Trump 2.0: Let that sink in.
Trump’s Second Act: Let That Sink In
“Let that sink in!”
--- Elon Musk on the purchase of Twitter (October 2022)
Elon Musk is back with a twist on his infamous “sink” moment. Remember when he walked into Twitter (now X) headquarters with a sink after buying the platform for $44 billion, captioned, “Let that sink in”? He’s at it again. This time, Musk shared a meme of himself inside the White House – still holding the sink – during the U.S. election buzz, using the same punchline. Donald Trump is back. Let that sink in.
Trump’s victory might seem predictable in hindsight, the media and pollsters create the impression that we were in for a much closer race right up until election night. Despite this narrative, many savvy bettors, like the French "whale" who staked $30 million on Polymarket, saw the comeback coming. The 47th president’s return to the White House carries significant implications; we’ve seen the impact of Trump 1.0, and Trump 2.0 promises more of the same, only with a sharper edge. His slogan might be "America First," but it’s likely to feel more like "America Only" for the rest of the world – a shift that will have real consequences for foreign policies, global markets, and local economies.
1. Initial Market Impact and Key Policies
Markets have already responded with enthusiasm to the prospect of deregulation and tax cuts. U.S. stocks surged on the election result, with fossil fuels, private equity, and the technology cluster flagged as the flavour of the moment. The immediate winner here? Big business, with regulatory rollbacks and big tax cuts expected. A standout winner is Elon Musk’s Tesla. Shares soared as investors bet on a friendlier environment for Musk’s sprawling empire. The irony isn’t lost. Musk, who famously bends the rules to his will, now has a president who not only approves but celebrates his rule breaking. We may well see Musk’s star continue to rise – perhaps even reaching that mythical trillionaire status. Musk has money on tap. And if big business is a winner, the world’s wealthiest will also be winners, further skewing income inequalities around the world, and aggravating social tension. Trump 2.0’s biggest market winner is a federal immigration contractor, Geo Group Inc., with the firm’s share price adding 80,5% over the week. Let that sink in!
The post-election rally wasn’t limited to equities. The U.S. dollar posted its biggest surge in over two years, rising 1.6% against a basket of currencies as investors wagered that the president-elect’s policies would boost economic growth. Bitcoin, seen by many as a "Trump trade" given the belief in more lenient regulation under his presidency, climbed to an all-time intraday high above $75,000. Wall Street, with the S&P 500 index and NASDAQ composite hitting record highs, reflected early market optimism about the potential for a robust economic boost.
In this, there are many nuances. The Republican leader’s intent to revive America’s fossil fuel dominance signals a shift that will see U.S. oil and gas industries benefiting and global energy prices falling in the fullness of time. The president-elect’s “drill, baby, drill” approach, expected to accelerate domestic oil production, creates clear winners in traditional energy and puts pressure on renewable sectors. Electric vehicles and offshore wind developers, for example, are already bracing for potential setbacks.
2. Separate from the Election: Fed’s Interest Rate Stance and the Role of Bond Vigilantes
"It’s the economy, stupid."
--- James Carville advisor to Bill Clinton (February 1992)
While Trump’s policy direction is one part of the economic picture, the interest rate stance of the Federal Reserve (Fed) holds equal significance. The bond market is sending a clear message, with veteran strategist Ed Yardeni reminding us of the so-called "Bond Vigilantes." As Yardeni put it, “Investors often hear, ‘Don’t fight the Fed,’ but perhaps it’s the Fed that shouldn’t be fighting the Bond Vigilantes.” With long-term Treasury yields rising toward 5%, these market forces may work to nullify the impact of additional interest rate cuts. The “Bond Vigilantes” see fiscal excesses on the horizon, spurred by the returning incumbent’s aggressive policy promises. Their pressure on yields could effectively raise long-term borrowing costs, intensifying inflationary expectations and complicating the Fed’s rate strategy.
Meanwhile, on the monetary policy front, and following closely on the heels of the election, the Fed and Bank of England (BoE) each delivered widely expected 25bps cuts, albeit with a slightly hawkish tilt. While the Fed’s cut was ‘priced in,’ leaving markets unmoved, attention was more keenly focused on Fed Chair Jerome Powell’s commentary regarding the implications of a Trump presidency on the economy, monetary policy, and the independence of the Fed. Powell’s remarks reflected cautious optimism – but also signalled concerns about potential fiscal imbalances, suggesting that the Fed remains on alert for signs of inflationary pressure from Trump’s policy agenda.
