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With the dust barely settled on the US election, Dimitri Zabelin of Pantheon Insights joined us to bring his international geopolitical lens to the show. We talked about the possible impacts of Trump’s economy and social policies on inflation, interest rates and the strength of the US economy.

We also talked about a few trade ideas related to the Trump victory, as well as the positioning of Elon Musk in all this.

You can connect with Dimitri on X or LinkedIn, or learn more about Pantheon Insights here.

Episode 201 is brought to you by Future Forex. They are disrupting an industry that desperately deserves to be disrupted: providing forex execution for individuals and businesses, fertile ground for traditional banks to charge large fees as a spread. Future Forex is doing things differently. Refer back to Episode 199 for a discussion with Harry Scherzer on this topic.

Future Forex SA Pty Ltd is an authorised FSP number 51884.

 

Full transcript:

The Finance Ghost: Welcome to Episode 201 of Magic Markets, brought to you by our friends at Future Forex. Go back and listen to that show a couple of shows ago if you want to learn about what they are up to these days and what we will be talking about.

Today is another milestone, not just our milestone of going through 200 shows, a milestone of a very important election all the way over in the US. It feels very far away from me, it’s a bit closer to you, Moe, and it’s very close to you, Dimitri. Down here in emerging markets land, it’s going to be pretty interesting to see how this Trump presidency plays out. It’s going to be interesting for developed markets. It’ll be interesting for global equities, portfolios and currencies and macroeconomics and the whole story.

And of course, to talk about this, we have two macroeconomic experts on the show, and me. So that’s probably as much as I’m planning to say for basically the next 25 minutes. I’m just going to keep quiet and let the pros do it. Moe, starting with you and I’ll let you introduce Dimitri for those who haven’t listened to any of the other shows we’ve had with him up until now. And if you haven’t, you should go check them out because Dimitri’s great, right? That’s it from me. I’m The Finance Ghost. Thanks for listening and hello Moe.

 

Mohammed Nalla: I love that, we’re not going to let you sit too silent during this podcast. We’re definitely going to rope you in. I’m really excited about this because like you say, obviously what’s happened in the US Is not just relevant to the US, it’s certainly relevant to me up here in Canada. I’m quite concerned because with all of the disgruntled Democrat voters, they’re all saying they want to move up to Canada. I’m starting to say maybe we should build a southern wall as well, I can see Dimitri chuckling at that. On my social media, just for some fun, I actually changed my profile picture on X. I went and I posted a picture of me that I have with this cowboy hat on. This is an historic election, let me actually go with that. I must say, it’s cost me some followers, so maybe some people reading that in whichever way they want to read what certainly wasn’t a political statement. But enough about that. I want to just introduce Dimitri Zebelin. As Ghost indicated, we’ve had Dimitri on the show previously. Dimitri is the head honcho at Pantheon Insights, and he’s really a great resource to tap when it comes to some of the global macro stuff, but specifically when it comes to geopolitics. And the reason why we have Dimitri on the show is that we don’t just want to wax lyrical about the US Elections. There’s a lot of news flow out there. So again, if you’re already kind of tuning out, this show is going to be different because we want to try and tie what’s happened there to what it means from the macroeconomic and the policy outlook and then very importantly, in terms of the markets and the investment outlook.

So with that as the backdrop, Dimitri, welcome back to Magic Markets. It’s always a pleasure having you on the show.

 

Dimitri Zabelin: Thanks, Moe, for having me. Always great to be here.

 

Mohammed Nalla: Dimitri, I’m going to jump in because this was a very, let’s call it tense election. We could certainly see Trump gaining momentum throughout the entire time period. The betting markets in this particular instance were certainly very right. And what we’ve ended up with is we’ve ended up with the Trump or the Republican slate winning across the board. They’ve won the Executive, so that’s the presidency. They’ve got the Senate, and then they’ve also got the House. So this gives them the trifecta, as it’s called. And this has a material bearing in terms of the ability for this administration to push through legislative changes. Why this is important is that there was a lot of rhetoric, a lot of people saying, well, let’s see, can they actually get some of these things they’re talking about across the line?

