In case you haven’t already heard – Trump has won the US elections.
In an overwhelming victory as well – with Republicans also winning control of the Senate, and possibly the House of Representatives (not confirmed as at time of writing).
This actually makes Trump one of the most powerful sitting presidents in modern history – and gives him pretty broad powers to enact policy / legislation (at least until the mid term elections 2 years later).
This has huge implications for investor positioning going into 2025, so I wanted to take some time out to discuss this.
3 big topics I wanted to discuss:
- Will inflation return in 2025?
- How I will invest my own portfolio?
- What are the implications for REITs or China?
Why I am worried for the potential resurgence of inflation in 2025?
I’ve shared for a while now that I am worried about the potential resurgence of inflation in 2025.
And with Trump’s Red sweep this week, and the Feds continuing to cut rates, well that fear just became a lot more real.
The basic logic goes like this.
Trump likes to run America first policies – large fiscal spending, lower taxes, potential tariffs on trading partners.
All of which are inflationary.
And with a Republican controlled Senate (and potentially House), he pretty much has a blank check on that front.
And on top of that – Jerome Powell’s Fed continued to cut interest rates.
And is projected to cut another 3 times over the next 6 months or so.
All while speculative asset classes like Bitcoin have pumped to all time highs.
So yes.
No doubt inflation has come down and may stay low the next couple of months.
But look into 2025, and with all the factors above – will inflation resurge in 2025?
All paths lead to inflation?
If you really think about it logically.
The best course of action for the US here, to get out of their debt situation.
Is to cut short term interest rates as much as they can, and let nominal GDP growth run hot above inflation.
By doing this they get to inflate away their current debt load.
While keeping short term interest rates low to stimulate economic growth, and lower the interest expense.
Effectively – making America great again, at the expense of bond holders of course.
Where is the fundamental limit to the US’s ability to run inflation hot? Will we see a “Liz Truss” moment for the US in the next few years?
For those who recall.
Back in Sep 2022, the new UK government under Liz Truss (at that time) announced an unsustainable government budget.
The market reacted violently – sending UK bond yields sharply higher, triggering financial instability for UK.
This eventually forced Liz Truss to walk back her policy choices, and eventually her resignation.
Where is the fundamental limit to the US’s ability to run inflation hot?
The nuance of course is that unlike the UK, the USD is the global reserve currency, so I’m going to venture out on a limb to say that it would take a lot more for the same thing to happen to the US.
But fundamentally if you really think about it.
The only constraint on the US’s ability to do the above – is the US equivalent of a “Liz Truss” moment.
When investors lose faith in the US budget deficit, and US long term yields start to blow up.
Just look at how US 10 year yields have reacted since the Fed rate cut (gone from 3.6% to almost 4.5%), and some of this is already starting to play out.
Will the same thing happen to the US the next year or two?
Who knows, but so far things are definitely heading in that direction.
What I would add is that (a) Jerome Powell (and whoever comes after him) and (b) the next Treasury Secretary have one heck of a tightrope to walk.
They need to find a way to sustain the budget deficit that Trump will run, while convincing markets that they have a plan to reducing this – to avoid a Liz Truss moment.
And boy do I not envy them.
What do I want to own in 2025? How to play this macro climate?
But as a investor?
Well that’s a climate that just screams opportunity.
Broadly speaking there’s 2 ways to play this.
The first is to buy hard assets that can perform well in such an inflationary climate.
Think stuff like Bitcoin, Gold, Commodities, Tech Stocks, Bank stocks, industrial stocks, real estate etc.
Basically stuff with pricing power, where you cannot easily create more of, that can hold their value even with inflation.
The second is to play this from the reverse side – higher long term interest rates, stronger USD, and so on.
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Which is the better way to play this?
I guess for retail investors the former is the “easier” way to play this.
For example you just buy something like Bitcoin without leverage and wait for the price to go up.
The latter involves more complex instruments like bonds, options, FX and so on, and are not appropriate for everyone.
But depending on how things play out in 2025, it’s worth keeping an open eye on the latter as well.
There are some situations where if inflation does make a return in 2025, and long term yields surge – that would not be good for risk assets, but is an idea that can be expressed via bonds (or FX).
How I would invest in 2025?
I think in this climate, probably the biggest question you want to ask is:
How much cash/bonds to hold, vs hard assets (like Bitcoin, Gold, stocks, real estate etc)?
If I am right and the US cuts short term interest rates while running economic growth hot (above inflation), while doing whatever it takes to keep long term interest rates down.
That’s a climate where cash yields will not be amazing because of interest rate cuts.
And yet inflation could be pretty high (albeit below economic growth).
In a climate like that you want to have a bias towards hard assets.
And yet not so much that if the US fails to thread the needle and long term yields blow out – you suffer catastrophic losses.
So that’s the million dollar question in my view here.
Personally I’ve been increasing risk exposure the past couple of months in anticipation of a Trump win.
And now that we have a confirmed Trump win (with Republican Senate), I may continue to do so.
But what is the exact right mix between cash/bonds and hard assets?
That’s one that I’m still figuring out as well – and you can see my latest positioning and what I’m buying on FH Premium.
