Crypto News: The only real 'Trump Trades' ride on rising interest rates

Remember when Donald Trump won the White House in 2016 in part on the promise of "Drill, baby, drill?" Well, it turns out that wasn't a boon for oil companies. The energy sector, in fact, was the worst-performing one during the first Trump Administration. Technology shares rose the most. Forecasting how things will play out in the equity market is no more clear with the prospect of Trump 2.0. That's not stopping traders from bidding up would-be winners, like immigrant-detention-center operator Geo Group Inc., or banks that could benefit from laxer regulations. But trying to divine how equity market sectors will perform has a lot to do with the macro economy and idiosyncratic factors beyond the president's control. Despite record highs for Bitcoin on Trump's election, the same might also be true for crypto too, an asset class with too short a history to judge.

The only 'real' Trump trades are those tied to the direction of interest rates (and maybe gold, which often behaves like a proxy). That's because Trump's tax-cut plans, if he follows through, will almost certainly balloon the deficit, taxing the market's ability to keep absorbing an endless — and ever rising — volume of Treasury bonds.
They would also pour stimulus on an economy that the Federal Reserve has already been actively trying to slow down. Throw on import tariffs, and the inflation pressures get that much heavier. Not only will monetary policy have to be tighter to offset that, but the threat of inflation and higher premiums for longer-maturity assets will take its toll. For rate bulls then, the only real hope is a recession — something we all want to avoid.

So, on the eve of the Fed's next rate decision, let's dispense with all the speculation about who can gain from the politics and focus squarely on what the macro backdrop is today and what it could be under a second Trump Administration.

As always, I present you with a short crib sheet of points I want to cover:

Why picking equity sector plays is a fool's errand.
n rates, deficits matter. And they matter most when they can be inflationary.
Now that we know Trump will be president, we already see markets telling us to fear inflation.
Gold might be a good way to play this too.

"We'll make so much money from that, from energy. We are blessed with something. You will hear numbers in a little while. We will make so much money that we'll start to pay down our $19 trillion in debt."

That's what Presidential candidate Donald Trump predicted in 2016. His plan was to eliminate regulations on oil drilling and usher in a production boom that would not only make oil companies rich but fill the coffers of the US government with tax collections.

If you look at the price of oil price under Trump's first term in office, it pretty much round-tripped, with a barrel of West Texas Intermediate oil costing around $53 when he came to office and when he left.

To be sure, there was considerable fluctuation along the way, with oil prices rising almost through the 2018 midterms and plummeting during the Covid epidemic. Still the lion's share of Trump's time in office saw oil prices in a comfortable $40-65 range.

Was that good for energy companies? No. Here's a chart showing sector performance from 2009 to 2023. it's pretty busy, so I want you to focus on the lite green from 2017-2020. What you'll notice is that energy companies did the worst of any sector.

Nothing about the price of oil or Trump's plans ahead of the election would have led you to expect that. Meanwhile the bitter feud between Trump and Big Tech leading up to the election quieted down, they mended fences by December 2016, and information technology ended up the big winner of Trump's term in office, even before the pandemic supercharged that run.

The moral of the story? You can't trade shares based on politics. All of this "Trump Trade" stuff is pure speculation. And we need to be cautious about making equity sector or individual stock predictions in a very uncertain macro world.

The story of a booming energy sector's dwindling the US government's debt in 2016 that never came to pass has become one of tariffs dong that same job in 2024. In fact, President-elect Trump even mused to podcaster Joe Rogan that the US could make so much money in tariffs, it might be able to eliminate personal income taxes.

The bond market isn't having it. By the time presidential election was called for Trump early Wednesday morning, Treasury yields were already rising sharply in anticipation. Yields on all maturities beyond 10 years rose in excess of 20 basis points by the time equity market trading began. Equities then blasted higher. But that's a trade that I find much less compelling than the Treasury market one.

Why?

In a world where the US is growing the most of any of the G20 countries, with the unemployment rate near 4%, and promises that will worsen the deficit, the biggest tail risk is overheating. When the world is falling apart — as it was after Covid hit or when the 2007-2009 recession scarred the world economy — deficits fill a hole that a loss of private sector demand create. But when demand is already high and you add more deficits on top, the result — as we saw in 2021 and 2022 — is inflation.

The difference now is that the potentially inflationary economic policy is coming when core consumer price inflation, at 3.3%, is almost a full percentage point higher than it was on the eve of the pandemic and two percentage points higher than it was before inflation took off in 2021.

That's better than the 1970s. But it's still reminiscent of that time. Back then, core CPI excluding volatile food and energy prices crested at 11.7% in 1975 and only got back to about 6% before it started rising again in 1977. So the same pattern we see today — albeit with numbers roughly half of those from back then.

2.65%

- The inflation rate through September 2024 on personal consumption expenditures excluding food and energy. This is lower than CPI but still just as elevated relative to pre-pandemic levels

As this picture plays out, the Fed will be forced to react. If, as they suspect, inflation is headed toward 2% already, there's no guarantee it stays there in an economy growing at 3% with 4% unemployment. This is as close to full capacity as it gets. Thus, to the degree demand is supercharged by tax cuts and deficits, the Fed will feel forced to offset that with tighter monetary policy. Of course, Trump might intercede if the Fed isn't helping his administration. But that would just mean higher likelihood of inflation

We see this in bond markets on all counts. The first sign is that, in the Treasury market, yields are up substantially across all maturities. The interest rate swap markets go deeper, foretelling what Fed rate policy will look like next month, in two months and even in 18 months. Early Wednesday they showed traders paring their bets on interest-rate cuts by more than 15 basis points through June 2026. In fact, now the market is predicting that after a quarter-point cut Thursday, the Fed will hold steady at three of the next six meetings. The breakeven inflation rate that equates Treasury inflation protected securities to the normal variety show this is all about inflation. As the Trump victory looked more likely, inflation expectations rose significantly.

So it's not, "buy the dollar, buy equities and buy Bitcoin" as the knee-jerk market reaction reveals. Any of those so-called Trump Trades can be undone by macro circumstance. The one enduring theme — ironically since worries about inflation aided Trump in his victory — is that Trump equals government debt and deficits and those deficits equal inflation.

Equities overall did well as inflation was rising in the late 1970s. But that pre-supposes a robust economy and is more of a derivative trade, benefitting from the impact of deficits and inflation on corporate profits. If inflation and interest rates rise so much that it drags down the economy, equities will falter. I'd rather look at a more direct route to hedge against inflation and that's through rising interest rates.

Gold, of course, is an alternative play. We saw in the 1970s that, as the inflation rate started to rise, gold tracked it higher.

This is not the 1970s all over again. The inflation numbers are lower and any potential oil shock is less severe. The lessons of the 1970s are only loose guides that point more to high inflation leading to negative outcome for Treasury holders but positive ones for gold investors. What makes the case against Treasuries more stark today is the fact that we are coming off an unprecedented period of people overpaying for longer maturity government debt.

When the premium people received for buying a depreciating 10-year Treasury bond rose in the 1970s, it did so from a level much higher than today. During the 1973-1975 recession that premium bottomed at about 60 basis points. During Covid it bottomed below -1.50%. Even today, the premium is barely positive and below every single data point from the 1970s. With the election of Donald Trump, the self-declared king of debt, that's about to change. Interest rates are likely going much higher from here.

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