That’s going to be my opening question to you, is that we’ve seen what happened during the campaign trail. We’ve seen what some of the promises were. We’re now sitting in the middle of seeing what some of Trump’s Cabinet appointees look like. But what is your read in terms of the ability for this administration to start delivering on what was pretty heated rhetoric and some very controversial policy positions?

 

Dimitri Zabelin: Definitely. And I think you put it best, they did get the trifecta. My only question for them is I guess, what is their unifying vision? Because we have an idea of some of Mr. Trump’s policies, which I’d be happy to expand on.

I think the biggest one, I mean, there’s a couple, and I actually wrote about this for my weekly intelligence letter for Pantheon Insights. But we have mass deregulation, mass deportation. Tariffs obviously are big ones and so-called special manufacturing zones or SMZs. Some of these really are more of a secular trend. Some of these are unique to Trump. The really big question and the unofficial narrative or consensus that seems to be going around is a lot of these policies will appear to be inflationary as far as the legislative branches go. Some of these policies will not need congressional approval, like with tariffs, for instance.

Specifically, I think what Mr. Trump will do in his second term, as he did in his first, was specifically cite, I think it’s Section 301 of the Trade Act of 1974, which allows the USTR to be able to essentially launch an investigation and use that as a legal justification to impose tariffs on goods that seem to, or that appear to pose a national security risk vis-a-vis the US economy.

We saw that with this first term when we saw a lot of tariffs imposed against Chinese goods that were imported. What’s interesting though, and the theory goes, at least according to Trump, is that if you tariff imported goods, they become comparatively more expensive than your domestic ones, and then people will then prefer the domestic goods in lieu of the imported ones. The only small problem with that theory is that it doesn’t work, specifically because that theory assumes that everybody has the same labour costs and they don’t. The US has much more expensive labour costs, which is understandable and I would argue morally laudable. We have much more worker protections and regulations versus in Asia who don’t have as many, so obviously the goods are much cheaper. We end up with are just generally higher priced imports. And you also get higher priced domestic goods because they can afford to raise their prices because the imported goods are now more expensive. So that’s inflationary, and we did see how that was inflationary in his first term. A lot of Fed studies actually came out. This isn’t anything that’s partisan, just objectively speaking, not just headline inflation, but core inflation rose as well, which is obviously something investors aren’t too keen on.

It seems, though, that if you look at the stock market, they’re really much more excited about deregulation and are not as concerned about the inflationary impact of tariffs to a degree, because we did see bond yields rise on the expectation that it would lead to later Fed rate hikes in response to the potential inflationary impact. My view on it, though, is that much like in Trump’s first term, the deflationary side effects of these tariffs vis-a-vis their impact on growth and global trade can actually potentially temper some of those inflationary trends.

So in a way, his own policy, which he hopes to increase domestic GDP, may ironically actually reduce it a little bit, but to such a point where it may not cause inflation to go excessively high.

I think the biggest inflationary risk is how they are going to implement this mass deportation. The new border czar, I forget his name, is quite intent on making that happen. I think that will require definitely both the Senate and the House to approve a lot of these plans. I don’t think it can be done just by executive order, although, as I understand it, on his first day in office, he may declare a national emergency at the border which will allow him to divert Pentagon funds. At least that’s how the theory goes. But there’s a lot of potential legal challenges there.

That could be a major inflationary risk and in my view, that one’s the hardest to predict because you don’t know how it’s going to be carried out.

As far as deregulation goes, there’s been a lot of excitement in the stock market from that to the extent that it’ll make M&As much easier. Generally, financials have benefited from this. We saw the financial sector benefit asymmetrically. Tesla skyrocketed. Even though Trump’s not exactly the most friendly to EVs and climate policy regulations, the theory goes that because Musk has been such an instrumental player in Trump’s campaign, in his election and his re-election, that he may go a little bit softer. Those are just some of the initial thoughts I have.

But, Moe, I’d be curious to hear your opinion on the inflationary aspect, because I know here you and I have a little bit of a disagreement.

