- Date:
Donald Trump's election victory brings with it a plethora of unknowns about the next four years. After a highly unusual election cycle, change is on the horizon, from a reordering of the existing power structures of the West to tariffs on China, from Elon Musk's DOGE to deregulation. In this special episode, Dan Clifton, Head of Policy Research at Strategas, delivers his thoughts on Trump 2.0 at the EFG Investment Summit 2025.
Speaker
Dan Clifton
Host
Moz Afzal
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Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.
Moz Afzal:
We have a special podcast today, a presentation from our investment summit. Very interesting presentations and we thought that for those of you who weren't there, we give you an excellent opportunity to listen in to some of the best minds in financial markets, economies, geopolitics. Let's listening to Dan Clifton. I said to Dan just a little bit earlier, the investment summit wouldn't really be without Dan Clifton, so Dan, please join the stage. Thank you.
Dan Clifton:
Well, good afternoon everybody. Moz, thank you for having me. It's a pleasure to be here. I am honoured to be part of your process. I have to admit, last year was such an easier presentation to make. Our politics are going to be crazy in the US. Biden's going to stimulate the economy, buy stocks. It is now a lot more complicated this cycle and you're seeing that play out every day. Yesterday at 6:00 AM Eastern standard time, the Washington Post reported that Trump was easing off on his tariffs with a very common sensical idea of how he'll do his tariffs. And by 10 o'clock in the morning, four hours later, we were no longer doing that. Okay? Now it's important to understand that that news article significantly moved the US dollar. So the dollar weakened, as soon as the news article hit and as soon as he retracted, you saw the dollar go back up.
So this political noise is more than just noise. It has real consequences. It's impacting bond yields, it's impacting the dollar and it's impacting all sorts of different currencies around the world and stocks associated with that. And I think that this is a continuation of last cycle where I just marvelled all year at how awesome this election was. Small changes in Trump's probability or small changes in Harris's probability would move, India would move any type of currency out there because this was a global election and it was a global election because it was binary between Trump and Biden or Trump and Harris, where if one of them won, Trump was more likely to put tariffs in place, and if he puts those tariffs in place, he's going to impact where growth and earnings are. It was really a truly great election. I never wanted it to end, to be honest with you.
I'm the only person in America who never wanted to end, and now it's becoming a little bit more complex and trying to understand what the next moves are. So hopefully I can give you some context of what Trump is up to and what we can expect both from a macro and from a sector basis as we think about it. I would be remiss not to just start off, I'm going to move over here so I'm not in the way, but I would be remiss just that we have to keep in our minds what's happening in global politics that's separate just from what's happening in the US. I had a breakfast with the European Union last month and they continued to marvel about the political change that's happening in Europe overall. So I knew it wasn't just me misreading the headlines, but what you're seeing is that the western world is reorganising and readjusting as Trump comes into office.
The latest example of this is Canada. I have long known Pierre who might replace Trudeau in Canada as a backbencher in the Parliament. Now he's on the verge of being prime minister. So this change is happening really, really fast. Germany's going right, South Korea just lost a leader. We saw what happened in France and I just put UK in there where we are and we'll see what happens in the UK. What is very interesting is that yesterday in my meetings with my clients, all anybody want to talk about was Elon Musk and the way Elon Musk is now interjecting on that. So I hope we can have a conversation about that. But this is a continuation of our long-term theme that we've had since the financial crisis, and that is that economic volatility is creating political volatility. This is the trend growth rate of the United States.
We could do it on a global GDP perspective. That red line is the trend growth rate. The blue line is the actual growth rate, and what we see is in 2008, we began to transition from that 3% growth rate to a 2% growth rate. We've largely stayed there for 15 years. The difference here is quite large, it's a $5 trillion gap, meaning Americans are $5 trillion poorer than otherwise would be the case if we were growing at 3% on a global scale. It's about $15 trillion. Just to give you context. So what we believe is happening in the United States and it's now happening around the world, is that voters know that their standard of living isn't rising as fast as it should be, and they're demanding political change. This is now the 10th election that we've had since the financial crisis in the United States, and the voters of the US have now removed the party in power in nine of those 10 elections.
