Trump vs the Deep State

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“Not permitted under the law,” snapped Jay Powell. The scene was the Fed’s press conference. It was the day after Donald Trump’s resounding election victory.

The reporter, seeking confirmation, followed up. “Not per-MIT-ted under the law!” repeated a visibly irritated Powell, slowly enunciating the word.

Powell’s body language said he’s ready to battle Trump in the press. I recount this scene to give you a head start in identifying one of Trump’s next battles in his multi-year conflict with the Deep State.

Starting in 2017, the Deep State tried to impeach Trump, undermine his policy goals, slow-walk his orders to the military, and ruin the 2020 economy with COVID lockdowns.

Most controversially, it’s hard to argue that the Deep State didn’t inspire the mysterious shooter whose bullet grazed Trump’s ear at a fateful July 2024 rally in Butler, Pennsylvania. You, me, and the entire world are wondering, “What will they do next?” By “they,” I am not referring to a pre-planned conspiracy. There is no single evil mastermind running the Deep State – one who has anticipated every possible countermove.

No, the Deep State is a faceless blob.

It is a group of government agencies, media outlets, corporations, and people inside those organizations. They understand that Trump’s vision for America is disruptive to their preferred way of doing business. Rather than adapt to Trump’s priorities, they see it as a sacred duty to resist him.

First Things First – Trump Will Inherit A Weak Biden Economy

Let’s return to the role of Fed Chairman Jay Powell. Powell is trying to serve the American public as best he can, even if he’s blind to the Fed’s role in promoting wealth inequality and inflation.

Powell’s policies have been too soft on asset owners in our overly financialized U.S. economy. The Fed’s asset-pumping policies have exacerbated the wealth gap. It eased policy far too much with trillions of dollars in money printing and its tightening in 2022 and 2023 has not been nearly so dramatic. The wealth gap, powered by the residual money printed in 2021 and 2022, has played a key role in resurrecting Trump’s campaign.

Trump started from a small base of loyal family members and friends on January 6, 2021, rode a tidal wave of public discontent over rampant Biden inflation, and won the popular vote. The remarkable rebound in support for Trump over three years could not have happened if most Americans were happy with the status quo under Biden.

We know where most of the American public stands. They are financially worn out and frustrated by the pain of cumulative inflation. Their confidence is low, but many are hopeful that Trump will turn things around quickly. However, turning around this economic ship will not be easy, nor will it be costless.

The economy is like a large ship that’s been heading in a specific direction. Even if Trump steers it sharply in a different, more production-oriented direction, it will take time to see material results.

Meanwhile, Biden’s advisors have for years been steering the economic ship in the direction of bloated government spending, government jobs, and malinvestment in green energy.

I think it’s important to keep this in mind when thinking about Trump’s goals starting in 2025: There is a global imbalance between production and consumption, and it’s been growing for decades. I support Trump’s vision to reprioritize production in America. Our multi-decade trend toward over-consuming with too many government jobs and service jobs is unhealthy and unstable. We’ve done this while exporting bonds and stocks to foreign producers to fund this consumption.

Bonds and stocks are securities with explicit or implicit promises to deliver streams of cash flow. Bonds are explicit, pre-defined streams of cash flow. Stocks are implicit promises of future cash flow in the form of dividends.

Here’s why stocks are so volatile: It’s difficult – even for diligent professionals – to estimate how large and sustainable their dividends will be for decades into the future. In an all-too-common example, a company that goes bankrupt within a few years of an investor buying its stock rarely pays enough dividends for that investor to recoup his investment in that stock before it goes to zero.

With that context established, I’ll say this: Achieving Trump’s vision to reprioritize production in America will involve pain for an economy with an unhealthy addiction to bubbly asset prices.

There is no easy path to revitalizing American manufacturing. Compromises will be required either way.

The fact is, the pain from restructuring a bloated federal government means the risk of a recession is high. And when recession risks rise, the Fed slashes rates and gold typically surges higher.

Stay tuned to see how this story develops.

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