 

Mohammed Nalla: Yeah, I mean, Dimitri, I was reading the piece that you put out recently and again, for those of you that missed it, you can go and find it on Pantheon Insights and we will include a link in the transcript as well. But the main impact for me is that both candidates were effectively very expansionary on the fiscal front. Trump more so. So no real surprises in terms of first round effects. I think both of those would have been inflationary, and I think those are quite obvious.

Where you and I maybe disagree is that if you draw an analogy to Trump’s first kind of term in office, effectively we had some of that second round effects come through from a disinflationary perspective that helped mitigate some of the inflationary impact. And I think in this particular instance, some of those global choke points are maybe a little bit more intense. I would say that, yes, the tariffs would start to come through. I think when you superimpose, remember during the first Trump administration, we’re not just talking tariffs in this instance. We’re now talking, as you indicate, mass deportation. That mass deportation is going to impact the labour market quite materially in the US. You highlight what a significant chunk immigrants effectively fulfil in terms of US labour in particular sectors. And I think, if he actually stays with that throughout his entire term, some of those price pressures become structural. They get baked in.

Coupled with the fact that we’ve got a declining interest rate environment, I don’t see that second round disinflationary impact or wave being as material or as strong as during the first Trump administration. And in that instance, I think that’s also potentially why you’ve started to see the term premium creep back into US Treasuries, certainly at the longer end of the curve. I think that’s what the bond market is telling us. And if history is anything to go by, the bond market’s generally right. My read on it is that inflationary risks are certainly to the upside on the first round effects and that the second round effects are not going to come through as strongly. It’s a subtle disagreement. I think we agree on the first-round effects. It’s on the second-round effects. Time will tell, but that’s really the main basis for it.

 

Dimitri Zabelin: No, that’s a really good point. And I don’t necessarily disagree with that. And I think that’s why, again, the mass deportation policy proposal that he has is the biggest question mark and in my view, the biggest risk to upside inflation. I think part of that inflation, though, may be tempered by potentially lower energy prices. But I think that’s in large part predicated on reduced geopolitical risks, which is not exactly the theme of the last few years. If anything, it’s increased geopolitical risks. So that certainly has an inflationary aspect to the extent that it can elevate oil prices.

Where I could see a bit of a deflationary downward pressure is from deregulation, specifically in the energy sector. That can make it easier to set up a lot of these oil facilities because we have seen recently, I think, the top five biggest oil companies in the US since 2013 or 2015 have lowered their capex expenditures by 50%. Part of that has to do with focusing on shareholders and increasing the dividends. Another one has just been the climate and environmental policies. And that’s a whole other debate we can get into another time. But essentially, I think a lot of those were hampering it.

I do think, though, in the short term, we may get a little bit of that inflation because I also wanted to address these special manufacturing zones. Trump wants to reduce the corporate tax rate from 21% to 15%, but that’s specifically for companies that would be manufacturing products in the US. I think you could see something deflationary to the extent that these special manufacturing zones, SMZs, would have much more lax regulations and tax subsidies and a lower tax rate that would make it much easier for these goods to be produced domestically.

The part, my own counterpoint to that, though, is that a lot of these things take a long time to go ahead and get started, right? The Chips and Science Act, which Biden put forward, is very similar in that way. It’s about friendshoring, near shoring and onshoring and providing these tax subsidies and a lot of this corporate support essentially to these firms that without it would likely not set it up.

It’s not something that’s unique to Trump, but we did see, I believe, local inflation not necessarily translated macroeconomically. I think over the long term, theoretically increased supply chains could lower the inflationary aspect of a lot of his policies. In the short term, again, I think it’s all predicated on his mass deportation of illegal immigrants. I think to the extent that he is very zealous about it, I think that presents the biggest upside risk to inflation. And I think that’s where your case could certainly be made.

