The betting market favors a Trump win … Treasury yields are not acting normally … would Trump be inflationary? … debasement is coming, regardless of who wins Trump is going to win the presidential election… federal spending will rise… interest rates will have to go up… therefore, bond yields will climb, which is what’s been happening in recent weeks. That’s the quick and dirty calculus of European oddsmakers, as well as our own bond market, as they assess the current U.S. political/investment environment. Legendary investor Louis Navellier unpacked these details in yesterday’s Flash Alert Podcast in Growth Investor: The catalyst [behind climbing treasury yields] is the European betting odds of the U.S. presidential election, and what they call "the Trump trade."
The perception in Europe is that Trump is going to be the next U.S. president, and the deficit is going to rise, so rates have to go up. That's what they foresee. In explaining why Trump is expected to win, Louis points toward the recent poll from the Financial Times that has Trump beating Harris nationally. Other polls from The Wall Street Journal and Rasmussen currently suggest the same outcome. But what Louis calls “the most devastating thing that’s happened for the Harris campaign” is how three democratic senators are running pro-Trump ads. Louis highlights Bob Casey in Pennsylvania, who opposes the Biden (and Harris) administration’s position on fracking. With Pennsylvania as “the” state each candidate must win to secure the presidency, this is a significant problem for Harris. So, with the political winds currently blowing in Trump’s direction, treasury yields have jumped in recent weeks, which defies the Fed’s rate cut last month. It's important to grasp the unusual nature of this surge from the 10-year Treasury yield The Fed cut rates 50 basis points last month. Traders expect another 25-basis-point cut in November, followed by a handful of cuts in 2025. Usually, this should result in lower treasury yields. Instead, since the Fed’s meeting on September 16th, the 10-year Treasury yield has climbed roughly 15%. This probably doesn’t mean much to you, so let me show you how abnormal this is. Below is a chart from Steno Research. We’re looking at how the 10-year Treasury yield has behaved in the wake of past Fed rate cuts. The black line is the median move in the 10-year yield. The shaded gray area covers the 20th through 80th percentiles of moves. The blue line (circled in red) shows what’s happening now. It has never occurred before. Why is the bond market reacting so unusually to rate cuts? Because traders no longer believe the Fed will cut rates to the same degree it had hoped. This shift is based on recent strong economic data and hotter-than-expected inflation data, plus the growing belief that Trump will win next month. To illustrate how much things have changed, let’s turn to the CME Group’s FedWatch Tool. It shows us the probabilities that traders are assigning to various target interest rates from the Fed at different dates in the future. One month ago, traders were all but sure that by January, the Fed would have lowered its target rate to at-or-below 3.75% - 4.00%. Specifically, the probability was 88.6%. And today? 0%. As I write Friday morning, a handful of traders are even expecting that the Fed won’t cut rates at all by January. This is just one example of the financial markets moving all over the place in the run up to the presidential election As we detailed in yesterday’s Digest, we’re expecting escalating volatility in all sorts of asset classes and prices in the days immediately surrounding the election. Here’s what Louis just wrote about it: I believe we'll see the market's "fear gauge," the VIX, double or even triple as the stock market whipsaws in the days and weeks following the election...
I'm already making moves to prepare myself with millions of dollars of my own money. Next Tuesday at 7 PM EST, Louis and Charles Sizemore, Chief Investment Strategist at our corporate partner, The Freeport Society, are sitting down to map out how to benefit from all this in your portfolio. Back to Louis: I'll be showing folks how to navigate the volatility I see coming and turn it into profits by using my proprietary computer-based investment system. You can reserve your seat for the evening right here. Circling back to a potential Trump victory... The move in the 10-year Treasury yield shows us that traders believe a Trump win would be inflationary. Why? First, Trump has proposed tax cuts on corporations, taking the rate from 21% down to 15%. Although this would be a tailwind for bottom lines and growth, it’s also inherently stimulative for the economy, and risks higher inflation. Below, we look at how earnings per share (EPS) by sector are expected to rise or fall based on Trump’s and Harris’s proposed corporate tax policies (data from Bank of America / amit @amitisinvesting). It’s broken down by S&P sector, then an overall average. This analysis suggests overall EPS growth of 4% from Trump versus an overall EPS contraction of 4.7% from Harris (who is proposing to raise corporate taxes from 21% to 28%). Source: Bank of America / amit @amitisinvesting
Next, Trump’s tariff proposals also might be inflationary. Here’s Bloomberg: Trump has floated tariffs of 60% on Chinese imports and as much as 20% on all other imports.