So we've tried all Republican, we've tried all Democrat, we mixed it up in 2016, we rolled the dice with Trump and now we're back to rolling the dice a second time with Trump. So voters definitely want some sort of change. This is not normal. The last time that this has happened was 1884 time period. So this is like the post civil war reconstruction period, and if you're a business or an investor, one year Congress is cutting taxes. Four years later they're trying to take it away or they're doing healthcare reform and taking it away. So it's political volatility is now turning into policy uncertainty overall. On top of that, we had a summer like no other, but can you imagine if I was here last January and I said, well, listen, Trump's going to get convicted. Biden's going to just show up for a debate and show everybody as the president of the United States, Trump's going to get shot twice and we're going to have a new candidate a hundred days before the election.
I think professional investors, not just retail investors, but professional investors would say, maybe I should take a little bit of risk off the table given all this that's going on. This is a lot of political noise here, political bandwidth to take on, and yet stocks were up 25% in 2024. That's pretty amazing, and it's really this idea that presidents love to prime the pump ahead of the election. They're going to stimulate the economy. Biden did that even though he wasn't a candidate for the second half of the year, we benefited from that. So the S&P is now up every single presidential re-election year since 1944. That's 14 in a row, and the average return is 16.5%. What I find to be most interesting about the election cycle is that when Harris got in the race, it was technically called an open election. At that point, we didn't have any incumbent president.
Why that's important is that stocks usually do pretty poorly around the election. As you get into an open election, there's uncertainty about who the candidate is, and yet the market treated Trump like an incumbent where the equity market rallies into and out of the election overall, almost saying, we've known this guy, we've seen him once before. We have less uncertainty this time around and we can maybe make better investments so at some point we're going to get a sell off. I'm surprised it hasn't happened yet, but it's been a pretty amazing run here given the level of political noise that we've seen before. Just quickly on the election, US elections are really close. 77,000 voters separated Trump from Hillary. 65,000 voters separated Biden from Trump, and in 2024, it's almost an embarrassment of riches where Trump won by 254,000 votes on a base of about 160 million voters.
You say, well, Dan, that number's not correct. I saw Trump won by 3 million votes. This is the electoral college number. If 254,000 voters voted differently in Pennsylvania, Michigan, and Wisconsin, then Vice President Harris would've won the election. To give you context of how close that is, it was about 0.17% of total votes cast in the 2024 election. So Trump needs to be very careful in not overreading what the voters said in this election. Clearly, they put him back in. His approval rating is at the highest level it's ever been in the United States, but these are very, very thin margins. What was the most interesting takeaway politically from the election is Trump's with demographics, a 5% improvement in women, a 13% improvement in non-white voters, and particularly his strength with younger voters. Overall, what Trump has built here is a working class, multi-ethnic coalition that we've never really seen in the United States.
He may not be able to hold that coalition, but it is something that is very different and something that is very unusual. I look at a place like the Bronx, New York. It voted 98 to two for President Obama in the 2012 election. It gave Trump about 30% of the vote in this election, which is just massive, massive change and tells you there's something different happening in US politics today. So what Trump has tried to do is take that multi-ethnic working class coalition and drive it into an agenda that starts with immigration enforcement. We believe on day one, Trump will close down the border and not let any new flow into the country overall. Second is that there's a lot of talk about trade policy. What we have been emphasising and Moz, I think I did this on beyond the podcast before the election, is really talking about separating China from the rest of the world.
I'm going to show you some charts in a little bit. The whole world is pricing in as if Trump is going to put tariffs on everybody all at once, and it's very unlikely he's going to treat China differently than other countries. Increased domestic investment, putting tariffs outside the United States trying to get those investment subsidised. We're going to do a massive tax bill in the first six months of the year. And then deregulation key areas, energy, financial services and artificial intelligence. This is really important when you think about something called DOGE. Has everybody heard of DOGE, which is the Elon Musk. People say, oh, is he going to reduce spending? It is more a deregulation commission than it is a spending commission, which I'll talk about and then lower government spending and ending of the wars in Ukraine and the Middle East. Obviously not all of this is going to get done, but a lot of these initiatives can get done by executive order and not Congress.
