Trump 2.0: Political Risk and Complacent Markets, with Economist Larry Hatheway

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Welcome to Many Happy Returns, where we aim to make you a better investor. I'm Roman and I'm Michael. Political risk is one of the most unquantifiable aspects of investing. Shifts in regulation, tax and trade policies can shake economies and upend asset prices.

Our guest today is economist Larry Hathaway, who argues that markets vastly underestimate the dangers of a second Trump presidency. And in today's dumb question of the week, we ask, are trade deficits a problem?

All right, let's get into it. Today, we're delighted to be joined by Larry Hathaway. Larry is co-founder of Jackson Hole Economics and brings decades of experience advising institutional investors and family offices. He has served as chief economist at major investment banks and asset managers and has a PhD in economics, as well as a masters in international studies, a dog, chickens, bees, sheep and goats. Did I miss anything? Thanks so much for joining us, Larry. It's a pleasure to be here. I really love it.

So today we're going to talk a little bit about political risk, aren't we? Because as investors, the conventional wisdom is that fundamentals are what matters to markets. So we focus on things like economic growth, inflation, corporate earnings, all that stuff. But can we really ignore politics?

No, I don't think we can in large part because politics also determines those same fundamentals that we typically focus on. Choice of president can affect things like taxation or regulation, which surely matters for the fundamentals that drive say equity or credit market returns.

The president can also impose tariffs, which also might have impacts on inflation, interest rates, how the Federal Reserve responds, all those sorts of fundamentals that we also typically focus on. I think political economy is perhaps the best approach here. Do you think that markets see crises coming, or do you think it's the case that they're not really aware of these things before they happen?

I think that in many cases markets and some in markets can perhaps see the contours of bigger shifts underway. I am, of course, reminded of the historian Al Ferguson, who really launched his career academically, if not otherwise, by pointing out that markets were seemingly oblivious to the catastrophe that was World War I on the eve of that war.

Some might quibble, but perhaps markets then weren't quite so well-developed, electronic, and instantaneous in their communications they are today. But I think that's actually to miss the point. The issue I think at hand is that when there is truly a discontinuous event, a move as were from one state of the world to another, I think markets have a very difficult time anticipating that, and not just markets, ordinary human beings as well.

It reminds me of I was reading a piece in the New York Times recently where on the eve of Putin's invasion of Ukraine, the US diplomats were meeting with their European counterparts and showing them satellite pictures like here are all the tanks lined up. He's going into Ukraine and everyone's like, no, it's a bluff.

It's just like we just deny what was in front of us sometimes, I think. Yes, I mean, that's another aspect of this that I suppose would take us deeper into areas of behavioral psychology and its applications, economics and finance. And that is whether we look for confirmation of what we were previously believing or wanting to believe anyway. And that surely also can blind us to some things, particularly if those things are unpleasant, which are example, I suppose, of Ukrainian, the Russian invasion of Ukraine.

is one such example.

I just remember just before Brexit, when I was looking at a Bloomberg terminal, and I was looking at the skew on Sterling versus the dollar, and it was pretty clear that markets were just not pricing in Brexit because, of course, we were the metropolitan elite. You know, we were people living in London in our own echo chamber, and it just seemed like an economic own goal. So it just seemed very unlikely what happened. I don't know why you're doing the past tense, Roman. We're still the economic elite living in London.

And perhaps to circle back to the metaphor there, I remember myself living as I did at the time in London, so in Great Britain, that many of us tried to use the example of the then-champions in the Premier League, that is Lester City that year, that no one had tipped to even remotely have a chance of winning. So whether we're talking about, let's say, betting markets or political events, such as Brexit, there are occasional times when

Yes, those things are utterly unanticipated and as a result, we're often big reactions. All right, enough about the past. Let's go to the present. Are markets complacent right now? From my point of view, they seem to be. We're at all-time highs and near-record valuations on stocks in the US.

