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“Beyond Markets” by Julius Baer is a series featuring conversations with experts to share recent market developments, key insights, and strategic inputs from around the globe. In each episode, we cut through the noise to offer practical advice and macro research on today’s shifting economic and market landscape.
The information contained in this podcast is marketing material. Opinions expressed do not constitute independent financial/investment research, investment advice, or an offer to buy or sell securities by Julius Baer. Please refer to www.juliusbaer.com/legal/podcasts for important legal information prior to listening to this podcast.
Hello, and welcome to Beyond Markets by Julius Baer, a series featuring conversations with experts to share recent market developments, key insights, and strategic inputs from around the globe.
Mark Matthews:Greetings. I'm Mark Matthews, head of research in Asia at Bank Julius Baer, and welcome to our weekly Beyond Markets podcast. The post election euphoria has waned. The S & P fell 2% last week, so it's lost more than half its gain since the election. And there are two reasons for the pullback.
Mark Matthews:The first is Trump's cabinet picks. The second is inflation and interest rates. Let's discuss both of those, starting with Trump's Cabinet picks. The incoming government is starting to take shape and there's a few things that are striking. The first is the ages.
Mark Matthews:Pete Hegiseth, the presumptive secretary of defense, is 44. Matt Gaetz, the presumptive attorney general, is 42. Vivek Ramaswamy, who will lead the newly formed Department of Government Efficiency along with Elon Musk, is 39. Lee Zedlin, who will lead the Environmental Protection Agency, is 44. Elise Stefanik, slated to be the ambassador to the United Nations, is 40, and Tulsi Gabbard, the director of National Intelligence, is 43.
Mark Matthews:That's vice president JD Vance's age, by the way. These compare to the average age of initial cabinet appointees in the Biden cabinet, which was 59. And in Trump's first cabinet, the average age of appointees was 63. So it's great that a new generation of future leaders is being empowered, and these people were in their teens when the Internet took off, so they're very comfortable with technology. But collectively, there is something weird about them.
Mark Matthews:For example, Pete Hegseth, who's been nominated as secretary of defense, has a big tattoo on his chest of the Jerusalem cross, a crusader symbol. And on his arm, there's another big tattoo that says, Dos Volt, which in Latin means, god wills it. That was a rallying cry for the crusaders during their battle. He's a presenter on Fox News, which is presumably the reason Trump chose him. The Department of Defense is very difficult to manage as you can imagine.
Mark Matthews:But Hegseth did go to Princeton, and he got a master's of public policy at the John f Kennedy School of Government at Harvard. He was a major in the army. He has combat experience in Iraq. He served in Afghanistan as well. It'll be hard to turn him down.
Mark Matthews:Tulsi Gabbard is another example of how strange this whole change is. Until this summer, she was being followed around by undercover intelligence agents, and now she's about to become the head of the entire intelligence community. The deep state hates her, and the best evidence of that is, well, on the one hand, Hillary Clinton says she's a favorite of Russia and is being groomed by the Russians. And on the other hand, John Bolton says she's a threat to national security. But it'll be very hard for senate to reject her, given her credentials, and she's extremely popular in the Republican party.
Mark Matthews:She was at all the Trump rallies during the campaign. But RFK Junior's nomination as secretary of health, that one will be very tough. Every Washington lobbyist will put pressure on the senators to reject him because every pharma and food company is against him. His confirmation process will probably be the most pressurized political event we'll ever see in our lifetimes. And Matt Gaetz probably won't make it as attorney general either.
Mark Matthews:He was at the center of the freedom caucus that wanted to cut government spending, rebalance the budget, and reduce the national debt last year. He was willing to risk a government default to achieve those things, and that would have been chaotic. And it would have cost many of the Republicans in the House their jobs when it came time to stand for election again. So they had to do a deal with the Democrats to raise the debt ceiling. Doing a deal with the Democrats is like doing a deal with the devil for those Republicans, so they bear a grudge toward Gates for that.