Again, that's what made this election so interesting to us is that if he wins, he can make those changes. So one of the best performing stocks since the election has been a company called Geo Group. It's a small and mid cap industrial used to be a REIT and why that's important is they are border enforcement, you need more beds, they do prisons and those are going to be the type of winners that you're going to see and you don't even need to know who's going to control Congress. Overall, the big trade coming out of the election has been higher bond yields and a stronger dollar. This is Trump's probability of winning in the 10 year yield. So as Trump's probability went up, bond yields went higher, as Trump's probability went up, the went higher, and that has continued through this election. What I see investors doing today is they're basically adopting onto this position, and I'm going to argue to you today that we're going to start seeing a reversal in bond yields and the dollar and the sectors that go with it over the next couple of months as the new administration begins to settle in.
But clearly that dollar is moving on trade policy and look at this. This is just me breaking that down into different areas. This is China and that's Europe. They look almost identical as the same chart, and what I think the consensus is doing is saying, okay, Trump has a universal tariff and he's got a tariff proposal on China. Let's pull it all together. Well, if we did all that, we'd have a pretty bad economy, we'd have really high inflation, and yet if it's just tariffs on China for $50 billion and negotiating with the European Union on defence spending and liquified natural gas and autos, it's going to give you a different outcome than that. Look at Mexico, very similar as well, and then you have Japan, so it feels as if the market is overestimating Trump's trade policy. I thought we were going to get some relief from that yesterday and it lasted about four hours overall, and I'll show you, this is what we did last night.
I'm notoriously bad by the way of getting my slides on time because we were going through the minute by minute tickers from yesterday. This is the dollar, that's the Washington Post article hitting at 6:00 AM and you could see the dollar starting to come down. Now the reason why I think this is important is that what the proposal is saying is that President Trump is going to put tariffs globally in three key areas. Number one, medical supplies, number two, defence equipment, and number three, renewable energy. He can argue that those are national security areas and he'll have the legal authority to be able to do that. If Trump wants to just put a tariff on every good coming into the country, he will not have the legal authority to do that even if he claims national security apparatus. This is something that we talked about Daniel in December about him lacking the authority to do this.
His advisors are figuring out the way to do this, and it really angered probably one of his advisors who doesn't want to do a more narrow approach and leaked it to the Washington Post yesterday. So the Games of Thrones are back in the White House. I almost missed them after the last four years, and they're really going after each other at this point. What is Trump's goal on China? He's trying to get US businesses out of China. This is the percentage of imports coming into the United States from China. We had about 21% of all imports coming from China in 2018. Today that number's about 13%, so he wants to put higher tariffs on China and continue to drive that down. He doesn't care that the supply chains are going to move to India. He'd rather have 'em in the us. He just doesn't want 'em in China, and that is our Strategas China real-time basket, which are US companies levered up to China and you could see their underperformance has been significant and we think the market has gotten that right and that is a source of continued pressure.
Moving on, what will be key is how the Federal Reserve interprets this because if the Federal Reserve interprets the Trump tariffs as inflationary, they can wind up getting monetary policy wrong or monetary policy right? I don't know, but this is 2018, the Trump tariffs on China start, and that's CPI decelerating all the way down to 1.2%. There are a lot of reasons why that happened. The tariffs, China was slowing rates were high, but what happened was the equity market crashed in December of 2018. We were down 20% in one month. It didn't help that Trump was trying to fire Jay Powell at the same time. My sense here is how the Fed interprets Trump's policies will be extremely important for the Fed outlook overall. I know that this may sound negative, but there's going to be a brighter side to all of this. Overall, we have a major catalyst coming in the month of February where we are going to provide significant liquidity into financial markets.