And you did point to the bond markets earlier. They do seem to be forecasting much higher inflation. Yet at the same time, the stock markets seem very excited about the prospect of looser regulations. It seems that we’re almost having two narratives being spun at once, which seem antagonistic by their nature but seem to be co-existing. So in my view, I think generally the stock market will do well, despite the inflationary risks and the subsequent tightening of monetary policy that we may see in response to these policies.

 

The Finance Ghost: Dimitri, I wanted to pick up on something you brought up earlier, which was my number one thing to ask you today, and that is the whole Elon Musk relationship and what it all means, because it’s just super fascinating. He basically just bet the farm on whether or not Trump was going to win. I think that’s the reality of what Musk has done here. And on paper, Trump is not necessarily a huge ally, to your point. He’s not going to be hugely in favour of EVs. He’s not going to be hugely in favour of subsidies, which were very helpful to Tesla for a long time.

In this tariff war with China, China is a huge growth market for Tesla, so if the Chinese return the favor, which I would imagine they will in some respect – I don’t know, you’ll have a good view on that – that’s not great for Musk either. What is he playing at? We know that the US likes to fight a good proxy war, but it feels like Musk just contested a proxy election. Have you got any views on that? Genuinely, for me, that’s the most interesting thing about this entire election is where does this really leave Tesla and Musk?

 

Dimitri Zabelin: Now that’s a really great question. We know that for instance, a couple of months ago, Biden imposed 100% tariffs on Chinese EVs and solar, if memory serves, because they didn’t want to displace a lot of the domestic manufacturing that’s done here vis-a-vis Tesla, even though there’s no love lost between Biden and Musk.

Regarding Tesla sales in China. I don’t have the data on that, so I can’t comment. I’d be very surprised if a lot of them sold there because I know China through their own industrial policies, they are trying to create their own EVs that are comparatively cheaper and state subsidised, which doesn’t surprise me. 40%, I think….

 

The Finance Ghost: …I think it’s more the bull argument is quite strong there. A lot of the stuff we’ve read around Tesla and you see a lot of these bull arguments is to say you’ve got to justify this crazy share price, right? And so they kind of point to the China opportunity and say, hey, this is the biggest EV market in the world. And to be honest, I’ve never bought it. Look, I’ve always been a bit of a Tesla bear and I’ve never bought the China story because I’ve always looked at the Chinese local manufacturers and said, why on earth would the Chinese allow that economic profit pool to land in the US? It just makes no sense to me. I think it’s the weakest of all arguments around the Tesla share price, to be honest.

 

Dimitri Zabelin: Yeah, no, exactly. That’s kind of the point that I was just bringing up earlier is that’s why I would find it quite odd. Though the other point I’ll make is that Tesla is more than just a car company, they’re also an artificial intelligence company. And this is going to be the point that I was going to address later.

As part of Trump’s deregulations, it doesn’t just apply to the financial sector, it also applies to artificial intelligence. He’s made numerous references to wanting to unleash the power of AI and do away with some of these safeguards. Morally or not, that’s really not the argument that’s being made here. Really, the argument being made is: is that risk-on or risk-off? In my view, I think a lot of artificial intelligence heavy companies will perform well under a Trump administration, not just as part of the secular trend of greater AI development, but also as a function of his deregulatory approach, which could lower compliance costs. And in that view, that would also put the US even further ahead of competitors like Europe and China, which have a much stricter AI regime that requires much more political considerations into their AI models that can hinder innovation. So I think to that extent, Tesla will benefit from deregulation as it pertains to AI.

 

Mohammed Nalla: I think those are all very compelling. Ghost, we know you’re a Tesla bear. I think with the share price move, as we’ve seen post the elections, if you were short Tesla, that will have hurt quite a bit. I don’t think you were short, I just think you’re bearish. I said it was in cloud cuckoo land a little while ago. It’s now probably more in cloud cuckoo land. I’d be quite cautious about that.

But I like Dimitri’s comment around the deregulatory impact on AI. It’s one area where the US Is arguably ahead of many other global geographies. And that’s really the signature of the Trump administration, is he wants to put the US in front of China. China’s made significant headway in AI. They’ve made significant headway in EVs, in pretty much any industry that China’s really ahead of the US in. I think Trump’s going to work really hard with his administration to try and get the US on the front foot there. And again, you could construe that as very bullish for certain industries.

