No enterprise can exist for itself alone. It ministers to some great need, it performs some great service, not for itself but for others, or failing therein, it ceases to be profitable and ceases to exist – Calvin Coolidge
The emotions surrounding Trump’s first three weeks in office are like drugs. It’s an upper if you voted for him; a downer if you didn’t. We’re better off letting other people overreact to the news while we try to be objective and study the coming change from the standpoint of the second derivative. In other words, what will be the long-term, investable trends that spring from this change.
The rise of the administrative state served its purpose by allowing the US to win WWII and the Cold War. Instead of winding down in the 90’s, the state sought new responsibilities and challenges. You could argue that it created some of the challenges it sought to control much like Prohibition agencies morphed into the DEA, or Drug Enforcement Agency.
For a couple of decades, it has seemed to me that government has moved away from serving the people to governing the people. As I wrote in the previous parts of this series, it worked extremely well until it got too big and became inflationary.
In Silent Cal’s words, it ceased to perform the great service for others, instead serving its own needs. The great opportunity for the US is to align the needs of business with the services offered by government. This is something that has NOT been the case since the time of Calvin Coolidge.
If successful, the US will be able to expand its economy even as the global economy enters secular decline. Coolidge was right, the business of America is business.
Beating Washington
The backbone of surprise is fusing speed with secrecy – Carl von Clausewitz
In 1967, the Israeli Air Force faced overwhelming numbers in Egypt, Jordan, and Syria yet they defeated all three with relative ease by applying the Napoleonic doctrine of divide and conquer with a competitive advantage in planning and logistics. To counter the overwhelming numbers of enemy jets, Israeli ground crews trained to be able to put a rearmed and refueled jet back in the sky within ten minutes. This allowed the IAF to multiply asset utilization thereby effectively cutting the gap in air power.
By employing the latest AI analysis software by highly capable engineers, the Trump Administration has been able to pierce the Deep State with facts extracted from the Treasury database before Washington could react. The result is that agents of the Executive branch are attacking many institutions at once before they can form a defense. This is the way Subotai, von Moltke, and Patton crushed larger forces through history.
The fight to tame the federal government is in its early stages so there is no knowing whether it can be reduced in size and scope. The Trump Administration needs to move fast because they are racing against a deep global economic downturn that is ready to start at any moment.
Global Decline
There is at least one point in the history of any company when you have to change dramatically to rise to the next level of performance. Miss that moment – and you start to decline – Andy Grove (Intel)
China is on the brink of economic oblivion, having bet the ranch on electric vehicles and renewable energy just as the developed world is moving back to carbon-based energy. Before much longer, they are going to be adding BYD, Geely, and SAIC to the same category as Evergrande, Vanke, and Country Garden.
If China is unable to sell their electric vehicles to Europe, excess supply will crush them. The automakers are largely financed with debt as is the auto supply chain. Cash flow is so bad that suppliers use the notes receivable from the big automakers as currency that they assign backwards through the supply chain. If BYD goes under, those notes are owned throughout the auto supply chain meaning the chain will collapse like a line of dominoes.
We know we’re getting close because the Chinese domestic market is in chaos. It appears that China is using extremely strict inspection standards to force consumers into new electric cars. At the same time, Chinese insurers are discovering that repairing electric vehicles is extremely expensive resulting in onerous premiums for insurance. Chinese drivers are getting clobbered from every angle, even as they face declining wages and job loss.
Meanwhile continental Europe is putting up trade barriers to prevent the destruction of its domestic auto industry. Neither Africa nor South America has the infrastructure to support a tsunami of electric vehicles.
It’s not just autos, China is attempting to export their way out of trouble even as the world is following the lead of the US and creating trade barriers to prevent China from dumping metals and cheap goods.
I wrote a piece last year where I share my opinion that China is running out of US dollars. It’s a unique thesis of mine but definitely worth a look. Here’s a link. https://geovestadvisors.com/has-china-run-out-of-dollars/
When I look at the above chart, I think of a company that’s close to bankruptcy that is attempting to maximize cashflow. This becomes a little clearer when we subtract imports from exports and add some color. Early in Xi’s reign, around 2011 to 2014, China was attempting to increase consumption as a percentage of GDP. It failed and they returned to their mercantilist roots.
Today, they look like they are desperate to generate dollars even as they face difficulty in keeping the yuan from collapsing versus the US dollar.
For those of you with a negative opinion of the US dollar and who cite Chinese and Japanese sales of US Treasuries as indication of disdain for the dollar, you are reading it wrong. China and Japan sell their Treasuries to prevent their currencies from collapsing versus the US dollar.
China has one foot in the economic grave, evidenced by the chart above and now the world is set to hang tariffs on many of their exports. When you consider that China is the marginal buyer in most commodity markets, a collapse in Chinese demand will throw the world economy into a deflationary downturn. I expect it to happen this year.
US Economy
I am prepared for the worst, but hope for the best – Benjamin Disraeli
I fervently believe that the Federal Reserve is making a monumental error by keeping interest rates elevated above 0%. They are reacting to economic policy mistakes from the past five years. It seems Biden went to the Hugo Chavez school of how not to spend tax dollars. I wrote about this in the 3rd installment of this series. Here’s a link. https://geovestadvisors.com/after-the-harvest-iii/
As much as I don’t want to pile on the former President, his economic policies were the primary cause of inflation – as were Trump’s Covid economic policies. Giving segments of the population free money always leads to inflation. This has been proven countless times throughout history.
Now that the Fed is totally model-driven, they’re effectively running monetary policy through the rear-view mirror. Trump is inheriting a credit card that is maxed out and that means that the inflationary impetus is already past. Once the effects of the excess spending of the past year are behind us, the US economy falls off the table. We can already see this forming in the auto market.
Automakers are already making plans to slash prices to move inventory. Lower interest rates would probably help. Think about it, we’re only at the 16 million vehicles per year mark despite trillions of dollars pumped into the US economy over the past year.
McDonald’s, Target, Family Dollar, Texas Instruments, and Federal Express, among others, are telling us that the US consumer is tapped out. Chevron expects to cut 20% of its workforce over two years. People are preparing for an economic storm later this year.
Conclusion
To live under the American Constitution is the greatest political privilege that was ever accorded to the human race – Calvin Coolidge
Originally, I had intended to end this series with a discussion of the industrial sectors that can take advantage of the changes in Washington. While there are undoubtedly companies that will benefit from a decline in onerous regulation, much of our economy remains levered to the old cycle and stock prices are extremely elevated relative to deliverable fundamentals.
Even the vaunted Artificial Intelligence frenzy is likely to prove a dud initially although I do expect beneficiaries to spring up over the next few years. I’m not sure whether OpenAI represents the next AOL or next Google. I’m pretty sure Nvidia will look like Cisco circa Y2K unless they can overcome the limits of silicon wafers. Deepseek has already shown us that AI can be pirated and commoditized.
I don’t believe President Trump is destined to experience a pleasant four years in office and not because of the Democrats. The American people would love to move in a new direction but there are significant barriers to exit from the old cycle in the form of debt and misguided investments from the past 30 years.
The developed world has over-harvested the fruits of the post-WWII cycle and stands over-levered to an unrealistic belief in permanent prosperity. America has figured this out which is why the US is rapidly changing the way it competes with the world. The investment landscape will reflect this direction over the next ten years as utility replaces luxury.
The road to return to a balanced and sustainable economy is going to be rough. But I’m convinced that it’s going to be a cakewalk compared to Europe, Asia, South America, and Africa.
If you’re interested in learning more, visit us at https://geovestadvisors.com/ and ask for Paul Hurley
Philip M. Byrne, CFA
