Trump must focus on a few key issues moving forward. First, although global assets are hitting new highs, domestic purchasing power has not kept pace.
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The challenge lies in how to expand purchasing power while simultaneously controlling inflation. Trump's approach centers on significantly boosting American wages, which he believes can be achieved by removing illegal immigrants. Currently, there are nearly 11 million undocumented immigrants in the U.S. If they were all removed, a severe labour shortage in service sectors would likely trigger wage increases.
However, concerns may arise that wage hikes could fuel inflation. Yet, as previously discussed with investment products, the real inflation concern stems from supply chain issues and geopolitical tensions, not from rising wages. Wage increases, in essence, expand purchasing power and could be a positive driver.
A second key focus is how to balance wage growth while keeping inflation under control. One solution lies in Trump's plan to ease regulations on domestic energy production.
By lifting restrictions on energy production, the U.S. could significantly increase its supply, helping to drive down commodity prices.
It also benefits U.S. supply chain industries, particularly those related to oil and gas, by supporting domestic production.
It helps reduce operational costs for U.S. companies by lowering energy expenses.
This is an essential part of Trump's strategy moving forward.
Despite potential inflationary pressures, it’s important to recognize that wage increases may not be as detrimental as feared.
Most people aren't inherently opposed to inflation; rather, they fear their wages won't keep up with it.
The potential removal of green energy subsidies could save the U.S. government an estimated $15.6 billion. Many view subsidies for green energy, along with carbon taxes and mandatory biofuel blending, as contributing factors to inflation.
Donald Trump has floated the idea of appointing Elon Musk as a "Secretary of Cost-Cutting" in a possible second term, highlighting Musk's reputation for business efficiency and cost reduction. Trump hinted that Musk could help trim unnecessary civil service expenses.
A Trump victory could also push European nations to increase their defense budgets and redirect strategic focus toward the Indo-Pacific, where China's influence is a primary concern. This shift might allow the U.S. defense industry to benefit as Europe takes on more responsibility in its own defense.
Trump will need to address this issue decisively in the next two years to avoid political backlash in the 2024 election, especially after seeing how economic growth didn't directly translate into political success in the past.
When considering the broader market, even if the U.S. stock market declines, it's likely due to a natural inventory cycle rather than any fundamental economic weakness.
Short-term government bond yields are also closely tied to inflation expectations and trade tariffs. However, despite recent declines in long-term Treasury yields, many assets—especially short-term debt, TIPS, and emerging market bonds—are still performing relatively well. This is an indication that investors aren’t overly concerned about a recession.
In terms of asset allocation, investors might consider rebalancing their portfolios. One strategy could be adopting Buffett’s approach of holding a substantial amount of short-term debt while reducing equity exposure. With short-term government bonds yielding 4.5%, they may be a more attractive option than stocks in the near term. This allows for capital accumulation in anticipation of potential stock market corrections, while offering lower volatility.
Looking ahead to 2025, those who maintain a balanced asset allocation should avoid major shocks, as the performance of equities has far outpaced bond markets recently.
Even with the ongoing rise in asset prices, there is a noticeable gap between global asset valuations and domestic purchasing power.
The ultimate question is: where will Trump's policies take the U.S. economy? While Trump is merely a short-term catalyst, his economic policies will have a lasting impact.
If the economy continues expanding, as evidenced by rising asset prices, the market will likely adjust accordingly, and fears over inflation may subside.
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