And here, there is cause for concern beyond just fiscal wastefulness. Circumstances feel ripe for the likes of Alexandria Ocasio-Cortez, Bernie Sanders, and Stephanie Kelton – the cheerleaders of modern monetary theory (MMT) to enjoy a moment in the sun. There are two real threats in this setting: the folly of MMT as a school of thought; and the economic illiteracy of Trump. It’s a dangerous combination that could easily translate into a cocktail of unbridled debt, price inflation, and currency crunch. The gravitational pull of foolish policy is strong; and no country has immunity. Thankfully, while markets didn’t blink with the Fed cut, Jerome Powell also hasn’t blinked, making it clear he’s ready to defend the US central bank from political pressure from Trump, and saying he wouldn’t resign if asked.
How did we get here? The election outcome in many ways is a clear rebuke of the Biden administration’s economic choices. Much debate has centred around why voters turned away from Kamala Harris and toward the White House’s new occupant. For many economists, the answer lies in the perils of running the economy hot. Gargantuan stimulus spending under Biden helped spur a robust economic recovery from the COVID-19 recession. But it also stoked consumer price inflation, leading to a 20% rise in prices over the last four years that hit American households hard. The lesson here may be simple: when the cost of living goes up, so does voter discontent. Or, as James Carville put it in advising Bill Clinton’s election campaign: “It’s the economy, stupid.”
3. Biden’s Economic Legacy and the Four Pillars of Trumponomics
"To me, the most beautiful word in the dictionary is 'tariff.'”
--- President elect Donald Trump (October 2024)
The Republican leader has squared up this this with his widely dubbed "Trumponomics." His policy platform is built on four key pillars: lower taxes (good for business); higher tariffs to protect domestic markets (good for Tesla and other manufacturers); stricter immigration controls (bad for almost everyone); and aggressive deregulation (good for many if it translates to productivity). While these policies resonate with the policies of Trump 1.0, this time the execution might differ. The former president’s first term was marred by a chaotic White House and policy setbacks obscured by the COVID-19 pandemic. Now, with a better-prepared team, Trump is expected to hit the ground running. The true test of Trumponomics could finally unfold, offering a more definitive case study on the effects of these policies – if another global crisis doesn’t intervene in the meantime.
In his victory speech, the GOP nominee boldly claimed, “Incomes will skyrocket, inflation will vanish completely, jobs will come roaring back, and the middle class will prosper like never before.” U.S. voters have bought into this pitch, but many economists – and we share this view – are sceptical. The policy mix of tax cuts and protectionist measures could simultaneously increase demand while restricting supply, a combination that risks re-fuelling inflation despite the president-elect’s assurances.
4. Geopolitical and Economic Fallout: Europe, Asia, and Emerging Markets
“What's Donald gonna do today?
Are we doomed or are we safe?
First thing I read is Donald's Tweet
What's Donald gonna do today?
He's a cross 'tween Homer Simpson,
And good ol' Fred Flintstone
Don't need no help from no one,
Fix this … all on his own.”
--- Australian music performer, Kevin Bloody Wilson (2020)
The 47th president’s combative approach to foreign policy and trade is expected to challenge global stability. Elizabeth Saunders, a professor of political science at Columbia University argues that his unpredictability is a feature, not a bug. That makes anticipating the course of his administration’s foreign policy challenging. Trump has given few details of his plans on many key issues. However, he has three fixed beliefs and behaviours. First, he really doesn’t like alliances, especially big multilateral ones. Second, he really doesn’t like multilateral trade deals. He wants to get out of them and then make them bilateral ones. And third, he admires authoritarian regimes. The specifics may be unpredictable, but these are the tenets guiding his approach to the world.
That said, we do have some clues. His pledge to halt aid to Ukraine may pressure Kyiv into territorial concessions. And Ukrainian stocks saw a lift after the election, as markets perhaps anticipate some form of resolution to the ongoing conflict. Investors may be betting that Trump, known for his unconventional approach, could pivot toward his preferred methods of "negotiation" and strong-arm tactics, potentially leading to a quicker settlement. Russian positions could also benefit if the Republican leader opts to reverse sanctions in a bid to restore confidence in the U.S. dollar and address the damage done by the confiscation of Russian reserves. Such a move could be interpreted as an effort to stabilising the broader geopolitical landscape, albeit with significant risks attached.
Former CIA director and US defence secretary Leon Panetta predicts that Trump will give prime minister of Israel, Benjamin Netanyahu, a “blank check” in the Middle East. Panetta notes that before the election Trump had basically said: “‘Whatever you do, whatever you want to do, whoever you want to go after, you have my blessing.” This opens the way for all-out war between Israel and Iran.