I want to pivot from that, just in the interest of time, to some core questions. First and foremost would be on the dollar, because Trump has historically said he doesn’t like a very strong US Dollar. Naturally, that makes them less competitive in terms of the global market from a US exports or products perspective, even services. The dollar has actually gotten stronger, so that’s kind of at odds with what Trump wants to happen longer term. I think the big fiscal deficit, I think a lot of those structural issues in the US will probably be dollar bearish in the longer term, but again the long-term can take a very, very long time to play out by definition. So my first question is on the dollar.

The second one is in terms of all of this that you’ve told us, we know what’s important to the US. I saw this fascinating, I think it was Cato Institute survey in terms of what is important to the US electorate. And at the top of that list was inflation, we’ve spoken a lot about that. Actually, at the bottom of that list was geopolitics, this fight with China when it comes to things like TikTok and Huawei and China spying, that wasn’t important to Americans. It’s about jobs, the economy, inflation and immigration and that’s really why Trump won. You can see some strong correlation and some strong points there.

But if we take all of that and we wrap it up into what does that actually mean for markets going forward? What sectors are looking attractive to you? You’ve mentioned AI. You know, how does that tie up with your world view?

So, firstly, the dollar, and then secondly, other interesting investment opportunities. I would say over the short, medium and longer term, because this does have a term structure to it. That’s probably where we disagree in terms of short term versus longer term effects. A long question, but keen to hear your views.

 

Dimitri Zabelin: Yeah, absolutely. So, regarding the dollar, Trump does have one policy that I do think is, to put it bluntly, quite stupid, which is that in order to stave off people from going off the dollar, he wants to tariff countries that want to de-dollarise, which produces the exact opposite outcome. As you might expect, a stronger dollar is actually good for the US. Now people will say yes, it makes our exports less competitive, but we’re not an export-driven economy, we’re a consumer-based economy. 80% of our growth comes from consumption alone. Exports only constitute a very small portion of it. Quite the opposite of Germany for instance.

But that’s beside the point, because the point of having a stronger dollar is it makes foreign imports that much cheaper. We get their goods, they get our dollars, which means then they are in the US’ geofinancial hegemonic paradigm, which means they can’t dump the dollar. Nobody has any interest in dumping the dollar because then all of their balance sheets would have a massive hole in it and they’d be isolated from a system where most other participants use the dollar. So that’s my take on it vis-a-vis the dollar.

When it comes to the federal deficit, I did address that in my paper as well. We’ve been hearing about an expanding federal deficit for more than a year, more than years, actually decades, and we keep hearing about these long term risks, but as John Maynard Keynes famously said, in the long run we’re all dead! So I didn’t address it too much just because that’s not really, it’s not near enough to be able to be actionable or have any sort of investment thesis around. Until it becomes an issue, which is not to say that there aren’t legitimate concerns, but as far as trading and investing goes, in my view right now it is irrelevant in terms of what other sectors and stocks and industries may benefit.

Something we did a while back actually was on defense contracting stocks and ETFs. I think those will benefit not just as part of the secular trend that we alluded to in earlier episodes as a function of increased tension in the geopolitical sphere, but also because Trump generally wants a stronger US military and generally he is more inclined to build that up. We could potentially see Lockheed Martin benefit from that. Raytheon I think has actually outperformed Lockheed if memory serves, because they’ve been focusing more on aerospace and artificial intelligence and more software versus Lockheed Martin, which is focused on a lot more physical hardware, which is not to say it doesn’t have utility, but Raytheon has been outperforming them, I believe to that extent in large part as a function of their diversification.

I think Palantir will also do quite well. The US government is their biggest client. I think recently the stock has been rising. But also as we see increases in artificial intelligence vis-a-vis its development, I think we can see a lot of those being applied to the US particularly as we get more competitive with China, as we start doing military drills – I think there’s one being done in Hawaii right now to simulate battle in the Asian Pacific. I think you could see those benefits.