Mark Matthews:But actually, what Gates wanted, a leaner government, looks like it's going to happen, because Vivek Ramaswami and Elon Musk, they don't need to be confirmed by Senate to run the new Department of Government Efficiency, and this will be a massive disruptor to the way government is done. They're basically going to do a Silicon Valley remake of the entire federal government. I'll read some of the statement from Trump when he announced it. To quote him, the Department of Government Efficiency will dismantle government bureaucracy, slash excess regulations, cut wasteful expenditures, restructure federal agencies, create an entrepreneurial approach to government never seen before, drive out the massive waste and fraud that exists throughout government spending, and its work will conclude no later than the 4th July 2026. End of quote.
Mark Matthews:The reason for that deadline that was given in the statement is that it would coincide with the 250th anniversary of the United States. The real reason is probably because the incumbent party almost always loses the House of Representatives in midterm elections, and those will be held in November 2026. So they need to get it done before then. To recall, Elon Musk fired around 80% of Twitter's employees, and x still works. In fact, it's hitting record highs in user engagement.
Mark Matthews:He says he can cut the 6 and three quarters $1,000,000,000,000 budget by $2,000,000,000,000. It's hard for anyone to make the argument that the US government is efficient as Musk himself points out, and I'll quote him now. In 1955, there were less than 1 and a half 1000000 words in the US tax code. Today, there are more than 16000000 words. Because of this complexity, Americans collectively spend 6 and a half 1000000000 hours preparing and filing their taxes each year.
Mark Matthews:This must be simplified. End of quote. Imagine if that happened. Imagine how much more productive US households and businesses would be. And imagine if the budget deficit and the national debt stopped rising, maybe even started falling.
Mark Matthews:Imagine if interest payments, which are a quarter of all government revenue, started falling. No one anticipated this. There are so many moving parts to the second Trump administration that it's very hard to predict what's going to happen. But for sure, one thing is going to happen, and that is serious change. I'll now read from the monthly newsletter of our chief investment officer, Yves Bonzon, that he wrote on Friday.
Mark Matthews:A second Trump presidency will be very different from the first one. The new administration will implement a libertarian vision. Libertarianism advocates a society in which freedom is paramount. This includes economic freedom and thus typically a push for freer markets. A leaner, more efficient government apparatus limits the risk of unproductive allocation of capital and crowding out of the private sector.
Mark Matthews:The US is likely to remain the place where capital is treated best, and it goes without saying that capital will flow to where it receives the best treatment. End of quote. But I would add, the one asset class in the United States you probably don't wanna touch right now is Washington DC property. Then with regard to the economy, if we are heading toward a recession, it's the strangest one ever. The Empire State Purchasing Managers' Index measures business conditions and manufacturing activity across New York State.
Mark Matthews:It was forecast to be 0 at an index level for the month of November, but last week it was reported at 31.2, its highest since December 2021, from minus 11.9 in October. And the index was driven by new orders and shipments, and that's an encouraging sign for future economic activity. So that's great, but it also means inflation won't come down so much. The October consumer and producer price inflation numbers both came out last week and both were hotter than expected, and when you add them together, they infer a month on month increase of 0.3% for the October Core Personal Consumption Expenditure Index, otherwise known as PCE for short. That's the Federal Reserve's favorite measure of inflation.
Mark Matthews:It comes out later than the consumer and producer price indices because it's more complicated. The underlying data is different. The October personal consumption expenditure index will be reported on November 27th, and a 0.3% month on month increase would translate into a 2.82% year on year increase. That's actually around where the consensus is expecting it to be, so it won't come as a shock, but it will show that inflation is stalling. And it might even be rising again because it was up just 2.7% in July, August, and September.
Mark Matthews:A stalling or rising inflation rate would call into question the narrative that rates are going to keep coming down. Our economist David Kohl says the Fed is less preoccupied with inflation than it is with the labor market, but data from the labor market is also telling us that there's no reason for rates to come down. For example, in the most recent reading, initial jobless claims, that's the number of people filing for unemployment insurance for the first time, were their lowest since May. That means the weak October nonfarm payrolls report was a digression from an otherwise positive trend, probably due to hurricanes and the Boeing strike. And speaking of that Boeing strike, last month, Boeing employees got a 38% pay rise spread over 4 years plus a $12,000 bonus.