I think there's perhaps a degree of complacency. I'm not as troubled at the moment by, let's say, the euphoric reaction of equity markets and some other risk assets to the, not just the Trump victory, but the so-called clean sweep of both houses of Congress, noting as well, one should add, that the powers extend beyond that, the federal judiciary all the way to the Supreme Court is,

Certainly loaded with many sympathetic judges and justices and the regulatory apparatus of Project 2025 is to believe will also be very much as it were aligned with the kind of objectives of this administration. And most of those objectives lower taxes and lighter touch regulation being two of them.

are very equity friendly. So on some level, the kind of instantaneous response building after all on a very strong market rally for the last couple of years is understandable. That still doesn't address the question whether risk around that is in any way in the market price. And there, I believe there is very little if any pricing of what I foresee as legitimate risks that should concern investors.

So what was great about your article, Larry, as always, is it really lays out clearly what could potentially go wrong with the Trump presidency. So what do you think are the key policies which could potentially be problematic down the road?

The starting point is an economy that Donald Trump will inherit as president that is essentially fully employed, maximizing the use of not just the labor market to its fullest extent, but perhaps many other areas of what we might describe as an economy running at its potential.

At that point, then we have to ask what sort of policies will be put in place and what will they do to that set of circumstances. And the policies of both tax cuts, which I think we all anticipate, not just the extension of the 2017 tax cuts, but perhaps going further in the sense of lowering and incorporating tax rates is one example of that.

Together with the unleashing of animal spirits, after all, the market itself is anticipating higher earnings. That's surely one of the reasons why equities have moved higher. There's higher earnings in and of themselves along with several other factors up to unleash stronger business investment spending. So we're going to see at least two forms of a positive aggregate demand shock in an economy that's already fully employed.

That alone should give their Fed reason to pause and while they didn't in their most recent meeting and may not in December when they could cut rates again, I think it's highly probable that the Federal Reserve will have to step back and reassess.

As a result, and we've seen it in markets, there's a tendency here for interest rate cuts to be priced out and from long-term interest rates to drift a bit higher. So far, so good. But on the supply side, there may be two adverse supply shocks. One is tariffs, which reduce obviously the supply of imported goods.

And the second is a crackdown on the border that is either slowing or potentially through deportation reversing the flow of that immigration in the United States, which would obviously crimp labor supply. It's important to note that labor supply has been a big driver of US economic growth since the pandemic ended. So from that perspective, if you have both a positive demand shock and a negative supply shock in a fully employed economy, one should expect that there's going to be upward pressure on prices

and more importantly on interest rates, the bond markets are factored that into higher bond deals. And the Federal Reserve should begin to signal its preparedness, perhaps by the spring or mid part of next year, to perhaps raise interest rates as might be necessary. And that, in turn, would put the Federal Reserve, it seems to be on a collision course with the White House.

This White House wants many things and will probably get many things, but one of the things it does not want to see is higher interest rates.

From that perspective, there is every risk, which is not at all pricing capital markets, that the White House will try to influence federal research policy. The shape that that may take the form is to be determined, but should it occur, it is a significant risk, perhaps the greatest since the financial crisis of 2008 to the health of capital markets. And in no way is that type of risk anywhere near the minds of investors at the moment.

Well, let's come back to the Federal Reserve Independence question, because as you say, that's a big issue that could go wrong in the next few years. But I wanted to focus on Trump's policies, because in your article, you wrote about what could be described as a contradiction. So Trump tends to want to close the trade deficit. So you have a weak dollar he often talks about, and to have low interest rates, whereas some of his policies kind of push in the opposite direction to all those things, right?

There are. And some of them are just logically inconsistent, which probably shouldn't surprise us. It's not just a Donald Trump problem. That's a fairly universal one amongst politicians, unversed in the wisdom of economics, I might say. But the second is, is that sometimes there just are unintended consequences. Once again, if you have strong growth in a fully employed economy, you're not likely to see low interest rates. You're also likely to see an appreciation of your currency.

