#29: The Second Gilded Age.
A look at how Trump's Golden Age may impact the stock market.
“The Golden Age of America begins right now”.
Trump proudly proclaimed to the world during a rousing inauguration speech yesterday. The message is loud, very loud, and also crystal clear. As he rattled off policy after policy of his plans to Make America Great Again, he signaled his intentions to rip up the playbook, put America first and reignite the prosperity machine.
A couple of hours before the speech I happened to catch my boss - a certified banker - on the way out of the office. He asked for my opinion of the stock market under a Trump presidency. It’s an interesting question and something I’ve thought about for the last few months. Although Trump plans to bring the golden age back to America, his policies reflect a return to tangible value.
The Golden Age
The Golden Age is a highly symbolic label, meant to hark back to the original Golden Age, the famous Gilded Age, where rapid industrialization, expansion and manufacturing led to a soaring economy and increase in national wealth. It’s also an era where the US undoubtedly began their road to becoming an economic superpower. Trump echoes that by focusing on reviving national pride, manufacturing and key infrastructure projects. His promise to making America a “manufacturing nation once again” is the clearest evidence of that.
Another clear symbol of his Gilded Age recreation is the renaming of the Denali mountains in Alaska to McKinley Mountains. President McKinley introduced high tariffs to protect American companies from cheaper foreign imports. It was a tool used to force fair trade as he felt that some countries treated U.S. exports in a "reciprocally unequal and unreasonable" fashion. Sound familiar?
Tariffs not only served as protection but also as significant revenue streams for the government in an era preceding income tax. Trump has vowed to heavily reduce income tax.
Other comparisons can be made between the railroad expansions and space exploration, with Trump stating his desire to send humans to Mars within his presidency. Now it would be remiss not to mention the inevitable comparison that accompanies the railroad expansion, Robber Barrons. Elon Musk - whether you love him or hate him - along with Bezos and the band of American oligarchs are bound to benefit greatly from this presidency. However for balance, since 2020 the wealth of the richest 5 billionaires increased by $464 billion. The Biden administration was no detriment to the oligarchs.
It is clear that Trump is echoing the great American economic revolution with the Golden Age rhetoric, but how is that likely to effect the stock market?
Return to Mean
As my boss and I discussed policy impact we settled on a common point: Trump’s policies are a return to sound money and sound money is bad for this stock market. That sounds crazy right? Well that’s because the market is out of sync and has been since the 2008 financial crisis led to cheap rates and as a result, cheap money. You see, despite our wonderful economies in the developed world bringing year on year profits and year on year GDP beats, the western countries are somehow saddled with high debts, higher poverty rates than pre-08, a crippling infrastructure, a devastating housing crisis and a measurably worse quality of life.
There is a scene in the Big Short where John Magaro’s character - Charlie Geller - calls his mother when he realises that the mortgage bond market crash was beginning. Realisation sets in and he tells his mother “It’s the end of capitalism”. Now obviously it wasn’t the end of capitalism per se, but it was the end of a truer version of capitalism. The banks and the market changed significantly after the 2008 financial crisis. The Federal Reserve kept rates at near zero for the best part of 15 years. They briefly tried to raise rates in the years preceding the Covid crash in 2020 but that led to liquidy issues at major banks. The Covid crash in fact ended up being both a great ruse for the stock market crash and also a great reason to lower the rates back to zero. We saw once again in 2022 how a rise in rates led to banking insolvencies with SVB and Signature two early bankruptcies. Others followed including one of Europe’s largest in Credit Suisse.
Back to the point. This cheap money has led to funky valuations and a very hot stock market. Why? Because this economy isn’t built on value, it’s built on cheap debt. Cheap debt that is incapable unsustainable in an era of sound economics. The hot stock market that we have is not a sign of a good economy, it is a sign of an asset boom borne out of an era where money and money-like instruments are cheapened / devalued.
So, with Trump evoking an era of fiscal prudence, protectionism and concentrated infrastructure policies, my read of the market is that throwing a dart will no longer work. To profit from the market, the participant has to find real tangible value.
Winners and Losers
Contrary to what we’ve been used to in the past few years where the market as a whole has risen through the advent of cheap money, Trump’s Golden Age will likely echo the Gilded Age, with winners being those companies and industries that add value to the real world. Railroads and their material suppliers dominated the stock market during the Gilded Age. And just like then, winners will be winners because they serve a purpose and they do it well, not just because they are publicly listed. Frauds, I mean memes, like GME and Hertz etc…will no longer be a theme. Money will concentrate to real value again.
Winners are likely to be infrastructure companies and suppliers of those industries. Space exploration (Musk, Bezos) will also benefit enormously. “Drill, baby, drill” will see energy companies benefit from lower regulation. Defense will be necessary to protect American interests. If Trump is going on the offensive with Panama, Greenland, Canada, he will need a strong military to flex his muscles. Likewise in the event that trade wars with China escalate.
Winners will emerge and will bring great wealth to those who are bold enough to follow their convictions. Losers will emerge in much larger abundance as companies that are overvalued see their price reflected so.
It's Just Money
In the final scenes of the movie Margin Call following the start of the winding down of what is assumed to be Lehman Brothers, Jeremy Irons character John Tuld says the following to Kevin Spacey’s character:
Its just money; its made up. Pieces of paper with pictures on it so we don't have to kill each other just to get something to eat.
Now, I realise I’m sounding like a bear with all these bearish movie quotes, but I promise you I’m not. I’m bullish on concentrated industries. “It’s just money” is exactly the symptom of a broken financial system. Money used to mean something because it had value. The past few years have shown us that more than ever, the value of money is at an all time low.
Trump is signalling a return to an old world, where economics was sounder and stocks were built on value rather than vibes. Trump’s policies are a return to a real economy and a real economy does not reward waste. It punishes it.
The only real question that me and my boss were left with was whether Trump’s ego could handle the consequences of that.