Trumpianomics: Third leg — Deregulate, reform, cut government spending to make America competitive again

1. Increase investments in the US, revitalise manufacturing and reindustrialisation; 
2. Increase jobs and real wages and, therefore, standards of living;
3. Increase exports and reduce trade deficit;
4. Reduce fiscal deficit to ensure fiscal sustainability;
5. Reduce total debt and debt-to-GDP to preserve US dollar hegemony;
6. Reduce taxes and excessive regulations to increase investments;
7. Raise efficiency and productivity; and
8. Increase US relative competitiveness.

We think few, including conventional economists, will disagree with the virtues of these goals in and of themselves. Indeed, most of what we have listed here are standard prescriptions for how countries should grow their economies and be fiscally responsible at the same time.

Case in point: Many have flagged concerns over the sustainability of mounting US debts at some point or other in the past, and the need for the government to rein in its fiscal deficit. Government spending has exceeded revenue in all but four years in the last 50 years, and every year since 2001 (Chart 1). 

See also: Trumpianomics: The art of coercion

Successive presidents since Bill Clinton (the last time the US ran a budget surplus) have talked about cutting spending but none have made a significant dent in US government outlays. That includes the first Trump administration, during which fiscal deficit increased, owing primarily to tax cuts that were not offset by equivalent spending cuts. The US fiscal deficit has been growing larger in the past 10 years.

As a result, total US public debt has risen at a very steep pace, especially after the Global Financial Crisis (in 2008) and Covid-19 pandemic (2020), now totalling more than US$36 trillion with a debt-to-GDP ratio of more than 120% (Chart 2). Such a high level of indebtedness, for any country, would have been punished by the markets. The US has got away with it thus far, primarily because the US dollar and US Treasuries are reserve assets held by most of the rest of the world. But there must be a tipping point, beyond which central banks and investors will start to worry about the credit-worthiness of the US and demand a higher risk premium (interest rate). Or worse, the US dollar will lose its reserve currency status and hegemony.

See also: Trumpianomics: Why tariffs, and their effects on the US economy, inflation, interest rates, competitiveness and the USD

To a certain extent, the urgency to reduce fiscal deficit and debts has been blunted by low and falling interest rates. For the past four decades, US interest rates have been falling — owing to the secular decline in inflation driven by globalisation — to near zero in 2020. As a result, interest expenses have grown at a slower clip relative to the size of total debt, and interest payments as a percentage of government spending have been steadily declining in the three decades prior to 2021 (Chart 3).

But that era of ultra-low and falling interest rates is over. Interest rates have risen since the pandemic and are expected to stay higher for longer. As a result, the government’s annual debt servicing costs have risen sharply, to well over US$1 trillion currently — and growing. Clearly, this is not sustainable. Left unchecked, interest payments will take up an increasing share of government revenue, depriving funding for other more critical programmes and development. And as we said, there will come a tipping point (albeit not in the foreseeable future) when the US dollar will start losing investor confidence and value.

The solutions are obvious. One, the US government must raise revenue and make material cuts in public spending to narrow the fiscal deficit and set the US onto a more fiscally sustainable path. And, two, grow GDP so that debt-to-GDP will begin to fall, as will interest servicing costs to revenue. The MAGA Pathway aims to achieve both goals.

None of what we have written so far is controversial. As we said, successive US presidents have talked about reducing the fiscal deficit — but without material success. The reality is that the democratic system is a popularity contest. All lawmakers (in the House of Representatives and the Senate) as well as the president are elected by the people. Raising taxes is never popular and cutting spending even less so. There is simply too much vested interests (perpetuated by powerful lobbyist groups) and cutting spending causes pain and job losses. Regulations, once implemented, tend to be very difficult to roll back. Therefore, what Trump is now attempting to do is well out of the norm, even for old-school Republicans.

What is controversial is how Trump is going about achieving his MAGA goals: tariffs (targeted primarily at friends and allies no less); the Department of Government Efficiency (DOGE); and his handling of foreign relations. It is his willingness to use tariffs as the blunt tool of trade policy, to use the force of coercion to get what he wants — the concessions and the sharing of burden of US supremacy. Specifically, it is the cost of providing the US dollar as the primary reserve currency to the world and the security shield, militarily, to allies. And he is succeeding! Not just in negotiations with foreign governments — pragmatic China will make a deal, including the possibility of voluntary export restrictions — but domestic institutions such as Columbia University and prominent law firm, Paul Weiss, too, are ceding to his demands.

