Trump's Three Market Priorities

The below article was published on February 18, 2025. In today's rapidly changing economic and political environment, some of the events and examples are now outdated. However, since publishing this article, Louis recently reiterated his high-level view that Trump's three market priorities seem to be: lower bond yields, lower energy prices, and lower the US dollar. As such, the below article provides a still-relevant perspective on the various ways the Trump administration could go about achieving these goals. 

It has been a busy first month for Donald Trump’s administration—and for investors trying to make sense of all the executive orders, “diplomatic” announcements and other policy decisions. Focusing on the economic issues (and carefully leaving aside all the various cultural and geopolitical battles), it is pretty obvious that the Trump administration has three key goals.

1. To keep long-dated yields down. Listening to Scott Bessent, Elon Musk and JD Vance, it almost feels as if long-dated yields have now replaced the Dow Jones Industrial Average as the scorecard of the Trump administration’s economic success.
2. To weaken the US dollar: a necessary condition for bringing manufacturing jobs back to the United States.
3. To weaken the oil price. This goes hand in hand with preventing long-dated yields from rising. Higher energy prices are seldom good news for bond markets.

These three goals are understandable. An environment of low yields, low energy prices and a weaker US dollar would unleash a US economic boom, and a global boom, of epic proportions. However, one does not always get what one wants. In this report, I propose to look at the tools available to the Trump administration to achieve these three goals and the arguments for and against these three all-important prices moving in the hoped-for direction.

Goal #1: getting long yields to fall (or at least stop rising)

Without pushing the US and the world into a recession, the Trump administration probably has three ways to get yields lower.

• The DOGE, or fiscal consolidation, path. Most market participants have been surprised by the speed and depth of the administration’s cuts in government spending. If the momentum continues, if fraud is squeezed out of the social security payment system, if defense spending is pared back, and if Bobby Kennedy Jr. does manage to reform a US health care system that has been taken over by special interests, then it is likely that US treasury yields have stopped rising.
  
  Granted, there are a lot of “ifs” in that last sentence. And previous generations of US politicians have stumbled on these very blocks. However, among the interesting features of the Trump administration are that (i) few of the key decisionmakers are career politicians, and (ii) the administration has its share of genuine warriors, i.e. people who have actually gone to war (JD Vance, Pete Hegseth, Tulsi Gabbard). So maybe this time will be different. I know; those are the most expensive words ever pronounced. Still, the chances of fiscal consolidation seem about as high as I can ever remember.

• The ABS path. The Trump administration has its fair share of world-class financiers. As well as Scott Bessent, there is Howard Lutnick, John Phelan and others. And of course, Trump himself was a property developer with a knack for arranging structured debt deals. Given this backdrop, could the US government start looking at more “creative” ways to fund its debt?
  
  In the administration’s first month, investors have heard about plans to create a US sovereign wealth fund that would include a lot of the government’s assets—potentially including land, infrastructure and buildings. These assets could then be digitalized, tokenized and monetized. Rumors also abound about how the US government could revalue its holdings of 260mn troy ounces of gold. These are currently valued on the government’s balance sheet at US$42/oz. Revalued to the current market price, the revalued holdings could then be used to issue gold-backed bonds.
  
  So far, this is just a lot of speculation; speculation which may first and foremost be designed to highlight to investors that while the US government’s income statement does not look that enticing, its balance sheet remains very solid, with lots of valuable assets (including roughly 28% of America’s land area).
  
  Of course, going down the asset-backed securities route might be a double-edged sword. For example, let us imagine that tomorrow the US government chooses to issue a gold-backed US treasury bond in order to reduce its cost of issuance. In such a scenario, would “old-fashioned” US treasuries suffer a derating? Would the same happen if the US government issued land-backed treasuries? How would existing bondholders react to being “pushed down the queue”? So far, this is all highly speculative. But given all the rumors swirling around, keeping an open mind about such developments probably makes sense.

• The Mar-a-Lago Accord path. Another way to keep a lid on bond yields would be to force US trade partners (and countries that depend on US military protection) to buy large amounts of long-dated US bonds. This raises the question whether one catches flies with vinegar or honey. In other words, if the Trump administration wants Germany, Japan, China, Korea, Saudi Arabia, Qatar and others to buy more US treasuries, will it achieve this goal by brow-beating and publicly humiliating foreign officials? Or through polite back-channel negotiations? Interestingly, so far it seems that the Trump administration’s browbeating has been limited to Europe, Canada and Latin America. Perhaps there is a message here?