Yeah, so Lockheed Martin, potentially Raytheon, potentially Palantir, I think Tesla as well, and then generally AI companies that are heavy in AI. I could see definitely Microsoft also doing quite well to the extent that that sort of deregulation would help with more innovation, even if those companies put on their guardrails. Now, of course you could make an argument saying that poses long term liability risks by not having guardrails initially, but that could be so far in the future that shareholders don’t necessarily care about that. They want to focus more on near term returns, which is not an indictment in any way, I think it’s just the way people think.

So to that extent, I think a lot of the companies that I mentioned and sectors would likely benefit not as just a function of the secular trends that we’ve mentioned in other episodes, but Trump turbocharging them specifically through deregulation and a prioritization of American dominance, not just technologically but also militarily.

 

The Finance Ghost: Last question, we’ve really got a minute left. Emerging markets vs. US – in Magic Markets Premium, we’re very focused on US stocks. Obviously I’m still in South Africa, I would say that my view is that a Trump victory is not great for emerging markets. I think it’s better for the developed markets. Would you say that’s a reasonable summary? Would this be something that tilts you a little bit back towards US stocks maybe, vs. some emerging markets?

 

Dimitri Zabelin: You know, that’s a really good question. I think part of that is a function of general risk appetite and that I think is largely influenced by the Fed because generally you see, with looser credit conditions, we do see a higher risk threshold for riskier assets and obviously emerging markets fall into that category

To be honest, in short, I don’t know the answer. I think in large part that has to do with monetary policy. We did see during the first Trump administration not just a trade war break out between the US and China, but between the US and the EU. And then eventually there are trade wars involving South Korea, Japan, Malaysia, India, Iran, Brazil, a lot of these countries. So there was like this ripple effect where you didn’t just get trade wars amongst G7 and G10 countries, but also intra-emerging market trade wars. I could see that dampening growth. And if indeed we do get higher than expected inflation for a longer amount of time, that leads to higher interest rates combined. That can make a very bearish case for emerging markets. But conversely, if you don’t have as much of a spillover in the trade wars and we don’t have as high interest rates as a function of high inflation, I could see a compelling case to be made for emerging markets.

 

Mohammed Nalla: Yeah, I want to maybe just jump in there as a parting comment. I think the emerging markets question is a very big one. It’s probably a whole entire show by itself. I’ll tell you why, is as Dimitri indicated, there’s the interplay between emerging markets. I think things like the onshoring might actually hurt Mexico because they’ve looked to Mexico in terms of the Chinese circumventing the tariffs by setting up shop in Mexico. Pay attention to that because a lot of those trade agreements might actually come under question, come under scrutiny.

The big question mark for me on the emerging markets is very much the dollar. Dimitri has correctly indicated the upside, inflation risks, the Fed policy and so forth. But I would say that if the dollar stays stronger for longer, that could have a very dampening effect on a lot of emerging markets because remember, emerging markets like South Africa specifically are actually importers from the US. A stronger dollar hurts you. The weaker rand, we don’t really benefit in terms of massive export uptick from that. For me the impact would be that potentially higher inflation in certain emerging markets may further constrain their own domestic monetary policy and then choke off growth.

I would say focus on the dollar for me on emerging markets impact would be really critical if we see the dollar weakening. Conversely, that could be beneficial, better for emerging markets. Some question marks around that, but unfortunately that’s all we have time for. I know Ghost is going to go at me if I say anything further. We are out of time Dimitri, this has been fascinating and there’s so much more for us to unpack. We’re definitely going to have you on in future shows, but thank you so much for coming on to this particular podcast.

For those of you that follow us on social media, it’s @magicmarketspod, @financeghost, @mohammednalla. We’ll also post a link to Dimitri’s social handle on X on the transcript. Go and have a look at that on the website. We hope you’ve enjoyed the show and until next week, same time, same place. Thanks and cheers.

 

Dimitri Zabelin: Terrific.

 

The Finance Ghost: Ciao!

 

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.