In turn, European leaders, particularly Germany’s Olaf Scholz and France’s Emmanuel Macron, face the challenge of uniting a divided NATO while filling the gap left by a U.S. focused on "America First." China, meanwhile, is bracing for an intensified trade war. Trump’s threat of a 60% tariff on Chinese imports could destabilise the region’s supply chains. Beijing may counter this consequence with a deliberate devaluation of the renminbi and strategic shifts in diplomatic alliances. This could easily degenerate into tit-for-tat retaliatory policies. As Managing Director and the Chief Sustainability Officer at United Overseas Bank’s Eric Lim notes, “The room for error under Trump 2.0 will be much lower than under Trump 1.0.”
However, in this, there could be winners. For instance, Lim believes Asia will respond by deepening regional collaboration to become “stronger through the collective.” In an era of heightened trade tensions, Asia’s regional economic integration will likely emerge as a defining counterweight to U.S. policy swings.
The international reaction underscores the uncertainty surrounding Trump’s return. While the front page of China Daily hailed a "balanced global order," there’s an inherent contradiction in reconciling a strong presidency with a fair, balanced approach to global governance. India, meanwhile, is scrambling to prepare, with the Economic Times of India noting the country is "Trump ready" with new policy briefs – but it’s far from clear if any country can be truly ready for the unpredictability of Trump 2.0 which looks set to feed a far more strident president than Trump 1.0.
5. Risk Premiums and Emerging Markets: A Volatile Path Ahead
“I used to think that if there was reincarnation, I wanted to come back
as the President or the Pope or as a 400 baseball hitter. But now I would
like to come back as the bond market. You can intimidate everybody.”
--- James Carville advisor to Bill Clinton (June 1994)
Economic Growth: The president-elect’s planned tax cuts may provide an initial boost to U.S. economic growth, particularly in the industrial and energy sectors. The long-term impact is far less certain. The threat of steep tariffs, especially against China and the European Union, raises the spectre of retaliatory trade measures. As global trade flows become more restricted, countries reliant on exports – like Germany and South Korea, and many emerging markets – may face growth headwinds.
Currencies: Emerging markets, already sensitive to U.S. trade policy swings, could see capital flight and increased pressure on currencies. For investors, this demands emphasis on policy stability, economic growth, and the structural strength of currencies. No country ticks all the boxes, but using this framework, Brazil, Chile, Indonesia, Turkey, and South Africa look attractive despite the heightened risks. Standing over all of this, the U.S. dollar is expected to strengthen in the short term, driven by hawkish Fed policy and safe-haven flows. But prolonged fiscal expansion without corresponding monetary tightening (watch for MMT) could raise doubts about the dollar’s sustainability, particularly if inflationary expectations become entrenched.
Inflation: Trump’s fiscal expansion, combined with restrictive trade measures, may spur inflation – the bond market is already suggesting this. Tariffs increase the cost of imported goods, while supply chain disruptions add upward pressure on prices. Inflationary risks may force central banks, including the Fed, to take a more hawkish stance. As noted before, the recent 25bps cuts by the Fed and the BoE came with a hawkish tilt, reflecting concerns that Trump’s fiscal policies could keep inflation elevated. The bond vigilantes have already reacted, anticipating higher interest rates.
Equities: Equities, particularly in sectors aligned with Trump’s agenda – such as energy, defence, and traditional manufacturing – are likely to benefit in the short term. Technology and the renewable energy sectors may face headwinds due to regulatory rollbacks. And big pharmaceutical firms are probably breathing easier – even if the landscape remains tough.
Commodities and Precious Metals: Commodities tied to infrastructure, like steel and copper, should see a demand boost from domestic investment plans, but the risk of a global slowdown will temper gains. Agricultural products could face price volatility from disrupted trade relationships. That said, precious metals, particularly gold, are poised to perform well as investors seek safe-haven assets in response to policy uncertainty and potential currency devaluation. Inside of the precious metals’ basket, silver is particularly attractive, and investments in precious metal miners offer geared exposure to this driver.
6. The Political Rebirth of Trump: Defying the ‘No Second Acts’ Narrative
The former president’s dramatic re-election marks an extraordinary political rebirth. He has returned from the political dead, demonstrating that despite the adage, there are indeed second acts in American life. His campaign capitalised on fears about immigration, the erosion of American manufacturing jobs, and most critically, inflation. This focus on kitchen-table issues translated into a red wave washing through voters. Trump’s win is decisive, and this will bolster his confidence and conviction on policy calls – as if he needed this in the first instance.
In the months ahead, we expect markets to remain reactive as Trump’s policies take shape. Between a shifting Fed stance, bond market resistance, and policy swings, volatility will likely dominate. We will stay nimble. With Trump 2.0 on the horizon, the world order is shifting – and with the lessons and learnings of Trump 1.0, we will stay nimble, letting the risk management and opportunities of Trump’s unpredictable agenda truly sink in.