Conversely, several things might foil administration hopes of lower yields:

• The 2025 debt rollovers are consequential. The second half of 2025 will see a record amount of corporate debt rolled over. When Covid hit in 2020, most corporates, like everyone else, were initially paralyzed. But as the summer set in, companies harvested the extremely low interest rates and issued record amounts of debt, typically five-year bonds. Meanwhile, the US government has also issued a lot of short-term debt that will need to be rolled over in the coming years.

• The emergence of other exciting stories. In recent years, international capital allocators had few stories to get excited about. Sure, US big-tech was on a tear. And yes, gold enjoyed a sustained bull market. Bitcoin was also exciting. But beyond these narratives, opportunities seemed few and far between. Fast forward to today and there is a roaring equity bull market in China. The valuations on Latin American debt are very attractive. The yen seems to be moving higher. Germany and the rest of Europe are likely to engage in much broader fiscal stimulus. Canada will finally get the infrastructure spending that should have happened a decade ago. And India and China are talking again, raising trans-Himalayan business potential. Suddenly there appears to be more competition for the world’s excess capital than lowish US interest rates.

• The inflation genie was never put back in the bottle. In January, the US and China, the two largest economies in the world, both registered upside inflation surprises. This may just be noise. But following the 2022 inflation surge, market participants are likely to be skittish about inflation risks. Perhaps most worryingly, inflation continues to track the path it took in the 1970s.

In recent years, I have yielded to no one in my bearishness on US treasuries. I even went as far as writing two books to express the reasons why OECD bonds should no longer be considered the building blocks of investment portfolios. There were many reasons for this bearishness, but chief among them were the world’s growing geopolitical tensions. As my friend Luke Gromen beautifully observes: “If truth is the first casualty of war, then bonds are a close second”.

Today, however, I am growing increasingly uncomfortable with my longstanding short bond recommendation. The single most important reason for this discomfort is the growing likelihood that geopolitical tensions will abate. In his first month back in the Oval Office, Trump has reached out to Vladimir Putin in an attempt to find a compromise over Ukraine.

Trump has also held back from the sort of China-bashing that marked his first term (and also Joe Biden’s administration). Perhaps most impressively, Trump has proposed a three-way reduction in military spending between the US, Russia and China.

To be sure, all this remains highly hypothetical. But we probably want to be more open minded about the possibility that US yields have made a short term high.

Goal #2: getting the US dollar to stop rising, and ideally fall

If the Trump administration is successful in putting a cap on long-dated yields, it will probably do a lot for its objectives of weakening the US dollar, improving the US trade balance, and reindustrializing the United States. Conversely, a continued rise in long yields will likely make it much harder to achieve a softer US dollar.

Beyond this, what are the arguments for and against the Trump administration achieving its goal of a weaker US dollar? There are strong arguments “for.”

• Shifting momentum? The first and most obvious argument for a weaker US dollar is that since Trump was sworn in, the US dollar has in fact been weakening. This seems to follow the pattern of Trump’s first term.

• Political pressure. The second obvious argument for a weaker US dollar is that it is pretty clear that Bessent is intent on forcing revaluations on the ridiculously undervalued North East Asian currencies of Japan, Korea, Taiwan and China.

• The DOGE job cuts lead to a lull in growth? A third argument for US dollar weakness is that downsizing the US government and cutting US government jobs could cause a near-term dip in US growth. This dip will be felt acutely in the greater Washington-Northern-Virginia area. In turn, this could lead the Federal Reserve to be more dovish than the market currently expects, which would tend to push the US dollar lower.

• Capital Repatriation? A fourth argument is that the weight of allocations to US assets—whether equities or bonds—in international portfolios has never been so high. Will foreign investors look at Trump and conclude that they want to deploy even more capital in the US? Or alternatively, will they be tempted to bring some capital home?
  
  Let us take Canada as an example. Canadian pension funds—La Caisse, Ontario Teachers, BCIMC etc—are some of the largest capital allocators in the world, and most of their money is allocated abroad.
  
  What if tomorrow, Canadian policymakers, driven by a renewed national fervor to reduce dependence on the US, start to build new LNG terminals on Canada’s East coast, pipelines across British Columbia and new oil refineries. And what if Canada’s deep-pocketed pension funds are put to task funding the capital expenditure?
  
  Clearly, the capital repatriation necessary would put a floor under the loonie, which has lately been in freefall. Similar arguments could be made for Germany, Sweden, Norway and others (especially after JD Vance’s speech at the Munich security conference).