It's an approach that's anathema to conventional economic thinking, which holds that such costs are ultimately borne by the home country's consumers and risk setting off a cycle of retaliation. Realistically, it’s hard to tell how much of what Trump says is bluster versus a genuine policy proposal. Additionally, though many people don’t realize this, President Biden kept all of Trump’s China tariffs in place when he took office. And as of September, he just added new tariffs. From Utility Dive: The Office of the U.S. Trade Representative finalized its plan Friday to raise tariffs on a slew of goods made in China, largely adopting hikes it first proposed in May.
The heightened tariffs go after strategic product categories, including electric vehicles, batteries, critical minerals, semiconductors and solar cells. The final tariff structure includes 14 product categories that cover thousands of items...
The Biden administration's dramatic hikes for this year include a 100% tariff on electric vehicles, a 25% tariff on lithium-ion EV batteries and a 50% tariff on photovoltaic solar cells. A 50% tariff on semiconductors made in China will go into effect in 2025. Given this, we’d be careful before hitching tariff-related inflation only to Trump, but we’re tracking how the bond market is reacting today, and bonds are predicting “Trump = inflation.” Finally, Trump’s proposal to deport millions of undocumented immigrants is likely have a two-fold effect. First, there’s the cost of the deportations themselves; second, some percentage of these undocumented immigrants work low-paying jobs. Their absence has the potential to result in a labor shortage for those industries, which could result in wage inflation. A Bloomberg opinion piece put it this way: [Deporting undocumented immigrants] could leave industries such as housing and child care short of much-needed labor, could cost billions of taxpayer dollars to execute and may sow chaos that weighs on the broader macroeconomy. To be fair, if Harris wins and her proposed policies come to fruition, inflation is likely to rise too, but for different reasons... Here are just a handful of Harris’s recent proposals: - Forgivable loans for up to one-million African American entrepreneurs of up to $20,000 each
- Forgivable loans to Latino entrepreneurs of up to $20,000 each
- $1.6 trillion to expand child tax credits over 10 years
- $25,000 in down payment assistance to working families buying their first home
- A continuation/expansion of the Biden Administration’s student debt forgiveness programs (which seeks to forgive qualifying loans of up to $20,000)
Ignoring the enormous tax implications of these programs on either you and me or corporate America, this is little more than giving away free money. The problem is that when you subsidize people – for whatever – that artificially boosts demand for the good/service being subsidized. So, if these policies go through, we can expect more African Americans and Hispanics pouring money into entrepreneurial ventures… more people sinking money into childcare services… more people spending money on higher education… and more people putting money into the housing market… Now, none of this bad in theory. For example, of course we want more African American and Hispanic entrepreneurs bringing great new products and services to market. Of course we want families getting childcare help where it’s sorely needed. What’s “bad” is that all this free money artificially boosts demand. And what does Econ 101 tell us happens when demand rises while supply remains static? Prices go up – a.k.a., inflation. So, with the government dishing out these free handouts, expect childcare costs to rise… tuition costs to increase… and price wars for starter homes to ramp up… This “doomed if you do, doomed if you don’t” Trump/Harris tradeoff is why we’ve been urging investors to own assets that will perform well in a dollar-debasement environment. Meanwhile, for other ways to play the November presidential election, we’ll steer you back to Louis and Charles next Tuesday. As we wrap up, yesterday, we signed off with “Volatility is coming. Get ready.” Today, we’ll add to that… Volatility is coming. So too is inflation – regardless of Trump or Harris. Get ready.
Have a good evening, Jeff Remsburg |
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