To The Moon

I've written a comprehensive article analyzing the financial market landscape in the event of a Trump election victory, highlighting which sectors and commodities are likely to benefit.

This article will be divided into two parts: Part 1 and Part 2.

This article is written by Shernice, if you like my article, please hit the like button. 

$Gold - main 2412(GCmain)$ 

$Tesla Motors(TSLA)$ 

$iShares Silver Trust(SLV)$ 

$United States 3x Oil Fund(USOU)$  

Part 1/2

The prospect of Trump being re-elected is a topic that raises numerous questions, especially for those of us who aren't American. The uncertainty of the election outcome is palpable; even Americans themselves are unsure. As we approach the election, it's notable that 25 million ballots have already been cast. The U.S. voting system differs significantly from ours; for instance, while we vote in person, they also allow mail-in voting.

Reflecting on Trump's previous term, it's important to consider why concerns about inflation are more pronounced this time around. In his first term, he often spoke about making America great again, but many of his promises—like building a secure border—remained unfulfilled. Despite his efforts, illegal immigration continued, and he struggled to bring manufacturing jobs back to the U.S.

Now, as inflation worries loom, people are questioning whether his proposed measures, such as raising tariffs and cracking down on illegal immigration, might actually lead to economic difficulties. While his intent is to revitalize American manufacturing and create jobs, the potential repercussions on the global economy can't be ignored. These policies might create issues that affect us all.

Interestingly, even critics of Trump, such as those from The Economist or The Wall Street Journal, have begun to acknowledge that he might have a good chance of winning again. This shift reflects a growing acceptance of his potential return.

If Trump does win, a major consequence could be the substantial increase in import tariffs, affecting not just China, but also countries like Taiwan, South Korea, and various Southeast Asian nations. Such tariffs could push consumer prices higher; for instance, if a beverage's cost rises from $2 to $2.20 due to tariffs, and each middleman adds an additional markup, the final price hike would ultimately burden consumers.

Moreover, retaliatory tariffs from other countries could further escalate prices. This resurgence of protectionism, fueled by geopolitical tensions, threatens to disrupt the free trade principles that have governed the past century.

To counteract the pain of rising prices, Trump may propose tax cuts for both individuals and businesses, which could provide some relief. Lowering corporate tax rates, particularly for struggling small businesses, could stimulate investment and consumer spending. This strategy could function as a fiscal boost, akin to government spending on infrastructure.

Raising tariffs has led to higher prices for consumers, which many are struggling to bear. However, Trump may attempt to alleviate this burden through tax cuts. Imagine being an American: even if beverage prices rise, a reduction in taxes could help offset that increase, allowing consumers to manage the costs. This means that for businesses, tax rates could drop to 15%, which would be particularly welcome news for small and medium-sized enterprises.

Currently, these small businesses are facing significant challenges. While the stock prices of major tech companies are soaring, most other companies in the S&P 500 have not seen similar growth, indicating the tough environment for smaller firms. If Trump can lower income taxes, both personal and corporate disposable incomes would increase, which could stimulate consumption and investment. This substantial tax reduction would act as a positive fiscal policy, much like government spending on infrastructure.

However, while increasing disposable income and corporate investment, rising prices seem inevitable. Previous interest rate hikes aimed to reduce disposable income and curb consumption and investment, while Trump’s approach could lead to the opposite effect, resulting in higher inflation.

The issue of illegal immigration plays a critical role. Some economic indicators in the U.S., like the Consumer Price Index (CPI), have decreased partly because illegal immigrants take on many low-wage jobs, helping to keep overall wage levels down. If these workers are removed from the labor market, American workers, who tend to demand higher wages and better conditions, would fill those roles. This shift could further drive up prices.

Ultimately, while there are legitimate concerns regarding inflation and economic strain, Trump’s policies aim to strengthen the American economy. However, we must also consider the broader implications of such changes, especially for those of us outside the U.S. The interconnectedness of the global economy means that decisions made in Washington can have ripple effects worldwide.

So, focusing on these three points:

1) Protectionism and Tariff Increases: Raising tariffs can lead to higher prices for consumers.

2) Fiscal Policy with Major Tax Cuts: These cuts are intended to stimulate consumption and investment, which can also contribute to rising prices.

3) Crackdown on Illegal Immigration: Reducing the labor pool can drive up wages, which in turn increases costs for businesses.

These three factors alone can contribute to inflation. This is why, despite Trump’s previous term not resulting in significant price increases, concerns about inflation are heightened this time around, especially with the election looming.

If we consider how fiscal policies can drive prices up, the potential for inflation becomes more apparent. Additionally, if we look at the monetary policy landscape, particularly in relation to the Federal Reserve, the situation could worsen.

