Now that Trump is on his way to the White House as the 47th president, it's not too soon to start building a portfolio that will outperform the stock market in the early years of the new Trump administration.
This kind of active asset allocation requires close attention to prospective policy details and their possible impact on specific business models. Not all stocks will perform well under the new administration. Some will perform brilliantly.
Let's first review the likely Trump policies and then consider their impact on certain stocks and sectors.
Under the guidance of Trump advisors Robert Lighthizer (former U.S. Trade Representative) and Peter Navarro (former Director of the Office of Trade and Manufacturing Policy), Trump will pursue a twenty-first-century version of what was originally known as the American System.
The American System was invented in 1790 by Alexander Hamilton and supported by a succession of U.S. presidents and leading political figures including George Washington, Henry Clay, John Quincy Adams, Abraham Lincoln, William McKinley, Calvin Coolidge, and Dwight Eisenhower.
There were opponents who favored agrarian interests over manufacturing interests, including early members of what later became the Democratic Party such as Thomas Jefferson, James Madison and James Monroe. Yet, their financial failures, including the liquidation of the First Bank of the United States (an early central bank with limited powers) and difficulties in financing the War of 1812 led to the success of the mercantilist and manufacturing programs of the American System leaders.
The American System relied on the following policies:
High tariffs to support manufacturing and high-paying jobsInfrastructure investment (public and private) to support productivityA strong army and navy to protect the U.S. but not to fight foreign warsA central bank with limited powers to provide liquidity to commerceTo the extent there was government spending, it was for productive projects such as canal and road building and later to support railroads. To the extent that early central banks existed, they were for secure lending to sound entities (including the U.S. government) and not for purposes such as printing money, fixing interest rates or "stimulus." The entire program could be summarized as sound money, smart investment and a strong military in the service of high-paying American jobs.
The American System prevailed from 1790 to 1962 with occasional periods of agrarian ascendency and some disruptions such as the Civil War.
Beginning after World War I, the neo-liberal movement of Austrian economists and libertarians began to promote globalist policies of open borders, open capital accounts, and free trade.
Of course, free trade is a myth because of subsidies and non-tariff barriers. Comparative advantage is obsolete because the factors of production are highly mobile.
Taiwan had no comparative advantage in semiconductors in 1979, but today they dominate global production. They made that happen through a Taiwanese version of the American System.
In contrast, the neo-liberals were living an ideological fantasy in which globalism was to displace sovereignty. At a minimum, their goal was the encasement of sovereigns in a larger orb of multilateral institutions such as the IMF, World Bank, WTO and the United Nations.
Beginning with the Trade Expansion Act of 1962, the Trade Act of 1974, and successive rounds under the General Agreement on Tariffs and Trade (today the WTO), the U.S. embraced the neo-liberal consensus including drastic tariff cuts. As jobs moved offshore to take advantage of cheap labor, capital followed as direct foreign investment.
The result was the hollowing-out of U.S. manufacturing, wage stagnation, slower growth, greater debt, and a succession of failed wars. The open border policy of Biden-Harris is consistent with neo-liberal views on the end of sovereignty but is a death knell for American jobs and social cohesion.
Trump, Lighthizer, Navarro, and others will return the United States to the pre-1962 glory days with the revival of the American System.
Foreign companies will be free to sell goods to Americans but only if they are manufactured in the U.S. This will lead to a wave of inbound investment in the U.S., a reduction in U.S. trade deficits, a stronger dollar (as the world demands dollars to invest here), and higher wages for U.S. workers. Higher wages will raise real incomes, stimulate consumption, decrease income inequality and expand the tax base to help reduce deficits without raising tax rates.
Sectors that will benefit from the return of the American System include:
Oil and natural gas drilling, production, and refining. This sector will benefit from Trump's "drill, baby, drill" policies including increased leasing on Federal lands, increased offshore drilling, replenishment of the Strategic Petroleum Reserve, new pipelines, and expanded refinery capacity.
Mining (gold, silver, copper, lithium). Industrial metals will be in increased demand related to the expansion of U.S. manufacturing. Precious metals will be in demand as a hedge against geopolitical uncertainty and as a non-digital store of wealth.
Defense and National Security. This will especially benefit defense and intelligence contractors with extensive R&D programs. The U.S. does not need more obsolete weapons; we need newer and more sophisticated weapons to keep up with the high-tech systems that Russia is using. AI will be a valuable tool in intelligence analysis, especially from open sources (OSINT).
Automobile manufacturing. Foreign manufacturers will face huge tariffs. This will include Mexican manufacturers that are fronts for China. The United States-Mexico-Canada Agreement (USMCA) will be modified as needed to accommodate the tariffs.
Cryptocurrency plays. Trump will ease SEC and other regulatory constraints on cryptocurrency mining, distribution and use.
Banking and finance. As the economy grows, banks profit as intermediaries without the need for high leverage and high risk.
Trucking and airlines. These sectors will benefit from lower prices for refined products such as diesel and aviation fuel (basically kerosene).
Sectors that will underperform in a new Trump administration will be Big Pharma and Big Agriculture under the motto of Make America Healthy Again.
Robert F. Kennedy, Jr. will lead this effort. Elon Musk will also lead an effort at government efficiency, which will hurt the profits of government contractors in sectors such as health care, education, and the Green New Scam (including EVs, and windmill manufacturers). DEI initiatives will wither and die. Portfolios that invest heavily in China or use ESG metrics will underperform.
Be sure to invest accordingly in the coming return of the American System, and rejoice as it brings prosperity back to U.S. citizens.
The Daily Reckoning