial position in a good way.
The question then is when do people give up on US treasuries as a safe asset? Using the 1970s as a template, it seemed to me when gold starts to outperform treasuries would be the start of problems. It has been brewing for a while, but 2023 really started to move, and with Trump’s re-election gold has soared versus treasuries.
Where it gets interesting for me is when lack of trust in treasuries leaks into problems with the S&P 500. Recently we have seen gold breakout against S&P 500.
From a technical perspective, we had the break higher, and then a pullback in gold v S&P 500. And as I told my 11 year old, I am now waiting for Trump to crash the market, or in other words, this break higher is followed by another move of gold up and S&P 500 down.
How exactly do I think that will happen? Well there are obvious signs of a slowdown everywhere. The Russell 2000 has gone nowhere for 5 years now.
Continuing claims has risen to the highest level since Covid.
What do I expect to happen here? The Fed should come under extreme pressure to cut rates so the US government can keep spending. Check.
And the Trump administration will likely look to stimulate the economy, which would worsen the inflation outlook, so should see foreign investors dump the long end of the treasury curve. That is I would expect to see the curve steepen radically. This is already beginning to happen. Spread between 30 year and 2 year has steepened to 1%. A move back to 3% seems likely to me.
This has always been the problem with “running the balance sheet through the profit loss strategy” - its a one time win. And once its done, it take a lifetime to fix. I don’t think any of the above it is particularly debatable - the question is really just one of timing. The timing looks right to me, in the way that gold and treasuries are moving, particularly in April. I think it was the tremor before the quake. The one reassuring thing about this strategy is that President Trump likes to create a crisis which he can then solve (which gives him leverage). Or what I am saying is that President Trump has an incentive to create a crisis. I just wonder if the next one he creates he is not able to “solve”. Or as my 11 year old said - betting on a crisis here seems like a good strategy.
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