The latter, of course, will tend to, all things equal, widen your trade deficit, making imports cheaper and your own exports more expensive. So, you know, politicians might like to have everything on the fully employed economy with low prices, low interest rates, and the trade surplus. But that's probably an unachievable set of objectives, so you kind of have to accept your lumps where they may arrive.

Is this why they're talking about laying off so many federal employees, just to free up some space in the labour market?

Well, I think that the issue around call it efficiency in government laid off federal employees, maybe closing down parts of the bureaucracy is always a popular one amongst voters. Voters seem to have this perception that there's a great deal of waste and fraud in government, and surely there is a bit of waste. I'd rather doubt there's much fraud, maybe with the exception of in the White House itself, but that's another story I'll put down.

And from the perspective of waste, well, yes, it's popular for politicians to say they're going to root that out in the federal bureaucracy or any other government bureaucracy. It doesn't, on any laws of estimates, amount to a hill of beans around the issue that also concerns voters, which is budget deficits and growing amounts of government indebted this. Those will not be solved by root out waste and fraud.

Ronald Reagan tried that hand back in the 1980s, and it was very, very ineffectual. He did some other things, perhaps quite well, and certainly very effectively, waste and fraud and reduction of deficits was not one of those.

Coming back to the Federal Reserve, I think, obviously, if there was some kind of shaking of the independence of the Fed, then bond vigilantes would probably take issue with that. And we could see a spike in US yields as we saw in the UK when we had our very own trust budget.

which caused a huge problem in the bond market and in the pensions market. But I was wondering about when Powell's term ends. So this is going to be in May of 2026. Do you think he'd be able to appoint Trumpnesses? Would he be able to appoint someone who would be a yes man, who would be situated in the Fed itself?

I want to be gender neutral here. It could be a guest woman as well, Raman and Michelle Bowman is considered as one of those individuals as a woman and maybe also as a yes woman. So a couple of points here that this should be made. First of all, I think it was absolutely remarkable, indeed stupendous, that the chairman of the Federal Reserve had to answer questions about whether he would

resign if asked by the president. I don't believe that's ever happened in my professional career in financial markets. And then had to attack on in response to a question that the president didn't have the authority to fire him. Not permitted under the law. Yes, under the law. And that is a simply remarkable attitude non-explored territory in the relationships between the White House and the Federal Reserve.

To which I would also quickly add that it seems to me, and I'm not a lawyer, but that Jerome Powell on the second question was narrowly correct and broadly wrong. To put it this way, under the current law, it is true that the Federal Reserve Chairman cannot be fired by the President. But we have to remember that the Federal Reserve was not established by the language of the Constitution, but rather by an act of Congress.

And it simply takes the mere act of Congress, which Donald Trump's party now controls both houses of, with obviously the signature of the president, to change that law to make it, in fact, possible to fire him or to, as we're outnumber him on the board. So from that perspective, I think it was actually not quite the right factual answer, even if it was the one the federal chairman had to give, lest he accept the capital markets about his potential fate.

was the correct answer not permitted under the current law? That's right. I think that would have been absolutely appropriate. Imagine if he said that. He's a very careful person, chooses his language very, very carefully. And I applaud him tremendously for what he said on that particular occasion. Where his thoughts were running, I can only speculate.

The challenge for the markets, of course, is that if you begin to question the Independency of Central Bank to in the case of the United States, pursue its dual mandate of price stability and full employment in perhaps exchange for something else, you have to then begin to think about a risk premium that must enter in into both the bond market as well as into the equity risk premium through the perhaps more conventional ways that we think about those things.

Nothing like that is inside of the moment. The best I can tell, obviously, these are unobservables, but there's no really no evidence I can detect that creepiness way into market pricing. So this would be a genuine shock. But at the final point, too, here, and I think you mentioned in your point there in your question, which is the following is that it's sad, and I think it's largely right, that there are very few guardrails now in the second term of the Trump presidency.

