News from the Trump regime

Executive Summary:

The new President Trump is already proving to be incompetent after just over 3 months. The creation of maximum economic policy uncertainty will damage the US economy even if there is ultimately hardly anything left of the tariffs. This is to be expected, because the harmfulness of tariffs, particularly for the USA, is not in doubt among serious economists. However, the uncertainty is restricting consumption and the willingness to invest because it is no longer clear what the general conditions will be like in the near future. This applies to an economy that is already facing considerable recession risks and may soon be pushed into recession by declining consumption and the need to reduce high government spending. As a result, the national debt will continue to grow and the USA's credit rating will be viewed more and more critically. Trump may not have wanted this, but if he knew anything about economics, he should have known. The fact that corruption can cause considerable damage to an economy is obviously unknown or completely irrelevant to Trump. Measured against these risks, US equities and the US dollar are overvalued and have very low expected returns, even if there is no recession.

The environment is better in Europe. Europe is less indebted and has not supported the economy with high government deficits in the last 10 years. This could happen now because Germany in particular wants to catch up on the infrastructure investments that have been delayed for 20 years and the whole of Europe needs to upgrade, which is also recognized by voters. This will provide some support for corporate profits in Europe, which will counteract the risks of recession.

As a result, the US dollar exchange rate against the euro will fall and European equities will outperform US equities over the next few years, as has been the case for decades in times of a weak dollar. The gold price also has further upside potential, especially in the event of a US recession.

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You can always rely on the Americans to do the right thing - after they have tried everything else, as Sir Winston Churchill, the British Prime Minister during the Second World War, already knew (source: www.zitate7.de). Seen in this light, Donald Trump is a true American - he is consistently doing the wrong thing. Consumer confidence, around half of whom are likely to be Trump voters, has collapsed in just a few months to its second-lowest level since 1952 (chart 1). In contrast, the values in chart 2 have risen rapidly in recent months, although these are the expectations for the inflation rate in 12 months, which Trump famously wanted to lower immediately after taking office. Instead, he has raised it to its highest level in over 40 years.

Trade policy uncertainty, as measured by the US Federal Reserve since 1960, has reached a record high since Trump took office; even during Trump's first presidency it was only 250 - now uncertainty is 4 times as high (chart 3). Finally, in the last 3 months, business-friendly Trump has erased more than 50% of the outperformance of US equities versus Eurozone equities, which was 46% under President Biden's administration (chart 4).

Mirko Papic, chief geopolitical strategist at the renowned Canadian research firm Bank Credit Analyst (BCA), for example, is of the opinion that Trump's negotiating style involves first making maximum demands and threats to wear down his opponents and then clearly giving in in order to conclude a "deal". However, he also mentions that trade agreements can take years to conclude and that governments rarely manage more than one such agreement per year. According to a recent study by the major US private equity firm Apollo, it takes an average of 18 months to conclude a trade agreement (source: onvista, 28.4.2025). As Trump now wants to conclude agreements with a large number of countries and the necessary capacities on the part of the US authorities have been decimated by his buddy Elon Musk, the official destroyer of state institutions, Trump may have gambled away. His negotiating tactics may work when it comes to buying golf courses, but they could be very unsuitable when it comes to concluding trade agreements on a massive scale. In any case, the Chinese do not want to talk to Trump until he has reversed the drastic tariff increases.

Meanwhile, some relief is emerging as Trump has raised some hope on tariff policy by expecting significantly lower tariffs on trade with China soon. However, this is not due to a sudden learning success on Trump's part. Adam S. Posen, the head of the Peterson Institute for International Economics in Washington, has observed that Trump has been convinced for 40 years that countries with trade surpluses with the US are plundering the country and must be punished with tariffs. The real reason for Trump's (temporary?) U-turn is the capital market, which Trump cannot control. When he announced the surprisingly sharp tariff increases, the US equity market lost over 10% (chart 7) because the risk of recession was immediately expected to increase significantly as a result of the tariffs. In order to stabilize the stock market, which is an important part of 60% of Americans' retirement savings, he suspended most of the tariff increases for 90 days. He was now furious with the President of the US Federal Reserve, who did not want to cut interest rates for the time being in view of the uncertain environment and rising inflation expectations due to the tariff policy. As a result, yields on long-term government bonds rose sharply (chart 8), even though the fall in share prices indicated an increased risk of recession. However, the dismissal of the central bank president would have meant the end of an independent central bank and further fueled inflation fears. So Trump had to row back again.