• Stronger European growth and a less dovish European Central Bank? A fifth argument is that the new German government which emerges following this Sunday’s election will likely be a grand coalition of Christian Democrats and Social Democrats. The main factor that will unite Germany’s two large traditional parties will be their desire to stop the right-wing Alternative für Deutschland from making any further gains. And they will be willing to spend money to achieve their aim. Cue a large increase in infrastructure spending (which Germany needs anyway) and budget deficits.
  
  From there, it seems likely that most other European Union countries will follow Germany’s lead. This will put the ECB in a quandary: if most of Europe embraces fiscal stimulus, can the ECB simultaneously ease monetary policy? If the answer is “no,” then we may well have seen the low for the euro, at least for the current cycle.

• A resolution to the Ukraine war? Finally, when Russian troops rolled into Ukraine in February 2022, the world experienced a massive “safety bid” for US assets. The euro gapped down, China became “uninvestible” and the yen collapsed (in the eight months between February and October 2022, the yen went from ¥115 to ¥150 to the US dollar). Could a—for now hypothetical—resolution to the war lead to a relief rally in these beaten-down currencies?

Conversely, there are also some solid arguments against the US government achieving its aim of a weaker US dollar.

• What if DOGE ignites an epic US boom? There are two ways DOGE could have a significant impact on growth. The first is that the cuts in civil servant numbers could result in a meaningful rollback of the administrative state. Fewer regulations, less paperwork and shorter lead times for project approvals could combine to in trigger an investment boom (the counter-argument is that with fewer civil servants, building permits and drilling authorizations do not get processed). The second is that the previously misallocated capital—whether human or financial—now gets used in more productive ways.

• A more isolationist US leads to a more unstable world. On Friday, Vance essentially told the Europeans that their values differ too much from US values—so much so that Europeans really need to start fronting up for their own security. His blunt message may well leave foreign investors wondering whether the US is now the only major market in which capital can be considered fully protected (admittedly, this probably depends on where the foreign investors come from in the first place).

• What if markets go back to being driven by the Mag-7 and crypto? So far this year, the market suddenly seems more excited by the prospects for Chinese tech stocks and by the value on offer in Europe and emerging markets. But this could shift again. Maybe US tech companies will announce major breakthroughs of their own. Or maybe Chinese policymakers will trip up China’s unfolding economic and market recovery. As Gavekal has repeatedly observed, the Nasdaq and crypto are essentially US dollar ecosystems; rising prices for tech stocks and cryptocurrencies tend to push the US dollar higher.

Putting all this together, over the past 30 years the US dollar has experienced:

• An impressive bull market between 1996 and 2000. This corresponded with the welfare reforms under Bill Clinton, the emergence of US budget surpluses, and the dot-com boom.
• An epic bear market between 2001 and 2008, as investors had to absorb the implosion of the dot-com bubble and the subprime mortgage crisis.
• A five-year period of dull range trading between 2009 and 2014.
• An impressive rally in 2015, driven partly by the monetization of Europe’s sovereign debt and the dramatic improvement in the US trade balance thanks to the shale revolution.
• Another period of dull range trading between 2016 and 2022.
• A meaningful rally in 2022 on the back of the Ukraine war.
• Another period of range trading between 2022 and 2025.

So perhaps the path of least resistance is to assume that the US dollar remains in the range-trading phase (since these seem to last for five or six years). However today, the US dollar clearly appears to be at the top of its range.

Goal #3: getting energy prices to go down

To the extent that economic activity is energy transformed, one would think that all elected officials, once in power, would look to reduce energy prices. What better way to win popularity, attract votes and deliver good economic outcomes for voters? However, in the past decade or so, delivering the lowest possible cost of energy to constituents does not seem to have been much of a priority in most Western democracies. Following Fukushima, numerous countries shut down perfectly functioning nuclear plants and put the construction of new ones on hold. The good news, at least for the US, is that the Trump administration seems to be far more energy-industry-friendly. Chris Wright is the first energy secretary with experience of running an oil company and has also sat on the board of a nuclear energy company.

Still, will that be enough to bring the energy price down? Again there are arguments for and against. The arguments “for” include:

• Trump seems intent on bringing Russia back in from the cold, declaring that Russia should be readmitted to the G8, and pursuing an early compromise peace (or surrender?) in Ukraine. Clearly, one of his motivations must be to get Russia to add 1mn bpd of oil back into the global energy balance.

