The Trades

Trump v Harris.

As expected, Joe Biden fell on his sword. His Republican opponent was wholly ungracious. Kamala Harris will emerge as the new Dem nominee. Trump still leads in the polls. But his ascent to the White House is no longer a slam-dunk.

Markets had been pricing in the ‘Trump trade’ for a few weeks. As Biden looked older, weaker and more vulnerable, the Wall Street turks became emboldened. There’s some doubt now where all this is headed, but the odds still favour the old guy winning (Trump is 78, Harris is 59).

What is the Trump trade?

In a few words, looser fiscal and monetary policy (lower taxes and rates), higher trade tariffs, weaker regulations and more stimulus than Jennifer Lawrence. Spending and deficits would go up. Stocks would boom. And, inevitably, inflation would roar back.

In a key Bloomberg interview last week Trump nailed it.

Tariffs on Chinese stuff, he said, would be at a rate of 60% to 100%. On all other imports (including ours), an extra 10%. Of course, other countries don’t pay these levies – they get added to US domestic prices. So no American jobs are protected because input costs jump. Meanwhile Trump’s plans for massive deportations of non-citizens are repeated in every speech. The cost would be historic and the jolt to the labour force significant, forcing wages higher. More inflation.

Trump has vowed to cut corporate taxes again, this time to 20% and possibly 15%. The Canadian rate, by the way, is 38%. Markets would roar, and federal tax revenues shrink, raising the deficit and borrowing requirements. Trump’s last tax cut cost the Treasury $100 billion a year.

“In short, Trump’s plans are inflationary,” says analyst Ed Pennock. “A WSJ survey of economists found that 56% believed inflation would be higher under another Trump term than under a Biden term. In particular, any attempt to interfere with Federal Reserve independence could send financial shockwaves around the world in light of the reserve currency status of the USD.”

So the Trump trade was positioning to take advantage of the positive stuff (higher energy, health and bank shares, another romp for the S&P) and seek protection from the effects of inflation (buy Swiss franc, gold, Bitcoin, trim long bonds).

While this is happening, investors expect the Fed to cut its rate for the first time in years this September, with another two cuts coming in November and before Christmas. Combined with a Trump win in November, it’s a formula for surging equities as the stage is set for four years of fiscal party time. Hangover to come later.

So the polls today still say he may take it. But things are changing. Kamala Harris means something new has been added – uncertainty. That usually brings volatility. And so the time between now and November may be choppier than was expected long ago – like back on Saturday.

What about a Harris Trade?

More boring. She’d extend the status quo.

Given the fact stock markets have hit dozens of new highs in 2024, that’s not a bad outcome. Inflation has retreated and interest rates are soon to drop – all positive. But corporate tax breaks are about to expire (in 2025) while the size and reach of government keeps expanding. American public debt is out of control at close to $35 trillion, and Harris is expected to keep pushing an agenda of action against climate change while maintaining the American presence in NATO and also backing Ukraine in its war with Russia.

Can she win? Unknown. But far higher odds than Biden. Can Trump win? Of course.

The big question: what happens if Trump loses? Would that push America closer to the edge of protest, violence or conflict? How would a President Harris deal with that?

Well, we dunno.

But that’s exactly why every sane person should ignore the Trump Trade, the Harris Trade and the volatility to come. Invest through ETFs, not individual stocks. Keep that 60/40 balance of growth to fixed-income assets. Divide your equity exposure by thirds – Canada, the US and international. Avoid home country bias with too much maple. Keep a quarter of your overall portfolio’s assets denominated in US$. Eschew crypto and rocks – that’s gambling. Keep cash exposure to 2%. That’s enough. Stuff your registered accounts to the gills. Earn taxable income through dividends and capital gains, rather than interest. Shun debt every way possible. And never buy an investment rental condo.

We told you 2024 would be raucous. Seriously. It’s just beginning.

About the picture: “Another dog photo I found for you,” writes Jim. “This is Audi and he has a problem. How do I keep this ball and still have you throw it for me. An age old problem that Audi solved when he realized he could have his cake and eat it too by slobbering on the ball so much that you would never want to keep it.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.