Trump Cycle, How to Price Assets

Core Viewpoint

The underlying logic of the Reagan cycle is to use tight monetary policy to suppress inflation, loosen regulation to stimulate growth, ultimately creating a cycle of "economic growth - strong dollar - strong US stocks" in terms of growth, liquidity, and asset.

Whether Trump can replicate Reagan, we believe, hinges on the sustainability of the AI technology revolution.

US Stocks: Under the drive of the technology industry in 2024, US stocks are not weak. The future trend of US stocks depends on the sustainability of the technology revolution driven by AI.

US Bonds: The probability of experiencing a round of "re-inflation" is low. The question of how much downward space there is for US bond yields, or whether they will maintain high volatility, is where the current market divergence lies. We believe that if technology has sustainability, US stocks will be relatively strong, and US bond yields may remain high due to the "teeter-totter" effect.

US Dollar: The future trend depends on the interest rate differential between the US and non-US economies brought about by AI.

Industrial Commodities: In 2025, the pricing of industrial commodities will be more driven by expectations.

Gold: Gold prices are not weak, but the conditions for a strong gold market (i.e., significant liquidity easing and geopolitical factors) are uncertain.

Summary

Many people compare Trump to the former Reagan, not only because their governance philosophies are somewhat similar, such as tax cuts and deregulation, but also because Trump specifically referenced during his campaign, "Are you better off than you were four years ago?" as a tribute to Reagan of the 1980s.

During Reagan's presidency, he addressed a series of economic issues in the US and became famous for the Reagan cycle. The so-called Reagan cycle refers to the core cycle chain of "economic growth - strong dollar - strong US stocks," supported by the policy combination of "tight monetary policy" and "loose regulation."

As Trump is about to take office as the new President of the United States, whether he can replicate the Reagan cycle, initiate a "Trump" cycle of his own, and what impact it will have on global asset pricing is a highly focused question in the current market.

1. Asset Mapping Corresponding to the Reagan Cycle

Reagan is famous primarily because he successfully ended high inflation and, while controlling inflation, accomplished the seemingly impossible task of driving the US into a new growth cycle and revitalizing the dollar index.

Due to successfully addressing the inflation issue and initiating a rate-cutting cycle, benefiting from the resonance of liquidity and growth, US stocks entered a long bull market; during the rate-cutting cycle, US bonds also performed well. With US policy adjustments, the dollar index first strengthened and then weakened.

Under the framework of the Reagan cycle, the overall performance of major asset classes is: global commodities weakened as inflation cooled, US stocks strengthened with US growth and dollar repatriation, and US bonds rallied due to declining inflation.

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Comparison of Trump 2.0 and Reagan's Economic Cycle

Comparing Reagan and Trump, the biggest similarity between the two is that their core policy ideas are consistent, namely "tax cuts" and "deregulation."

In comparing Reagan and Trump, there are four main differences:

First, the focus of policies differs. Trump places more emphasis on immigration and tariff issues, aiming for "the return of American manufacturing." The main issue Reagan needed to address was "stagflation," and he did not overly restrict the outflow of manufacturing. In fact, the Reagan era can be seen as the beginning of the outflow of American manufacturing.

Second, the economic conditions are different. When Reagan took office, the U.S. was experiencing severe stagflation. Unlike the Reagan era, the U.S. economy was healthier when Trump took office for the second time.

Third, the focus of technology has shifted. From the Reagan era to the eve of Trump 2.0, the U.S. has been a leader in the new wave of technology, with Trump’s era leaning more towards software. The driving factors of technology during Reagan's time were hardware-dominated, while Trump's era focuses on algorithms and data. Economic impact models: The PC revolution directly created new industries, while the AI revolution plays a role more through optimizing traditional industries and promoting digital transformation. Stock market performance: Technology stocks were just emerging during Reagan's time, while tech giants had become dominant forces during Trump's era.

Fourth, population growth and driving forces differ. Population growth during Reagan's time mainly relied on the post-war baby boom. In Trump's era, despite a declining birth rate, immigration has become an important source of population growth

3. The Real Key to the Trump Cycle Lies in Technology

1. The cycle of "Economic Growth - Strong Dollar - Strong U.S. Stocks" has been initiated.

At the beginning of 2020, the pandemic broke out, and the U.S. fell into a brief recession with soaring unemployment rates. Due to the short-term impact of the pandemic, the economy was more easily self-healing. Coupled with the dual easing of U.S. fiscal and monetary policy, this recession was resolved smoothly.