We can venture the conclusion here that Trump cannot ignore the capital market and will not maintain measures that have an unfavorable impact on share prices or interest rates in the future. However, the unfounded confidence in the quality of Trump's policies, which was quite widespread until 8 weeks ago, has been significantly damaged. This will affect consumption and investment in the US economy and increase the risk of recession even if there is not much left of the tariffs.

If you try to make any sense of Trump's policy at all, you will find it in the impact of the Trump chaos on the confidence of foreign investors in the US, who will weaken the dollar as they begin to withdraw from the US capital market. In our capital market outlook from February 28, 2025, which you can read here we described in detail further reasons why the US dollar will fall in future - a weak dollar would help Trump to eliminate the US trade deficit - and why US equities will underperform in the long term. The dollar has since fallen by 10%, but that was just the beginning. The Leading Economic Indicators calculated by the US research firm The Conference Board in March continued to fall in all three major economic regions of the world in March, i.e. before Trump's tariff chaos began (charts 9-11). Until two months ago, the stock markets had nevertheless been rising for years, but have now returned to their normal behavior of falling prices when the economic outlook deteriorates (narrow green strip on the right-hand side of the three charts).

The major and renowned US banks are now increasing their estimates of the probability of a recession in the US. Just a few weeks ago, the major US banks Goldman Sachs and JP Morgan did not want to concede any significant risk of recession. Now Goldman has put the probability at 45%, JP Morgan at 60% and the aforementioned firm Apollo even at 90%. In December 2024, the only investment strategist to predict a fall in the US S&P 500 equity index for 2025 in the annual Bloomberg survey (Peter Berezin from Bank Credit Analyst, source: Bloomberg, Dec. 2024) put the probability of a recession at 75%.

However, if you compare the valuation of the major stock markets in Europe with that of the US stock market, then investors in the US are obviously still expecting a perpetual boom. Shares there are valued at 17.6 times gross earnings (cash flow), whereas in Europe they are valued at no more than 10 times (chart 12). If US equities were also valued at 10 times cash flow, one could expect solid returns in the upper single-digit or even double-digit range, but not at 17.6 times. Therefore, one should rather expect slight annual losses over the next 10 years (chart 13).  

The risks on the US equity market are also considerable in the short term. Should the recession expected by many materialize, a price loss of around 13% is to be expected until the recession begins (the left of the three red bars in chart 14), and then a further 18% (middle red bar) if the recessions of the last 55 years are taken as a benchmark. Since the record high on February 19, the S&P 500 Index has so far lost 11%. A further 20% in total should follow, meaning that Peter Berezin's forecast could well come true.

A US recession will not leave the European equity markets unscathed. Chart 15 shows that the performance of European and US equities was almost identical from 1970 to 2016, including the price losses during US recessions (chart 16). However, the valuation differences between Europe and the US were also much smaller until 2016 than they are today (chart 12).

Another problem could also weigh more heavily on the US equity market than the European equity markets in the coming months. The US has been expanding its government deficits for around 13 years, even when the unemployment rate fell to record lows since the 1960s. This happened before the corona crisis, when deficits rose to 6% of national income, and also afterwards, when extremely low unemployment led to government deficits of over 7%, i.e. a well-performing economy was additionally doped by high government spending (chart 17). This led to a very sharp rise in government debt compared to the eurozone (chart 18). A significant proportion of this government spending naturally ended up in the coffers of US companies - additional income that companies in the eurozone were missing out on.

In future, US companies will have to do without lavish government funding; the national debt cannot continue to be inflated unchecked. In Europe, on the other hand, there is a need to catch up on armaments. Figure 19 shows the development of armaments spending in the USA and in some European countries up to 2024. Russia significantly increased its armaments spending after the first attack on Ukraine in 2014; European countries, including Germany and very much Poland, are now catching up. The Poles want to keep Putin out of their country at all costs.

