Mike Novogratz, the founder and CEO of $US10 billion ($15 billion) crypto asset manager Galaxy Digital, was sitting in a bar in New York drinking a cocktail with a name he couldn’t pronounce when Chanticleer caught him just hours before vote counting started in the US presidential election.
Novogratz was nervously waiting for the results from North Carolina; as a rusted-on supporter of Kamala Harris, he was hoping that if the vice president could win that battleground state, she could win the whole thing.
But Novogratz, who will be one of the star attractions at next week’s Sohn Hearts & Minds conference in Adelaide, admitted he would be “crying crocodile tears” if Harris loses and former Republican president Donald Trump claimed victory.
Having watched bitcoin surge 57 per cent to about $US69,000 already this year, Novogratz is tipping even brighter times ahead. “If Trump wins, we will take out $US73,000 tonight,” Novogratz boldly predicted. “And we will probably be close to $US100,000 by January.”
If anything, Novogratz wasn’t bullish enough.
Even before it was clear that Trump would steamroll Harris and led the Republicans to a stunning sweep of the White House, the Senate and the House, bitcoin had surged to a record high of about $US75,000, a gain of about 7.5 per cent on the day. That $US100,000 prediction suddenly doesn’t sound so crazy.
Novogratz believes Trump will usher in a much more supportive regulatory environment for crypto, with several members of his team of advisers firmly in the true believer camp.
But more than this, he sees no slowdown in the profligate government spending that has pushed the US government debt towards $US35 trillion.
“What’s making crypto so exciting is governments can’t keep their pants on – they’re like a 14-year-old boy at the senior prom. They just keep spending too much money,” Novogratz said. “And so it just makes hard assets like gold, silver and crypto go higher.”
We can debate whether crypto has really made the jump from tool for speculation to inflationary hedge in the mind of investors, but it seems clear that markets believe a likely Trump victory will usher in a new wave of inflationary pressure. Novogratz points out Trump was the highest spending president in the history during his first term in office.
The benchmark US 10-year bond yield shot higher as the vote count moved decisively in Trump’s favour, surging from 4.26 per cent to as high as 4.45 per cent. That’s a serious move, but consider that the 10-year yield was 3.7 per cent in September after the Federal Reserve cut interest rates by 50 basis points.
These moves underscore why Marko Papic, chief strategist at BCA Research, calls Trump The Human Steepener – history says that when Trump is in power (or close to it), the yield curve steepens. Bond yields rose sharply in 2016 and 2017 when Trump was elected, and they’ve risen sharply again in the lead-up to this year’s poll.
One important question
What’s been remarkable is that equities have remained resilient in the face of this big move in bonds. The S&P 500 is up about 7 per cent since early September, taking year-to-date gains to 22 per cent. Wall Street futures rose 1.2 per cent on Wednesday in Asia, while the ASX 200 rose 0.8 per cent.
The well-established narrative in the lead-up to the election has been that a Trump sweep would be positive for markets, as The Donald ushers in a bevy of populist pro-growth policies: extending the tax cuts he introduced when he was last in power, further lowering the corporate tax rates and stripping back regulation across a range of sectors.
The view is that means stocks go up, and bonds (where prices move in the opposite direction to yields) go down.
But investors who’ve ridden this two-year rally on global equity markets will need to ask themselves an important question: do they believe the stocks can continue their rally if bond yields keep pushing higher?
Papic is in no doubt. He argues higher yields are already starting to hurt the US housing market as they flow through to fixed-rate mortgages, and over time will start to weigh on the overall economy. History says stocks are unlikely to escape some pain.
“Thus far, equities have ignored the bond market sell-off. This is unsustainable.”
What’s more, he believes the rise in Treasury yields could have further – possibly much further – to go as the bond market reacts to Trump’s policy platform. Based on the market’s reaction to the infamous British budget handed down by the government of Liz Truss in October 2022, BCA estimates yields could rise as high as 5.6 per cent.
But Papic believes yields could go even higher because the environment has changed; then, central banks were raising rates, but now they are easing, making lenders more nervous about the impact of stimulatory policies.
“In other words, bond vigilantes have emerged out of their dens and are roaming the savanna, following the herd of developed economies to isolate the weakest from the pack.”
Papic argues that a “further sell-off in the long-dated Treasuries is likely to weigh both on growth prospects and the equity market. Which means that – unlike in 2016 – the big surprise on November 6 and beyond will be a downturn in stocks if president Trump wins.”
At that point, Papic reasons, Trump will be forced by the bond market to pivot away from his fiscal spending plans.
Investors will be justifiably cautious about calling an end to US exceptionalism, and Trump’s legislative agenda is as clear as mud.
And herein lies the potential big-picture problem for investors. Since 2020, Papic argues, two of the key engines of the exceptional outperformance of US shares have been huge levels of immigration and government spending. “No matter who wins the election, both are going to end from 2025 onwards. If Trump wins, [they end] in spectacular fashion.”
BCA is short both US bonds and equities. “The US is priced for perfection,” Papic says. “It requires all of its pillars of growth and outperformance to continue to perform at 100 per cent in order to justify lofty valuations. Whereas the rest of the world is priced for imperfection. Europe, Japan, EM, and yes, even China, need very little tailwind to outperform on a multi-year trajectory.”
There’s logic in this argument. But investors will be justifiably cautious about calling an end to US exceptionalism, and Trump’s legislative agenda is as clear as mud. He’s seemed far less definitive on tariffs, for example, than in the past, and the installation of Elon Musk as a quasi adviser on government efficiency suggests his administration might not be as fiscally profligate as feared.
It also needs to be pointed out that while US sharemarket valuations are stretched on basically any historical metrics, the backdrop for the market is hardly dire: corporate profits remain solid enough among the big stocks that move the market, the US economy appears relatively resilient and, despite sticky inflation, the Federal Reserve will juice conditions by continuing to cut rates.
Back in that New York bar, Novogratz sums up the puzzle facing markets in his typically direct style.
“Trump’s got a ton of downside volatility because he’s so weird, but he’s also got some upside volatility.”
Just don’t ignore the message in Wednesday’s jump in bitcoin and bond yields. Trump’s win won’t automatically keep the bulls running.
This article was originally posted by The Australian Financial Review here.
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