• The US could cut regulatory costs. This is essentially the promise of the “drill, baby, drill” program. Although interestingly, the increase in tariffs on foreign steel means an increase in the cost of building and operating a US well. Still, will lower regulatory costs be a big enough motivation for US energy companies at a time when the market tends to reward executives more handsomely for displaying capital discipline than for pursuing growth?

• The US could embrace coal. If one focuses simply on the financial costs, and forgets about externalities, coal is by far the cheapest and—importantly—the most stable way to generate electricity (see chart below). So one simple way for the Trump administration to keep energy prices in check and improve the US trade balance would be to embrace more coal-based electricity, while selling US natural gas and oil to foreign partners.

Against these forces, it is interesting to note that while the Trump administration has clearly made achieving lower oil prices a key goal, so far oil prices continue to “feel” essentially range-bound. Brent crude has hovered between US$70/bbl and US$90/bbl for the past three years. Incidentally,this is a range in which producers make money, no one goes bust, and the global economy hums along.

In the face these forces, what could push oil prices higher?

• Trump is tightening the screws on Iran. While Trump is open to talks with Russia, he also seems to believe that further pressure on Iran will lead to a collapse of the Iranian regime. Essentially, this is a reversal of Biden’s earlier policy of toughness against Russia while letting Iran export oil in defiance of US sanctions. The tightening is already having an effect: the dearth of ships willing to carry Iranian oil means that Chinese teapot refiners are rapidly running out of their preferred feedstock. This is occurring against a backdrop of low product inventories across China and the world.

• Chinese growth is now picking up. Chinese growth has been slowing for a decade and the current rebound will likely be mild relative to the heady growth rates seen in the past. Nonetheless, a combination of falling US treasury yields, a falling US dollar (should the Trump administration get its wish) and rebounding Chinese growth doesn’t exactly sound oil bearish.

• The Trump administration seems keen to improve the US trade balance by exporting US energy. This is all well and good. But if more US energy is shipped abroad, while at the same time the US government is working hard to bring manufacturing back to the US, then unless domestic production really cranks up, the combination of reduced domestic supplies as energy is exported and increased demand on more domestic manufacturing should logically lead to higher prices. And this will be doubly true if tariffs and hostile US rhetoric encourage Canada and Mexico to sell their energy elsewhere.

• Oil inventories are low everywhere around the world, including in the US and China (which explains the sudden stresses on China’s teapot refiners). This means that the ability to cushion either a supply shock or a demand shock is limited.

• US allies may start to question the reliability of US protection. In the past, countries such as Japan, Germany, Korea and the UK never felt the need to build large oil inventories of their own. Their US ally controlled the seas, which meant their oil deliveries were assured. All they needed to do was stock up on US dollars in the form of US treasuries to pay for the shipments. However, in the new world we inhabit, the security of shipping lanes is easily threatened by cheap drones, as the Houthi actions in the Red Sea demonstrated. Moreover, the cost of US protection may be set to increase markedly. This combination may encourage countries around the world to build strategic inventories of commodities within their own borders. The law of unintended consequences at work again?

Putting all this together, it seems likely that in the coming year, demand for energy will continue to chug along. It may even surprise on the upside; few people expected China to sell so many millions of cheap combustion-engine cars across emerging markets. As a result, the Trump’s administration ability to keep energy prices in check will depend on its ability to encourage increases in supply either domestically or abroad, notably from Russia or Saudi Arabia. With this in mind, I am skeptical that energy prices are set to collapse.

Conclusion

If the Trump administration gets the three economic things it wants—falling US treasury yields, a weaker US dollar and lower energy prices—then the whole world will boom, and the assets that are priced for delivering little or no growth will get rerated most aggressively. On the opposite side of the ledger, if the Trump administration fails in each of these three tasks, and we end up with higher yields, a stronger US dollar and higher oil prices, there are probably few things investors will want to own except short-dated US treasuries, and perhaps gold and energy stocks. The first outcome is a global deflationary boom scenario. The second is a global inflationary bust scenario. One is undeniably more fun than the other.

Of course, there are other possible scenarios. After all, these three prices can each move up, down or sideways. And right now, it seems that long-dated US yields may have made a near-term high, the US dollar is going down and energy prices are range trading. This leaves us to ponder an investment environment in which bonds no longer fall, the US dollar weakens gradually and energy is stable. This fairly benign scenario may help to explain why investors and markets are willing to look past all the noise coming out of Washington. The reality is that stable-to-lower bond yields, a weaker US dollar and stable energy prices are a positive environment for most businesses to plan their future.

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