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We think this is largely due to his personality — he is aggressive and he is obnoxious. The course of history has never been changed by a weak personality, out to please others. He says what he means and he does what he says. Also, he is — and makes deals like — a businessman, not the typical politician. And the environment is ripe for his disruptive, wrecking-ball approach. Many middle-class, hard-working Americans believe the US has been going in the wrong direction — economically (hollowing out of manufacturing, expansion of foreign aid and welfare programmes that need to be paid for) and culturally (woke, transgender, cancel culture), on immigration, DEI (diversity, equity and inclusion) and affirmative action and so on — under the influence of the progressive left and the globalist elites. They believe the system is broken. When things are pushed to the extreme, there will be a backlash. Right now, the pendulum is swinging sharply back towards the right, after years of liberal extremism.

Fiscal sustainability through lower fiscal deficits and GDP growth

The three key thrusts in Trump’s MAGA agenda — tariffs and cost-sharing, DOGE and deregulation — are interlinked and self-reinforcing, enabling a positive feedback loop to achieve his goals.

Tariffs will raise revenue for the government, lower the fiscal deficit as well as pay part of the cost of tax cuts. Lower taxes and tariffs will encourage more investments in the US. Companies (foreign and domestic) can avoid tariffs by producing in the country. Higher prices due to tariffs will reduce imports and lower the trade deficit and reduce the supply of US Treasuries. Yes, in the short term, it will lead to domestic producers also raising their selling prices, thereby increasing their own margins and profits. Over time, however, it will lead to higher investments and domestic production, creating jobs and raising productivity and wages — and drive economic growth. Revitalising manufacturing and reindustrialisation as well as infrastructure rebuilding is the basis of our longer-term investment thesis for US steel and building materials sectors (more on this next week).

Aggressive DOGE cost-cutting — including eliminating wastages, fraud and abuse, and downsizing the government — will further lower the fiscal and trade deficits. That will improve efficiency and productivity. It will also free up more revenue for the rebuilding of America’s ageing infrastructure, which will, in turn, raise efficiency and productivity. As long as productivity gains exceed US dollar appreciation, the US will net gain relative competitiveness.

Less restrictive regulations will boost the attractiveness of investing in the US. Over-regulation stifles innovation and discourages investments. Just look at Europe. Deregulation of the financial sector, such as reducing excessive rules and oversight, will lower compliance costs. Lowering capital reserve requirements (as originally mandated under the Basel 3 Endgame) will unlock capital (reduce the banks’ mandatory holdings of US Treasuries) that will go towards expanding lending capacity — at lower interest rates — to the private sector while generating more business and profits for banks. This is one of the reasons we are bullish on US banks, why we bought JPMorgan Chase and Goldman Sachs (see Chart 4). Less stringent environmental rules and regulatory hurdles in the energy sector, especially on federal lands, will boost oil and gas production and bring down prices (costs) for both consumers and businesses.

In short, the combination of Trump’s actions will reduce the cost of doing business in the US, stimulate investments, create more jobs and better wages for Americans, boost productivity and relative US competitive in the world while maintaining US supremacy, sustained GDP growth and US dollar hegemony (see Diagram for a summary of all the actions and MAGA goals).

Asian economies are vulnerable to more tariffs

We have explained in our past articles that tariffs are just a means to an end. We will not rehash it, but you can reread them in our last two articles on Trumpianomics (scan the QR codes to read the articles in full). Tariffs are proving to be quite effective in forcing concessions from others, to the benefit of the US. We suspect that the final piece to Trump’s “MAGA Pathway” will include terming out US Treasuries (including perpetual bonds) and forcing countries to increase the value of their currencies. This will resolve the Triffin Dilemma, where being the reserve currency will lead to an overvalued US dollar and ever-increasing trade deficit (to supply the world with its US dollar needs). Of course, there will be consequences, in the short term and in the long run, for the US and the rest of the world.

Already, uncertainties and volatility in global equity markets have worsened in recent weeks, as the full extent of Trump’s tariffs became increasingly clear. Thus far, the US has imposed 25% tariffs on all imports from Canada and Mexico, additional 20% tariffs on China and 25% tariffs on steel and aluminium imports from all countries. He has talked about similar tariffs on products such as copper and lumber, cars, semiconductors and pharmaceuticals. Trump has also threatened a 25% blanket tariff on the European Union.

