January 31, 2025 | Trump 2.0 is Destined to Fail

President Trump was inaugurated for the second time on last week. He is taking over the Presidency at an unusual time for the economy and financial markets.

Trump has only a small chance of living up to the hype and expectations over his promise to Make American Great Again.

Trump takes over when the U.S. has not experienced a severe recession for about fifteen years, since the Global Financial Crisis ended. During that time interest rates were kept artificially low, and government ran large deficits. A new recession is overdue.

Trump 2.0 begins when the stock market is near record highs, and at an unusually high valuation. The Magnificent Seven have led the S&P 500 higher, stretching valuations to levels only seen in 1929, 2000 and 1989 in Japan. In every previous time that valuations have reached similar levels subsequent returns in the stock market have been poor.

The U.S. market now makes up 65 percent of all markets in the world, a record high. This is partly due to an unprecedented influx of investment funds into U.S. markets in recent months, in anticipation of the Trump 2.0. It is easy to imagine a reversal of those flows during Trump’s term.

Source: The Daily Shot, WSJ

Trump will place large tariffs on foreign goods. But those tariffs will be met with retaliation, and that will raise prices for Americans, at least in the short run, as the manufacturing capacity of the U.S. has been shrinking for several decades and goods from lower cost foreign manufacturers will be hard to replace. Price increases will push consumer costs higher, not lower as Trump promised.

Trump’s plan to increase fossil fuel production in the U.S. is also fraught with problems. The increase in production in the U.S. of oil and gas has been extraordinary for about twenty years now, taking domestic production from approximately 5 million barrels to 13 million barrels per day. Private sector operators are reluctant to increase production further for fear of generating a glut of oil and collapsing the price.

Unemployment has been very low for years, bottoming in 2023 at 3.5 percent and now up slightly to 4.2 percent. Trump cannot stop unemployment from rising further, if he implements cost cutting plans that Elon Musk is working on. There are 23 million U.S. government employees and even a 10 percent reduction would push unemployment substantially higher.

Trump’s promise to deport all illegal aliens is also inflationary. Many of those people work hard in agriculture, construction, mining and other industries where the wages are low. And they live in fear of deportation, so they do not complain or push for raises. To replace those workers, wages will have to rise substantially.

In less than two years there will be mid-term elections with 435 members of the House of Representatives and 1/3 of the Senate seeking re-election.

In November 2026 it will be difficult to make a case that things are better than they were when President Trump came to office.

Hilliard MacBeth

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Hilliard MacBeth January 31st, 2025

Posted In: Hilliard's Weekend Notebook

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