What about REITs and China? How would a Trump win affect them?
I’ve been getting a lot of questions on REITs and China, and the impact from a Trump win.
So let me share some thoughts there as well.
Why are REIT prices falling?
Short answer is because of higher long term interest rates.
I’ve plotted REITs against the Singapore 10 year yield (inverted) below.
You can see that REIT prices peaked around the same time as bond yields bottomed.
Are REITs a good buy here?
A lot of you have asked whether REITs are a good buy here after the selloff.
In an inflationary climate, real estate in good locations can hold its value well.
And with falling short term interest rates and higher rentals, we may see DPU pick up going forward.
The problem is that interest rate volatility will wreak havoc over the market prices for REITs.
So I suppose it goes back to what are your investment objectives.
If you are long term and just buying for the yield, and content to ignore the market fluctuations.
REITs could be a decent buy after the sell-off.
If you’re the kind that cares about the market price and look at them daily, well it could be a pretty volatile ride in 2025.
Personally I run exposure to REITs, but I don’t see myself increasing exposure to REITs further.
I think in this decade the structural tailwinds are no longer as favourable for REITs, and because of that REITs do not need such a big place in my portfolio any more.
What about China?
China is a tricky one.
The conventional logic seems to suggest that Trump will return with a Trade War 2.0.
Which of course is not good for China.
But I can’t help but shake the feeling that Trump is a showman.
And he is many things, but predictable is not one of them.
If everyone is expecting a Trade War 2.0, what if he leans the other way?
It seems poetic justice that the Trade War he started in 2018, exacerbated by Biden the past 4 years, can only be solved by Trump in his second coming.
What if he finds a way to cut a big “deal” with China?
To be clear this is pure speculation territory, and we will see how this plays out in time.
But as shared there are tentative signs that China has hit a policy bottom, and that going forward policy may get incrementally less bad.
If so that could signal opportunity in the China space, and I have shared on FH Premium in the past how I would build exposure to China (if so inclined).
Closing Thoughts
Whatever the case, I made fairly big changes to my portfolio this week, and I will likely continue doing so over the next few weeks heading into year end (full changes shared on FH Premium).
With the uncertainty from the US elections out of the way, the market can now move on to doing what it does best – pricing in the outcome.
And I would expect pretty big moves heading into the year end and into early next year.
Buckle up!
This post is written on 8 Nov 2024 and will not be updated going forward. My latest views on markets, my Stock watchlist and full Personal Portfolio, are shared on FH Premium.
So in this case what do you recommend for housing loan interest rate. What should be the strategy. Lock it in now while the going is good or?
If it were me? Probably lock in, and ideally with the right to reprice after 1 year.
Mostly agree with you: https://profithunting.blogspot.com/2024/11/the-trump-effect.html
The key things are a switch from stagflation to growth+inflation, and increased energy production. So we can’t just hedge against inflation in energy. And gold historically performs poorly in a growth+inflation environment…though it is the only contender to replace USD as a reserve currency.
I’m thinking industrial commodities (like copper, silver, tin, PGMS) plus bitcoin (behaves like a commodity) should do well.
Longer term, Asia needs to change to consumer led growth instead of export led. Else tariffs just get higher and higher till they do. Its a reversal of the past 40 years. Maybe SEA consumer companies?
That’s a good comment, generally agree with you.
I was actually thinking a basket of assets. Gold, Bitcoin, commodities, stocks, real estate.
And in this climate, cash/short term bonds have decent yield too.
Basically just buy everything hahaha.
Hello
Came across this post from Threads.
On this point:
If I am right and the US cuts short term interest rates while running economic growth hot (above inflation), while doing whatever it takes to keep long term interest rates down.
That’s a climate where cash yields will not be amazing because of interest rate cuts.
How long can this be maintained? Wouldn’t the bond market be unwilling to lend at low rates if they think inflation is going up? For that matter the Fed would have to raise rates if inflation starts to run hot, assuming Powell is still at the Fed (and not some Trump flunky)?
I think the govt can hold rates down by buying bonds. Or mandating that banks, pension or insurance companies have to buy them.
That’s a good question.
Although if you recall in 2021 the Feds waited until inflation hit 9% before they even started raising rates, and they raised 25 bps per meeting at the start.
Will Powell necessarily be so different in 2025 if inflation starts to pick up?
I really don’t know, but time will tell.
On the bond market – we need to differentiate between the short and long end.
Long end – absolutely agree with you.
Short end – there’s so much cash floating around in money market funds that whatever the Fed Funds Rate is, I dont think there will be a shortage of buyers.
Hi FH
i cannot stop to be amazed with your knowledge in knowledge on interest rates, jobs, and its effect on bonds, inflation and shares, its like textbook article, but why is the weeks after the US election and TRUMPs victory with plans to drive up US inflation with his new tax cuts, import tariff policies, stocks markets dives with the annoucements both US and local markets dropped by 10% what else is going in Nov 2024?
The US Stock market has been up though.
Do you refer to REITs in Singapore?
REITs are down because of the expectations over higher interest rates, but as you can see the Singapore bank stocks have done well.