The Trump administration is set to announce on April 2 much broader “reciprocal tariffs” that will cover all countries. Basically, countries will get a tariff “number” from the US — to match the tariff rates that each country currently levies on US exports. Negotiate or accept the tariffs. The thing is, smaller nations may have little of value to offer — or, using Trump’s analogy, they probably have few, if any, cards to play — even if they are willing to negotiate.

This is why we are more bullish than most on larger economies such as China — even though they are positioned by the US as foes — than smaller nations, even when they are positioned as friends. It is why we think the traditional trichotomy view of friends, foes and neutral nations may no longer be useful. What does this mean for future geopolitical alliances? What does this mean for trade and economic relations between the US and China, the US and Russia, and the US and India? We think President Trump is a political trader, not investor. This is a topic we will return to in a few months, when the time is right.

We see more tariffs as imminent and Asian countries are most likely next in the line of fire. Those with large trade surpluses with the US will be particularly vulnerable. China, Canada and Mexico are the top three on the list. The next is Vietnam, with Japan, Germany, South Korea, Italy, India and Taiwan rounding the top 10. Malaysia is on the list at No 13 and Indonesia is at No 14. In addition, India, South Korea and Indonesia have some of the highest protectionist tariff regimes in the world. Trump’s reciprocal tariffs will also take into account non-tariff barriers, value-added taxes, exchange rates and other perceived unfair practices (such as subsidies) that disadvantage the US. Back in 2021, the Trump administration had listed Vietnam as a currency manipulator, essentially charging that the country was depreciating its currency to make exports to the US cheaper. Indonesia, too, has been on the US’ currency monitoring list at different points in time (see Chart 5).

Box Article: Responses from readers of The Edge

The following are a sampling of comments and questions in response to our previous two articles on Trumpianomics.

“I agree, method and madness. But he is rude and crude.” — Former banker, chairman of a fund

“I am not expert enough on the world economy to have a fulsome discussion on the precepts of this article … but I cannot agree that the theory of Trumpianomics is in fact or any way a part of a strategic economic plan devised or even understood by Donald Trump. His aspirations are enrichment of himself and the oligarchs surrounding him. He is destroying the US, one chaotic day at a time.” — Director of a public-listed company, retired senior public servant in Canada

“Is Trump a blip or the end of American exceptionalism and a return to 19th century multiplayer imperialist states?” — Former publisher, philosopher

“Trumpianomics … hmm. An interesting perspective and rationale for his actions. However, I wonder whether his MAGA supporters and independents who voted for him will have the patience, tolerance and abilities to wait for his plan to come to fruition?” — Audit partner in the US

“Regardless, he’s either a genius acting really dumb, mad and scary (and doing it incredibly well) or he’s really dumb, mad and scary.” — Malaysian politician

“An incisive analysis, perhaps a cyclical phenomenon, the world reset itself postWorld War II. It was then principally led by the (victorious) US. It has been 80 years since; we expect a fresh global deconstruct and reconstruct, and US (Trump)-led again ... hopefully without a preceding World War. We are probably looking at a global correction — 30-year reset.” — Bank chairman

An email from reader Mr Chong (March 22):

I read with intrigue the latest analysis on Trumpianomics and its repercussions on the world. My questions are:

1. The Edge Singapore printed a Bloomberg article on Ray Dalio’s analysis on the world economy today. Can you state your position on his opinion that a neutral country “could” fare better? What options could smaller countries such as Malaysia or Singapore have to survive this new economy setup? What could a Malaysian or Singaporean do to survive and, if possible, thrive with the changing order?
2. Some Malaysian export-oriented companies such as WellCall and Uchi Tech were sold down recently. The smart money has already made the move, but these companies have USD revenues and, according to the article’s analysis, the USD should do better if Trump’s policy works. So, why the selldown?
3. The Malaysian Portfolio sold properties companies last week. Why? If the Malaysian economy becomes weaker, properties and construction should do better from pump-priming and the lowering of interest rates.

