Trump's fat cocks

Good morning Well, that's what happened. There should be fewer surprises at today's Federal Reserve meeting – markets are confident they will cut interest rates by 25 basis points given last week's weak jobs data. But the future of the Fed's interest rate path is now more uncertain; see below. Let us know if you won or lost money on the election betting markets (Rob foolishly hedged his Trump bet at the last minute and evened out): [email protected] and [email protected] .

It's time to challenge conventional wisdom about Trump and the markets

The market reacted to the Republicans' overwhelming victory exactly as one would have expected. For the market, Donald Trump's big win means a stronger dollar, more M&A, less regulation, crypto utopia and higher deficits, inflation and tariffs. Everything worked wonderfully yesterday. For example:

• The S&P 500 rose 2.5 percent; Domestic-focused small caps in the Russell 2000 rose 6 percent.

• The yield on 10-year government bonds Inflation rose by 15 basis points, two-thirds of which came from a higher breakeven inflation rate and the remaining 5 basis points from higher real interest rates. That limits a 70 basis point increase in the 10-year yield since Oct. 1, when Trump's rise in the polls and prediction markets began.

• The forecast of the futures market for the The Fed's key interest rate increased 12 basis points in December 2025; it has risen 88 basis points since October.

• The KBW bank index rose 10 percent in anticipation of softer regulation and continued higher interest rates. The biggest winners were CapitalOne and Discover, which renewed hopes that their merger would go through.

• The government-sponsored mortgage guarantors Fannie Mae and Freddie Mac rose on expectations that Trump would return their profits to shareholders.

• house builder slipped as investors suspect higher interest rates will worsen the problem of home affordability.

• Dollar stores Stocks like Dollar General and Dollar Tree fell sharply on concerns about China tariffs. Dollar Tree, for example, imports 40 percent of its sales directly, and the “vast majority” of that comes from China.

The list could be continued endlessly. Investors think they know who they are dealing with in Trump. They probably do. But the “probably” is a bit dangerous here. The man is difficult to predict. He is not bound by history or his previous statements. The distribution of the results of his presidency will have fat tails. So while the core forecast for the markets needs to be based more on what we saw yesterday, we need to think hard about other possible outcomes.

The central dogma worth questioning is the connection between deficits, inflation, interest rates and the dollar. In this context, consider the possibility that the market will hold back on Trump.

Start with the popular notion that Trump will appoint a sycophant to the Fed who will help meet the need for low interest rates in the face of tax cuts and high spending. Would the bond market accept this? Shares?

In this context, will Trump continue with deep tax cuts and sustained spending as inflation rises again and markets panic? Trump likes to use markets as a benchmark for his performance. From 2016 to 2020, both bonds and stock markets cooperated with his ego. Stocks hit a rough patch in the fourth quarter of 2018, falling in the first month of the Covid-19 crisis. Otherwise they rose. Prices were either low or very low. We simply don't know how he will behave in the face of continued market hostility. It could place him in economic conventionality.

Remember, Trump just won an election by blaming Democrats for inflation. Given this, how will he respond to the inflation created by his tax, trade and immigration policies?

Trump genuinely hates trade deficits and believes tariffs will close them while doing little damage elsewhere. During the election campaign, he said he would impose a tariff of up to 20 percent on all imports and impose tariffs of up to 60 percent on China. How exactly are they implemented?

Higher trade barriers could be a purely political statement. But some close to him – including his former trade adviser Peter Navarro – have suggested that imposing tariffs is a negotiating tactic. If that were the case, Navarro points out in Project 2025's conservative policy playbook that there are two possible scenarios: Other countries lower their trade barriers or they raise tariffs in retaliation. The market seems to favor the second scenario, which is clearly inflationary. What if the first game goes out?

As for the China tariffs, it's unclear whether there will be exceptions for products where the U.S. doesn't hope to compete with China (past exceptions range from X-ray machines to crab meat) or where U.S. consumers will feel the pain directly would get. Unhedged is confident Trump will back off before raising the price of iPhones by 60 percent.

The other main factor driving the consensus for higher interest rates is immigration. As we have written, newcomers have recently helped curb inflation by slowing wage growth. Trump has promised to effectively close the southern border. This would lead to wage inflation among workers already working in the country. That's part of the point. But the influx of migrants is gradually slowing and the US economy is no longer performing as well as it did in 2022.

Trump has also announced that he will deport illegal immigrants already here. Vice President-elect JD Vance put the number at 1 million people per year. This is also about wage inflation. But how do you get a million people out of the country? We believe he will give mass deportations a chance. But there will almost certainly be legal challenges and ugly, violent scenes. How strong is Trump's stomach? How strong is America?

A good read

In some lighter news: Moo Two

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