It's best I can tell, there are no adults left in the room. I'm not sure what to call them, but I wouldn't call them adults. And therefore, there really is, in my view at the moment, only one institution that can constrain the president, and that is indeed the bond market.

And not on obviously all areas, but the areas that touch on economics and finance and particularly the conduct of monetary policy. The bond market is not a voting machine that doesn't have political beliefs. It simply is a mechanism to store wealth and those people who have their money in the bond market don't really care much about politics. They only care about the wealth they have there.

And if the president deemed it sort of for some reason that would escape me to be appropriate to challenge the independence of the central bank, I think the bond market would be his great come-up. Sadly to the detriment of all of us who also have money invested in capital markets, by the way. He seems to be willing to flirt with norms to put it mildly, especially around the Treasury market. Like he did talk about how the Democrats should default on the national debt, right?

It said the unsayable. Right. And this is the, I think, the point of those who push back who say that we can't take Trump literally. But in some cases, it seems to me we can. So it's hard to know quite where we can and where we can't. And to pose the question would suggest that there ought to be at least a risk that you might be wrong if you are unconcerned, as it were, about its ability to mess around with the independence of a central bank.

But I would say this, what we're really talking about is something that's very, very I think close to what used to be talked about in the day when we talked about mutual assured destruction in a bipolar nuclear world. This is actually mutual assured destruction. It would both destroy the bond market, but it would also destroy President Trump's presidency and his legacy. And from that point of view, there may be some rationality in the market that they understand

that no matter what you might say in terms of breaking norms about what is said, there is no teeth behind any of these threats, because ultimately it is, to use Raman's earlier analogy, an own goal. It's probably more like letting in 10 goals at once, but whatever it still is an own goal.

But just thinking through that scenario in which we got a rapid re-pricing of risk. So we price in a risk premium for treasuries, for credit markets, for equity markets. Really, it seems hard to find somewhere to hide in that kind of scenario. What would the hedge be if there was one?

Yeah, that's a great question. I think you're right in the premise that there is nowhere in what we'll call the normal capital markets to hide from a sharp increase in bond yields and what it would do to equity credit markets. And by the way, to the institutions that intermediate those markets, the kind of reductions that would emerge would really, I think, very much challenge the

The viability of various financial institutions, we never know which ones, but I'm reminded of what happened in 1998 with long-term capital market and its ability to bring down some really disparate groups of folks had it not been in some way cobbled together in terms of a rescue package.

That still leaves open the answer to your question. Cash is always, I suppose, an alternative, though, if truly the independence is compromised. Cash loses value relative to all other goods in the form of inflation. So that may be small comfort. There are those who sort of believe that maybe cryptocurrencies or gold might be the answer there.

I'd rather not apply more on cryptocurrencies, which I think are a rather unethical instrument, the full stop. But I suppose gold is one of those places where people might find some refuge. Let's hope we don't go there, though. Hope it's not a strategy.

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It seems to me, as a sort of distant observer on the other side of the pond, that Americans don't really know how lucky they have it in terms of the financial world, right? The dollar is the safe haven asset. Treasuries people around the world buy treasuries. You can run a huge trade deficit without too many consequences, right? Is that just being taken for granted by Americans?

Oh boy, this opens up a whole area where I share similar abuse and I would say it goes beyond abuse, but there's probably more about genuinely concerned about essentially what is driving Americans to make some of the political decisions they do.

