July 23, 2024 | Read Online

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"If you've been a staunch Republican or a staunch Democrat through these 77 years, you'd have missed out on a lot of the party."

— Warren Buffett on investing in the US

Investing in the age of Trumponomics

One of my core principles in both investing and trading is to never mix either of those pursuits with politics.

For one, your political bias will fatally prejudice your decision-making.

And for two, politics rarely matter.

Warren Buffett agrees: "If you mix your politics with your investment decisions," he told CNBC, "you're making a big mistake."

I've learned that lesson the hard way.

Every fourth year, the outcome of the US election seems like the most important thing to me — and every fifth year I realize it wasn't.

Not even close: The regular ups and downs of the business cycle far outweigh whatever policy changes were ushered in as a result of an election, every time.

But this time feels different, doesn't it?

Every US presidential election is "the most important in our lifetimes," but this one feels like it really is.

So, surely it must be the most important thing for markets too?

There's reason to believe it might, because the Overton window of potential policy outcomes is wide open — in both directions.

One side has proposed taxing unrealized capital gains, for example, and the other has proposed imposing 60% tariffs on China — two radical proposals that would reshape the US economy in ways that would surely be disastrous for your investment portfolio.

Fortunately, neither policy is likely to be fully realized.

But these extremes remain a measure of how much political and economic variance we are currently facing — we're not quibbling over a few percentage points on the top tax bracket this time around.

Even there, though, the bid/offer spread is wider than usual: A Trump administration might lower corporate taxes to 15% whereas a Harris one might raise them to 35%.

Unlike most public policy debates, a 20-point swing in corporate tax rates is significantly price-relevant for the index funds you are passively invested in.

But the economic debate goes far beyond the usual territory of taxes and regulation.

This is, of course, the first election where AI is an issue and on that, the two parties couldn't be further apart: One side wants to regulate it and the other wants to let it rip.

For that reason alone, the investing stakes in this election couldn't be higher.

Do we have to take the risk of making some politically biased investment decisions then?

All that said, I still don't think we should.

Gridlock to the rescue

Your election-related investing decisions (should you choose to make them) will mostly be a function of your take on Trumponomics (we don't yet know Harris' plans, but they will probably be close enough to the status quo to be ignorable).

As for Trump, the bipartisan consensus is that his agenda, if enacted, would be bad for bonds and the US dollar and good for crypto.

What stocks might do is where it gets contentious — and also therefore where our political biases most get in the way of reasoned decision-making.

If, for example, you like Trump for his anti-wokeness, you will probably like his economic agenda, too — irrespective of its merits.

This applies to partisans of both sides: "Individuals become more optimistic and perceive the markets to be less risky and more undervalued when their own party is in power," a University of Miami study found.

Professionals are no better: Another study found that credit analysts "who are not affiliated with the US president's party downward-adjust corporate credit ratings more frequently."

So, if you hear someone saying Trumponomics will crash markets, know that there's a good chance they will be voting for Harris (and vice versa).

Still, there are non-partisan reasons for concern in this election.

Yes, the traditional Republican platform of deregulation and lower taxes is good for the stock market.

But Trump's non-traditional policies on tariffs and deportations are indisputably bad for the stock market.

How bad?

The analysts at Allianz Research estimate that Trump's stated intention to crack down on Chinese goods coming into the US through the Mexican border would add 0.6 percentage points to US inflation.

0.6%! Just from enforcing checks at the border!

That seems like a lot.

A full-blown trade war with China would decrease US GDP by as much as 1.4%, they estimate — enough to give any clear-thinking investor pause.

But this is a worst-case scenario.

The report also predicts that US political gridlock will take the edge off Trump's proposals: "We expect a pragmatic policy approach, supported by a scenario of a divided Congress and Republican Party."

This will annoy Trump supporters, of course, but it should encourage investors — because political gridlock, for lack of a better word, is good.

In a gridlocked political system, "when reform succeeds, it tends to be modest in scope and to more closely track what the median voter prefers," according to a new study.

"Surprisingly," the authors conclude, "voters are best served by a pair of polarized and unrepresentative institutions."

We should be very well served then!

Decision time

If political gridlock takes the edge off Trump's proposed tariffs and deportations, it's reasonable to think that the downside risk to markets from Trumponomics inflation may be offset by the upside risk of Trumponomics deregulation.

Or more than offset.

The economist Ed Yardeni makes the bull case for Trumponomics by noting that inflation should be less of a consideration for investors, and technology more of a factor, than has historically been the case: "The US economy has become technologically driven and industrially diversified with an exceptional entrepreneurial spirit," he wrote in the FT. "More than half of capital spending is on technology."

If so, investors should maybe look through short-term inflation risks and look forward to long-term technology gains (AI included), as the a16z founders argue here.

How you weigh these pros and cons will be a judgment call, of course.

Which is why I've resolved to do nothing — I don't trust my own judgment when politics is unavoidably in the mix.

Instead, I'll take Warren Buffett's advice and stay fully invested in US businesses.

Because one thing I know from experience is that the only thing worse than missing out on a stock market party is missing out on it because of politics.

— Byron Gilliam

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Tom Dunleavy @dunleavy89

Stablecoin market cap has jumped since July 2 after period of stagnation, reaching ~$165 billion

The highest since May 2022

6:54 PM • Jul 22, 2024

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Blockworks Research @blockworksres

Why @solanamobile should 100x their phone production:

1/ While initial demand for the phone seemed underwhelming, sales skyrocketed at the turn of the year, resulting in cumulative sales of over 160K units.