​Our reply:

1. To the extent that Dalio’s articulation means that being friends and allies of the US under President Trump has little to no advantage than just staying neutral — since Trumpianomics means all parties must share the burden (whether the US is providing a defence shield, a ready American market for its exports or the US dollar for its foreign exchange reserves and enabling financial transactions) — whether friends or foes, we are broadly aligned. But we think the traditional trichotomy view of friends, foes and neutral nations may no longer be useful. The US under Trump will define each nation’s relationship by linking trade, defence, investments in the US, US dollar holdings and the size of their national reserves to the national security interest of the US and the American people, and extract what it can, bilaterally rather than multilaterally — more transactional, mercantilist, coercive and extractive. Our response to the second half of Question 1 is in the articles we have previously written and the articles we will be writing in the next few months. It is not possible to articulate possible options or opportunities under this new Trumpianomics in a single paragraph here.
2. The reason for the selloff is likely the expectation of new tariffs to be imposed. Asean as a block enjoys a huge trade surplus with the US. In the case of Malaysia, it is the electrical and electronics (E&E) sector. While exporters earn US dollars and will make forex gains with a stronger US dollar, their exports (sales) to the US will be hit by higher tariffs. Many events will occur in an economy at any moment in time, they may be complementary or have offsetting effects, which will also differ in magnitude. Think of the difference between a tide (in this case, forex gains) and a storm (adverse effects of tariffs). Investment choices are made by distinguishing between these — what is the dominant factor that will overwhelm and drive the macro economy and the capital markets.
3. The disposals to raise cash for the Malaysian Portfolio is based on our decision to be overall defensive. The “bears overcome the bulls” — and the risks for high-beta stocks. As we said above, there will be many moving parts and we expect Malaysia’s interest rate response will be delayed, given the focus on exchange rates. Deciding on which prevails is how we make our investing choices.

An email from AbsolutelyStocks subscriber Ee Yih Chin (March 25):

I appreciate your article showing the argument from the other side (see “Trumpianomics: The art of coercion”, The Edge, Issue 1568, March 24). We seldom get to read such alternative views in mainstream media. I have a question about what you wrote:

1. “How to drive down the US dollar so that it is not overvalued? Make central banks around the world sell their US dollar reserves gradually. In return, these countries buy their own currencies, thus driving them up, making US goods cheaper and reducing their trade surplus with the US.”
2. “And, making them sell the US dollar in their foreign currency reserves for the perpetual US Treasury securities, or UST.” I understand part (1), which is common knowledge, but I’m confused by part (2).

Our reply:

The bulk of the foreign reserves currently held by most countries are in the form of foreign currency reserves (89% for Bank Negara Malaysia), most of which are in “securities” (81% of foreign currency reserves in the case of Bank Negara). Gold, International Monetary Fund (IMF) reserve positions and special drawing rights (SDRs) are relatively small.

Total global foreign exchange reserves stood at US$12.35 trillion at end-2024. Almost 55%, or US$6.8 trillion, are in US dollars. Total M2 (money supply in the US) is US$21 trillion. In other words, the US dollar assets held by foreigners as their foreign exchange reserve is a “needle mover”. It affects US dollar exchange rates and US interest rates.

Since Trumpianomics is the belief that the US dollar is overvalued and needs to fall over time, the risk of a managed decline in the value of the US dollar in the long term is that it makes US dollar assets less attractive for foreign investors. And if so, this means that yields for US dollar assets must rise (to compensate for the gradual depreciation of the US dollar). But higher yields would hurt the economy. To keep the shorter-term (up to 10 years, which is the key benchmark for most borrowings) yields low, a possible tool would be extending the duration or terming out the US dollar assets (UST). Yes, the yields on these very, very long-term UST will rise, but they will have limited impact on the economy.

Foreign reserve managers are asked to sell the USD (UST) to buy their domestic currencies. This can be accompanied or replaced by “terming out” of the UST still held by these central banks in their reserve holdings to keep shorter-term US interest rates down. By extending the duration to perpetual or 100 years, the shorter-term funding pressure on the US is significantly alleviated. The US Federal Reserve buys back these shorter duration in exchange for the long-dated or perpetual UST.

— End of Box Article —

The Malaysian Portfolio was up 0.8% for the week ended March 26, led by gains from United Plantations (+6.4%), Kim Loong Resources (+2.2%) and Kumpulan Kitacon (+1.4%). The only loser was Insas Bhd – Warrants C (-16.7%). Last week’s gains lifted total portfolio returns to 187.1% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 17% over the same period, by a long, long way. 

The Absolute Returns Portfolio also traded higher last week, gaining 1.5% amid steadier sentiment for the broader market. Total portfolio returns since inception now stand at 25.6%. The top gainers for the week were JPMorgan Chase (+7.3%), Goldman Sachs (+4.1%) and US Steel Corp (+4%). On the other hand, Tencent Holdings (-5.5%), CRH (-2.8%) and Nucor Corp (-1.9%) ended in the red.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.