Mark Matthews:And the longshore men who were on strike, those are the people who load and unload ships at ports, they got a 62% wage increase over 6 years. Higher wages mean higher production costs and increased consumer spending. Those are usually inflationary, and if the Trump administration deports the one point 2,000,000 illegal aliens who've been told they have to leave and they haven't left yet, well, that might be inflationary too. So unsurprisingly, there have been a lot of tweaks and commentary from Federal Reserve officials. Last week, Federal Reserve president Barkin in Richmond said inflation might be coming under control, or it might risk getting stuck above the target.
Mark Matthews:Kashkari, the Minneapolis Fed president, said if we saw inflation's price to the upside between now December, that might give us pause. I thought we were putting 2 feet on the brakes, but in hindsight, we were only putting 1 foot on the brake. Schmidt from Kansas City said, I believe it will take a cautious and gradual approach to policy. My read is that we're seeing a normalization rather than significant deterioration in conditions. And Dallas Fed president Logan said the Fed should proceed cautiously at this point.
Mark Matthews:And most importantly, Federal Reserve chairman Powell said, the economy is not sending any signals that we need to be in a hurry to lower rates. It may be the case that we slow the pace of what we're doing just to increase the chances that we get it right. End of quote. So all of that is setting the stage for a slower pace of easing. The futures market still looks for a rate cut in December, but then it looks for a much shallower decline in rates to just 3.8% by the end of next year.
Mark Matthews:Back in September, it was looking for 3% by the end of next year. Our economist David Cole has a slightly different view. He thinks the Fed will pause in December. He does expect rate cuts in January March, but then he expects it to stop. And if he's right that the terminal rate stops at 4 and a quarter by March next year, it'll be 45 basis points higher than the 3.8 percent that the market expects for the end of next year.
Mark Matthews:Whoever is right, what's certain is there won't be as many rate cuts as were expected a few months ago. Lastly, and briefly on the stock market: After Trump's victory in 2016, the S and P rallied 5% into year end, and it rose 19% in 2017. The difference between 2016 and this year is that, well, back in 2016, the S and P had only risen 7% from the beginning of the year to Election Day. This year it was already up 22% by Election Day. Likewise, in 2016 there were only 18 all time highs.
Mark Matthews:So far this year there have been 50 of them, the 7th most in history. And if we add 3 more all time highs, that'll put 2024 in 5th place, tied with 1961 and 2014. One of the things that bothers our CIO, Yves Bonzon, is that so many clients ask him, why don't I just put everything into the S and P ETF? That does seem to be a popular thing to do these days or at least buying ETFs in general. So far there's been $913,000,000,000 of US ETF purchases this year.
Mark Matthews:That's a new all time high and the year hasn't even ended. But someone else has been selling. Fund managers have to file a quarterly statement with the SEC called Form 13 f that discloses their equity holdings and the filings for the Q3 became available to the public last week. Among them were Berkshire Hathaways. Berkshire sold $36,000,000,000 of stock in the Q3 that included a 25% reduction of its stake in Apple, which means they've now sold down 66% of the stake they had in the company.
Mark Matthews:In total, they've raised over a $158,000,000,000 in cash so far this year. Our CIO, Yves Bonzon, says that as a rule of thumb, we at Julius Baer don't try to front run market tops. It's too risky. This market could easily go up more. We'd rather wait for evidence of a top and then derisk.
Mark Matthews:And so far that evidence has not appeared yet. This is Mark Matthews signing off for now. On behalf of Julius Baer, we wish you a very pleasant week, and we'll speak with you again next week. Goodbye.
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Voiceover:The information and opinions expressed in this podcast constitute marketing material and are not the result of independent financial or investment research. Please refer to www.juliusbear.com/legal/podcast for further important legal information.