So there are a lot of things here that are curious. I think we can from the narrow, let's say economic perspective, look at a whole host of Americans who not just in the COVID period experienced some declining living standards due to higher prices that ensued from that era, but who probably now look back on perhaps decades of experience where living standards have generally stagnated or certainly not risen very quickly.

going back to the earlier topic of behavioral economics. I think that that's a discipline that tells us that happiness, whatever happiness might be, is not absolute, it's relative. So the massive skew of income in the United States is surely something that's gnawing away and eating that they have not.

and watching the haves jump around on stages doesn't seem to deter them with their Trump voters, but for perhaps a whole host of other people it is a concern. So there could be lots of reasons why Americans don't seem to be very happy with their lot, and they certainly have thrown their lot in with someone who is not likely to make them all that happy going forward either.

Could we focus back on the trade deficit and also tariffs? Because I think I was quite shocked. There's someone on TikTok economics called Kyla Scanlon, who says that when she goes around and talks about tariffs, only about 20% of people realize that a tariff is actually a tax on people in the US rather than abroad.

So do you think that understanding is part of the problem about why people don't understand the importance of raising tariffs, even with existing trade partners outside China? As on a serious note, economic literacy has never been all that high in the general public, and it seems to be particularly wanting at the present

Not much we can do about that in the short run, but your assessment of tariffs is, of course, absolutely correct. There is, of course, still this issue about how much of it is bluster and how much of it will actually be put into place. My sense is that tariffs probably will be raised on some countries, first and foremost, China, and across perhaps more industries in their case for reasons that are varied, both economic as well as national security.

The reality, though, of course is that tariffs are borne by the domestic residents. They are akin to a sales tax. And that doesn't seem to have really been part of the national consciousness for those people who thought that Donald Trump was going to improve their living standards relative to his.

and opponent Kamala Harris. But as I said before, I don't give the American public particularly high marks as a professor, by the way, of economics for their understanding of the discipline. What about the British public? What are you going to give us? Medium marks? It has to be higher. That understanding breaks it. I still have a soft spot for Britain, and it's basic understanding of what I would call public policy. Maybe it's undeserved and that reflects the bias of mine, perhaps.

So let's try and add a bit of balance because we've talked about what could go wrong a lot. But what could go right with the Trump presidency for markets? Yeah. So, I mean, what could go right is exactly what's unfolding at the moment. It has to recognize that if you are an investor in either public or private equities or other instruments that are fundamentally determined by the health of a company as measured by its profits and its cash flows, like say, the existing companies

All of those assets are going to receive if expectations prove to be correct. What a considerable boost from lower taxes, so after tax returns will be going up for those companies and hence for their investors. And as a result of much lighter touch regulation, which is going to extend from sectors as diverse as fossil fuel energy to pharmaceuticals, at least relative to what they might have anticipated under

a Kamala Harris presidency to many other sectors as well. And so from that perspective, the good news for investors is what we're realizing at this very moment, which is a surge of equity prices, that at some point may get overdone, but at the moment is surely justified on the basis of the kind of policies, the business-friendly policies that markets anticipate.

Business-friendly policies to US companies maybe. But I think there's a risk that the administration in the US gets more activists where foreign regulators are coming down hard on, let's say, US tech companies, like in Europe, right? The EU loves to find an American big tech company.

Yes, and fixed in that point. I mean, you're absolutely right. The rest of the world can have it say around things like market abuse if you're talking about a monopolist or a near monopolist. And Europe has demonstrated a really is to take that on in the past, the EU, that is, and they do so in the future.

should be noted as well that this administration is business-friendly for most, but it may not be business-friendly for all. If one looks at the vice president, or vice president, elected in advance, he is someone who, despite having spent a bit of time in Silicon Valley, takes a rather dim view of some parts of it. And so the idea that ancient trust could be wielded by

The Justice Department of the Federal Trade Commission in a Trump administration was not far-fetched at all. And where I think they believe that there might be both perhaps an economic argument, but maybe even more importantly a political argument to do so, I wouldn't rule that out. So it's not across the board if everybody's better off. I think there could be some who crossed the line.

And of course foreign businesses themselves will not be favored if they try to access the U.S. market through their exports hour imports. So there's clearly going to be an anti-business tilt in that direction which comes back to tariffs. Those that decide to relocate their production within the United States will of course, I think, see quite a bit of beneficial freedom for doing so.