If Trump is re-elected, he might push for significant interest rate cuts from the Fed. If Jerome Powell, the Fed chair, complies, that would create a situation of loose monetary policy. If Powell resists, Trump could replace him with someone more agreeable. This would lead to aggressive rate cuts, further stimulating the economy but also risking increased inflation.

In his campaign, Trump could argue that high mortgage rates are burdensome for everyday Americans, and therefore, substantial rate cuts are necessary to ease those financial pressures. While this approach might be politically expedient, it could lead to further inflation if implemented.

Currently, the Consumer Price Index (CPI) in the U.S. is around 2.5%. If it were to rise to 4.5% , that would certainly be shocking for many, as it’s a significant jump that most wouldn’t expect.

If you saw such a number, it would likely prompt a reaction—people would be concerned. With a CPI increase, the question arises: how would the Federal Reserve respond? If inflation rises to 4.5%, there’s no way to simply ease into a “soft landing” anymore.

CPI is measured as a year-over-year change, meaning it compares current prices to those from the same time last year. So, if Trump were to be in office next year, any monthly figure would be compared to this year's monthly figures, which might be higher. This could easily lead to the perception of inflation rising significantly.

You may have noticed that grocery prices are climbing, which ties into these inflationary concerns. When we talk about interest rates, particularly the 10-year Treasury yield, it’s essential to recognize that this reflects not just the Fed’s short-term rate decisions but also broader economic conditions and inflation expectations.

If the CPI were to jump to 4.5%, and the current 10-year Treasury yield is around 4.2%, the question becomes whether there would still be room for further interest rate cuts. If inflation is rising, it becomes increasingly difficult for the Fed to justify lowering rates, as they would need to balance stimulating the economy with controlling inflation.

The expectation of a rate cut cycle means that the Fed is likely to lower rates in November. As a result, bondholders won’t need to adjust their positions because it's almost certain the Fed will proceed with cuts. If Trump assumes office in January, he will maintain the existing plans laid out by Powell, and the Fed is expected to cut rates in November as well. However, it’s important to note that financial markets often price in future expectations, meaning they won’t just react to events from November or December; they will already be factoring in what happens after Trump takes office.

With higher interest rates, particularly for the 10-year Treasury yield, consumer loan rates will also rise. This linkage means that loans for buying homes or cars will become more expensive, impacting the real economy significantly. If consumers have already taken advantage of lower rates and now face unexpected rate hikes, they could find themselves in a difficult position.

This situation could lead to similar issues faced by bank crisis in the past, where higher rates cause substantial losses on bonds. In 2023, Silicon Vally Bank collapse, After the bank was forced to sell bonds at a loss, its stock price plummeted and depositors panicked, leading to a classic bank run. This was the second-largest bank failure in U.S. history. The third-largest came just days later when Signature Bank ceased operations. If the economy suffers due to these changes, the government may respond by increasing spending. The Fed might ramp up money printing, and the U.S. could see an influx of public debt as the government issues more bonds to fund bailouts and cash subsidies.

This chaotic approach of raising rates while simultaneously injecting money into the economy can be contradictory. The U.S. national debt is already around $36 trillion, and if Trump were to continue these spending practices, we could see it reach $40 trillion. Just the interest on such a massive debt could exceed $1 trillion per year, leading to significant fiscal challenges.

The ongoing fiscal challenges in the U.S. raise significant concerns, particularly regarding Trump's potential policies. One key issue is the balance between revenue and expenditures. While Trump might aim to increase tariffs to boost government income, his proposals for tax cuts for both individuals and corporations would create a substantial decrease in revenue. Typically, tax cuts will outweigh any revenue generated from tariffs because collecting tariffs is often more complicated than implementing tax cuts.

As a result, the fiscal deficit is likely to expand. The worry here is that as the deficit grows, the overall debt level will rise sharply, forcing the U.S. government into a corner where its only option is to print more money.

When the government prints more money, it can lead to higher inflation rates. Moreover, as the supply of money increases, borrowing costs may rise too. Although the U.S. government may have a seemingly unlimited capacity to issue debt, an increasing debt load can make borrowing more expensive over time.With US debt now at $35.8T, the big question is: what’s the plan for repayment? As interest costs soar, the risk of dollar devaluation becomes real. 

This situation also impacts other countries. For instance, many nations, including, China, Korea, Taiwan and Japan, hold significant amounts of U.S. Treasury bonds. If U.S. debt continues to rise dramatically, these countries may begin to worry about the stability of their investments. The recent troubles faced by banks with large amounts of U.S. debt serve as a cautionary tale. If smaller banks struggled with their exposure to U.S. bonds, larger economies holding massive amounts of U.S. debt would face even greater risks. The potential for widespread financial instability is a significant concern as we consider these dynamics.

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