As a result, European companies will benefit more from government spending in future, especially if arms purchases are made in Europe, while the flow of government money to US companies will shrink. This development is being accelerated by Trump's foreign policy; Europe can no longer and no longer wants to rely on Trump's America, even if many Americans do not seem to support this part of Trump's policy.  

Another development that is very dangerous and costly for the USA in the long term is corruption, which took off under President Trump just two days before he took office, when he recommended his self-made, completely pointless and useless cryptocurrency to his supporters and lined his pockets with it. In April, he continued unashamedly in public by promising the 220 largest and most loyal holders of his cryptocurrency the chance to attend a dinner with the President himself. This pushed up the price again, which had initially collapsed again after a steep rise; certainly not to the detriment of Trump's family and his oligarchs. This set an ethical depth record in American history. Self-enrichment also existed in the past - not only in the USA - but it has probably never happened so openly and directly to the detriment of his supporters. The new clairvoyant abilities of the US president, who suddenly publicly recommended the purchase of shares a few days after the fall in share prices as a result of his tariff increases and then lifted the tariffs again for 90 days less than four hours later (see chart 7), also fit in with this, causing share prices to immediately shoot up by 8%. There will certainly be no investigation into the purchases made during these hours, but Trump's company "Truth Social" will enjoy a large following in the future, which will not want to miss out on the one or other lucrative and infallible stock tip, because it was created through impunity-free insider knowledge.  

Analyses by Transparency International, which show the strong correlation between high corruption and low national income (Figure 20), and the results of a study by Prof. Schularick, head of the Kiel Institute for the World Economy, show just how damaging corruption is. According to this study, just 4 years of Trump would cost Americans around 6% of their real national income (Figure 21). Perhaps Trump will be so rich by then that he will at least give up his presidential pension.

Conclusion
‍Trumphas either shown with his tariff announcement, the subsequent slump in share prices, followed by a recommendation to buy shares and the subsequent reversal of the tariff increase, that he does not know what he is doing or that he is doing it to make money through insider trading. Corruption "on camera" is rather unusual even in banana republics (ex-US Treasury Secretary Larry Summers on the USA under Trump). In view of the appalling quality of government work, which is particularly dangerous given the already existing recession risks with enormously high government debt, both US equities and the US dollar are overvalued and should remain underweighted. This president will not succeed in reducing government deficits, which is urgently needed. He wants to continue to cut corporate taxes and finance this through tariffs and a reduction in social benefits. However, this and the general increase in uncertainty will damage both consumption and investment and further increase the risk of recession, which in turn will lead to a sharp rise in national debt. As a result, less capital will be invested in the US in future and Americans will also be more likely to invest their money abroad, which has not been the case in the past. The US central bank may have to print money again, as it did during the financial and coronavirus crises. Europeans, on the other hand, with their significantly lower national debt, more favorably valued companies and new state-financed investment projects such as armaments spending throughout Europe and infrastructure investments, particularly in Germany, can hope for a slightly better economic development, which could put additional pressure on the US dollar. A falling dollar is very likely to result in two developments:

• In such periods, e.g. from 2000 to 2007, you always needed more US dollars to buy one euro, so the blue line rises. The red line also rose (European equities outperformed US equities (chart 22)). This will continue to be the case in the future, especially as rising investment in Europe also benefits corporate profits, as has been the case in the US to date. In Europe, the fact that Trump's tariff policy is likely to have a slightly inflation-reducing effect there could also help (see the capital market outlook from March 2025, which you can find here ), which makes further interest rate cuts more likely.

• Gold prices are also expected to rise. It has also been able to benefit from a falling dollar for 56 years (chart 23), especially as the issue of the USA's creditworthiness as a debtor under a president who is clearly incapable after just 100 days is now increasingly being addressed.  

In conclusion, our key statements from the first FINVIA Capital Market Outlook from April 2020, which you can find here here:
5 years ago, the effects of the corona crisis, which had begun the previous month, were the dominant theme. We predicted sharply rising government debt, a significant rise in inflation in the medium term and a favorable environment for equities, as investors had no alternative to equities in the spreading environment with interest rates close to or even below zero. We also predicted a rising gold price, as gold was the only one of all the zero-interest investments that suddenly became available that would not go bankrupt and could not be inflated away by central banks.

You can also download the capital market outlook here.