Do you think that the policies to do with trade with China would actually improve that relationship long term, given that currently China is in quite a weak state economically? So it's likely that tariffs would be quite a good bargaining chip. So this might actually be a net positive long term.

Yeah, so I certainly do believe the idea that tariffs are being used for many purposes and one of them may be to achieve better outcomes that is as a bargaining chip to see if policies can't be changed.

The extent to which, however, those better outcomes are economic, I think, is a bit in question. The extent that those might be used as a way of trying to dissuade whatever countries, whether it's China or others, to either not pursue, let's say, geopolitical strategic military objectives or some other sort of wielding of power through the weaponization of trade, that's a different story, of course. It may or may not deliver economic benefits to anyone.

I do think, though, that in the context of what we're talking about, we have embarked on, and Brexit was the starting point, I suppose, at least certainly a marker, on a process of gradual de-globalization anyway. Certainly, if you measure it in terms of trade as a shareable GDP, we've seen it peak and begin to move lower over the course of roughly speaking. Now, the last decade,

The measures and things we're talking about whether they are terrorists or whether they are forms of industrial policy or non-tariff areas or restrictions on immigration and possibly even maybe one day restrictions on cross-border capital flows.

all would be a continuation of something that may have coincided with Trump's arrival on the political stage, but this is some extent we're unfolding anyway. And therefore, to your question about, let's say, beneficial impacts for China, China has started a policy in recent months of trying to now support its economy again.

Perhaps to try to provide a bit of a bootstrap to get to a better place than it was going to be headed to on the basis of its own internal problems and some of the challenges that a Trump presidency in terms of trade restrictions would have imposed upon it. That too could be seen as a good thing. I mean, I think China had already made up its mind that it was going to try to stabilize economic conditions, which is certainly welcome for the world economy, but may or may not flow directly from the threat of tariffs.

Is it a problem that Trump will be taking office when equity valuations are extremely stretched in the US? Because he seems to measure his performance at least somewhat based on is the stock market going up. He likes to get up and to the right. So it's harder for that to happen, I guess, when valuations are where they are now.

Yeah, I mean, I think he does until he does it, right? Obviously, as COVID sort of arrived in early 2020 in the stock market, Tumble, he stopped talking about stock market as a measure of his performance. You know, with Donald Trump, most of the rhetoric is heads, I think, win, tails, you lose. And so therefore, if it doesn't go his way, it's someone else's fault. And he stops, you know, perhaps focusing on that.

You know, that's mostly the stuff of politics and rhetoric and narratives and whatnot. Fundamentally, I don't think that voters really are persuaded or influenced that much by markets. That then the case that Kamala Harris would have had a cakewalk to the presidency, given the strong performance of the US equity market of the last couple of years.

They're going to be more concerned as we, I think, just discovered about their real living standards. Are there wages rising faster than prices, as I suppose what ultimately boils down to? Can they buy a house? Can they afford a car when they need one or one? That's the metric by which, from an economic perspective, any president now will be judged, and that includes Donald Trump.

I was listening to a podcast about investing in the US and potential trades that could still pan out. And it was interesting because one of the things they discussed was reduction of immigration, but also deportation of illegal immigrants.

And we were looking at a Peterson Institute report recently, which we discussed on the podcast, and it showed the different sectors which would be negatively impacted. Agriculture was one of the big ones. And the slightly glib response to that was that no problem. We're just going to automate the picking of blueberries. So it's not going to be a problem. We could just shift the way we produce. Do you think that's plausible?

Well, I don't know enough about the technology of blueberry picking, but I don't know. I gave you the big sell as a farmer in the introduction. Now, despite the fact that I have a small farm here, I do pick it all by myself, as it were.