If I came up here and told you that Jay Powell was going to do quantitative easing on February 1st, it probably would affect your investment outlook, particularly around US equities. And yet we've now given the US Treasury Department the ability to do QE style policy, which is now coming, and the reason for that is that on January 1st, the US government hit its debt ceiling and when the government hits its debt ceiling, it cannot issue any net new debt. The only way the government can pay its finances is through what's called the Treasury General account, which sits at the Federal Reserve. And so as the government pays its bills, it takes money from outside the banking system and floods it into the banking system. It's extremely meaningful. You're looking at about a 300 billion liquidity surge in the month of February. So yes, I'm worried about Trump's tariffs, but Trump's tariffs on China are about 50 billion over the course of the next year.
This is 300 billion in the month of February alone. It provides a cushion that allows us to adjust for any type of policy mistake that Trump or Powell will make on monetary or fiscal policy. It's not linear. April will be another tough month as Americans pay their taxes, but it's just a reloading of that liquidity that you'll start to get in May and June and this will go on until Congress votes to raise the debt ceiling. Overall, the reason this is important is that that liquidity measure has a 60% correlation to bond yields, and so as liquidity improves, bond yields should start to come down and that trade has become a lot more one-sided recently about Trump and what he's going to do with the deficit overall. This is the relationship between net liquidity and the dollar. It's about a 70% correlation between the two of them.
And just to show you how you could see some sort of sector rotation from this. This is the NASDAQ relative to the S&P 500 and the Japanese yen, and what you see is that as the yen weakens relative to the dollar, the NASDAQ outperforms and vice versa. If the dollar starts to come down, you'll start to see that tech trade begin to reverse pretty quickly. That means that the market will start to broaden out and look at areas that have been unloved, like healthcare materials, industrials and other of the more kind of value-based type of sectors overall. Another way to think about it is equal weight S&P over market weight S&P as you go through this overall. What about DOGE? To me, this is like we could do a whole presentation on Doge. These are defence stocks, US defence stocks.
There's been a huge divergence between European defence stocks and US defence stocks. The US defence stocks are pricing in about a 10% cut to the US defence budget overall. So Trump gets no more spending on Ukraine. DOGE starts to reduce what we're spending on government contractors overall. The whole idea here is that the government will provide more efficiency. I would argue that DOGE is more of a deregulation than a spending commission. They're going to take AI. Elon Musk is going to take AI and apply algorithms to all the laws in the United States to make sure that they're consistent with Supreme Court rulings on regulation and whatever is inconsistent with that. Then you'll see the office of management budget begin to withdraw those regulations. So the two areas where I think you'll see the biggest deregulation from that are going to be in financials and in industrials, and I think it's going to be a meaningful pickup for productivity of the US economy overall.
So what about spending? I used to be a lobbyist. When I was a lobbyist. I used to help state legislators be able to cut spending so that they wouldn't have to raise taxes. Pretty cool job that I had. This is dating myself. It was over 20 years ago, but what I used to do is I used to find the most largest source of waste and just really just terrible examples, and then hold the press conference with the press in that state and say, look at what's going on. So in Georgia, I found an empty office space in rural Georgia at $20 a square foot that the state was paying, and the owner was a major contributor to the previous governor. The total savings from that project was like $135,000. Okay? But what it did was it created this image that there was all this other waste in the system that gave cover to the legislator to be able to vote for 50 or $60 million of spending cuts that cycle.
That's what I believe that Elon Musk is doing here. He's creating awareness in a way that nobody politically had been able to do before that's going to allow Congress to make tougher decisions on spending. It is really hard to cut spending in Washington, and I do not believe that they're going to cut $2 trillion in one year. I don't even believe they're going to get 2 trillion over 10 years, but they're going to try and then it will get smaller and smaller as you go along. This is the companies with the most government revenue as a percentage of total sales relative to the S&P 500. Look at that drop, and my point is the market is just assuming all the worst case scenarios now, and you'll start to see that get resolved. Overall, the big issue for this year will be tax policy. This is what's going to impact, what the deficit will be, what bond yields are going to be, what the growth estimates are going to be.