The "big cycle" reappears, with "loose fiscal + tight monetary" successfully leveraging the vitality of U.S. industries and consumption, forming a virtuous cycle between industry and consumption.

Subsequently, the U.S. tightened its monetary policy, yet it did not impact U.S. stocks. Tight monetary policy should theoretically impact liquid assets (such as stocks), but under the support of technology, tight monetary policy was accompanied by a return of the dollar, which is also the reason why tight monetary policy can avoid hurting the liquidity of the stock market.

The U.S. has become a global high-interest rate haven, with low-cost funds from overseas continuously flowing into the U.S. On one hand, this boosts U.S. financial assets and increases the wealth effect for residents; on the other hand, it promotes real investment in the U.S., aiding in the completion of the AI industry investment boom.

2. Whether the Trump cycle can proceed smoothly depends on the sustainability of technology, which is also key to the current direction of the U.S. economy and assets.

This round of the AI revolution originated from Biden's industrial stimulus policy, which is currently crucial for U.S. stocks and the return of the dollar. The U.S. technology sector is experiencing large-scale investments, with investments first reflected in construction spending, while equipment investment is still in the early stages of growth. Clearly, this round of AI is also key to the direction of the U.S. economy.

The explosive growth of the AI industry primarily promotes investment growth. Investment in computer and electrical equipment products stimulates productivity enhancement. Understanding this allows us to comprehend why the U.S. has shown resilience in growth in recent years, why inflation is difficult to suppress in the final mile, why U.S. stocks are relatively strong, and why U.S. bonds are relatively weak.

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IV. Potential Impact on Global Asset Prices

1. U.S. Stocks: Driven by the technology sector, U.S. stocks are likely to remain strong, and their ability to strengthen further depends on the sustainability of the technological revolution.

In 2024, the performance of U.S. technology stocks remains impressive and continues to be a significant driver of U.S. stock market growth. In the second half of the year, financial conditions are expected to ease, providing further support to U.S. stocks. In 2024, the growth rate of construction spending in the U.S. high-end manufacturing sector is still significantly higher than that of equipment investment.

Whether there will be sustained equipment investment spending in the future largely depends on the development trends of the technology sector.

2. U.S. Treasuries: The probability of experiencing another round of "re-inflation" is low, and the extent to which U.S. Treasury yields can decline or maintain high volatility is where the current market divergence lies. We believe that if U.S. stocks remain strong and risk appetite is not weak, then Treasury yields may still be relatively high due to the "teeter-totter" effect.

In 2024, the U.S. has made significant progress in its anti-inflation journey, although the final mile has been slow and uneven. The most important factor is that investment in technology and high-end manufacturing has driven growth in R&D investment, while the U.S. labor market remains strong, resulting in persistent inflation in the service sector, represented by rents. This is a potential consequence of the "MAGA movement." The probability of a rapid decline in service sector inflation in 2025 is low.

3. U.S. Dollar: Future trends depend on the direction of the interest rate differential between the U.S. and non-U.S. countries brought about by AI.

In this round of dollar fluctuations, capital continues to flow into the U.S., seemingly due to relatively strong U.S. growth and the attractiveness of U.S. stocks, reflected in the high interest rate differential between the U.S. and non-U.S. countries. In fact, the interest rate cycles of the U.S. and non-U.S. countries are not synchronized, with the key being that the U.S. is the leader in the current AI industry development, with rapid growth in technology and high-end manufacturing and potential high returns.

4. Commodities (Industrial Products): In 2025, the pricing of industrial products will be more based on expectations.

High interest rates suppress demand, trade frictions may escalate, and industrial chains are being restructured, leading to potentially weak global demand for industrial products. The Chinese economy is still in a weak recovery process, and global manufacturing is weak, making it difficult for global industrial product demand to improve significantly, thus keeping industrial product prices weak 5. Gold: The strength of gold prices is not weak, but the conditions for its further strength (i.e., significant liquidity easing and geopolitical factors) are uncertain.

Gold is primarily priced based on its financial and monetary attributes. In the medium term, gold prices are not weak, and further strength depends on U.S. Treasury yields and geopolitical conflicts. The reason gold prices are not weak is due to central banks' continued purchases of gold supported by the logic of changes in the international monetary system.

Author of this article: Zhou Junzhi S1440524020001, Sun Yingjie, Source: CSC Research Macro Team, Original Title: "Trump Cycle, How Assets Are Priced | China Looks at the World (7)"

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