We have a 400 billion fiscal cliff that the US is facing on December 31st, 2025. Congress will not let these taxes go up. It will be an extraordinarily large tax increase for middle class families, higher income tax, lower standard deduction. The child tax credit gets cut in half. The estate and gift tax gets cut in half, and so Congress has to figure out how to extend these tax cuts. On Friday, we elected a speaker of the house on Saturday, the speaker of the house and President Trump made a decision that we're going to do one tax bill and in that tax bill will be immigration energy spending cuts the debt ceiling. Trump calls it a big beautiful tax bill, which was the name of my client note yesterday. Okay, by last night he was talking about two bills, not one bill, right? I don't know if you can have two big beautiful tax bills overall.
There are five different factions in the house Republican Caucus right now trying to figure out what they want to do. So he's got to bring everybody down, the Mar-a-Lago this weekend. He's got meetings with all five of those groups. I call them the five families of the Republican House. They have to figure out how to get this resolved and it will look like they will fail over and over and over again. The sentiment around this tax bill is going to be extremely negative all the way up to the point where they pass it, and I do believe that they will pass a tax bill probably by the first week of July and in there will be a raising of the debt ceiling overall. They have basically said that they're going to get this done by late April, early May, and I think that's almost impossible for them to be able to do given the narrow majorities they have and some absences that you will see.
But this is a pretty broad set of tax issues that they're going to have to deal with, and they're going to have to do it in extremely narrow majority. So what I tried to do here is just look at the majorities going all the way back to the Civil War, and what you see is that the Republican majority in the House of Representatives will be the smallest one that we have going back to 1857 where we got our first record. We also have three people who were selected out of the House of Representatives to join the Trump administration. One just simply retired. The other two will join somewhere around January 20th, and that will bring the margins down even further. The reason why I show you this is that these replacements are not going to be put in until late April, early May, and we will not be voting on major legislation until those majorities get broken up.
So a lot of movement on the bill until we get there. There is very likely going to be a corporate tax rate cut for domestic manufacturers in this bill, and it will get enormous amount of attention in capital markets if they're able to be able to pull that off because it will be viewed as some sort of growth driver if they'll be able to do it. When I asked the Trump folks, what's your priority, it is that corporate tax rate cut being included as part of that, and that's not really part of the discussion today in the mainstream press overall. So I'll stop there. I think we have about 15 minutes. I talk way longer than I wanted to, but I'll see if anybody has any questions, not just on this, but on any topic affecting US policy. Thank you again for having me today.
Moz Afzal:
Thanks, Daniel. So I'm sure there's going to be quite a few questions coming up. If I can maybe summarise one key point, certainly for an investment takeaway is that a lot of bad news for non-US stocks as been priced in already.
Dan Clifton:
Absolutely.
Moz Afzal:
And so you're expecting maybe a bit of a shift back from February onwards.
Dan Clifton:
So I got two reasons why exactly. I'm sorry for being convoluted on this. I got two reasons why. Number one is that I anticipate that the liquidity will start to bring the dollar down, and number two is that I believe that the consensus has overestimated where those tariffs are going to be outside of China. So maybe for China it's right, but in the other places it's not right. With Trump, it's really hard to get the white flag like, oh, all clear, or the white smoke might be a better way all clear. You're probably never going to see that all clear, but you have already two very specific examples. Example number one was right in November where Trump said, I'm going to put a 25% tariff on Mexico if they don't fix their border. He didn't say, I'm going to put a 25% tariff on Mexico because they have bad trade policies of the hurting US companies.
He showed you the transactional nature of what he was trying to do, and when you read the Washington Post yesterday, it is the only legally sound way that they can do this, and it really doesn't impact Europe. It really doesn't impact many of the other Asian countries. So from those two vantage points, you're incrementally starting to see it. And I think what was interesting yesterday is that you saw Mexico's currency rise even after he rejected it. You saw Europe's currency rise after that. So we're at the beginning stages here and the liquidity will be the big catalyst.
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