And obviously we've mechanized large parts of agriculture, but it's taken us a long time to do that, starting with the cotton gin and moving forward to the combining wherever we are today. So yeah, I mean, I think in some very long run sense, maybe mechanization will fill certain gaps, but we do live in the short run. And the short run in this case would be long enough that if it came to mass deportations, including from agriculture, from domestic services, from

but literally mowing people's lawns as it were, that sort of thing. I think that people would find that their gardens have weeds and their grapes cost a lot more. And those things might be the realities that ultimately constrain how much of that kind of thing goes on. But I will note that the administration's first appointments in that space are very, very hard line.

not just anti-immigration, close to the border types, but deportation types as well. So I would have to say right now this is one of those cases where we're probably more apt to or should be more thinking about taking the matter word.

Okay, well it's pretty dark so far, so let's try lighten the mood. I speak to a lot of people about their portfolios and we talk about high valuations and concentration in the US and we've just seen this Goldman report which talks about US returns not being for the equity market being greater than that of treasuries over the next decade, which from Goldman is quite a shock.

So if you were to position your portfolio today, how would you do it in terms of risk assets and would you price in more Trump risk than maybe it's currently priced in by many people?

So starting with the second part first, if I'm a tactical investor looking at my return profile over the next three to six months, I don't mind extending it perhaps a bit longer than that. And I think I really want to be invested in the equity market now. I think I want to move from longer duration government bonds to sort of duration lower quality credits, US credits. Both of those again benefiting from the improvement in after tax cash flows of the corporate sector.

going to be along the U.S. dollar against most other currencies. And that really becomes sort of the core set of holdings, which one could express, obviously, through a variety of different instruments. On the other side, I would be cautious, as I probably have just suggested, of the longer end of the U.S. sealed curve. I think bond yields are going to back up a bit from here, so I think that's going to be a weaker performing asset.

I think this is going to be a little bit more of a challenging environment when you combine a stronger US dollar with some higher US interest rates for local currency emerging debt. That's an asset class that typically struggles in that kind of environment. What about gold? You said that was the ultimate hedge. Is that not getting a little tickle in your portfolio?

Gold would be a potentially a hedge instrument. The problem I think with many investors, and I say this with some regret, because I do think a portfolio construction is effectively about giving away some of the upside for greater stability, in other words it's akin to purchasing insurance, but most of us

really mash our teeth when we write the check for the insurance policy, get on our auto or life or our home. So with that caveat aside, you can add some portfolio assets that will generally reduce return in good times, but might act as a stabilizer over the median term. And gold is surely a candidate in that regard. It's a wasting asset in most in most states of the world, but in a few states it can actually be fairly helpful.

It's kind of weird, isn't it, that that insurance policy has been paying out really well over the last year? It is. The one of the reasons, by the way, to be a little bit, let's say, less enthusiastic about goals prospects going forward, I suppose, is a quick combination of several. First, as a non-interest-bearing asset, it's going to tend to underperform an interest rates arising, which I would anticipate. Second, as it's priced in dollars, you're usually quoted in dollars. It generates it quite so robust when the dollars are appreciating.

And third, it should be noted that it's finally got after several thousand years, a bit of a competitor out there called cryptocurrencies, which for some people is a close substitute. I won't necessarily go there, but because there is that substitute in people's eyes, maybe gold has lost a little bit of its lawsuit.

As someone just observing what's going on around me, I think that the other thematic play that people really have to pay attention to is defense spending, right? And it might take the form of being tact-like, as in drones rather than guns, although I think it's probably both. And that's because, you know, as the U.S. under Trump continues the process, accelerates the process underway now for quite some time. We're joined as the global hedge among when it comes to so many things, but including defense.

Every part of the world that I think of that's of any significance to the possible exception of Latin America is going to arm itself to the deep, right? Western Europe has to take another responsibility, Korea, Philippines, Vietnam. South Asia is already, of course, headed in that direction rapidly. We'll only accelerate.

And so while it's a terrible theme as an investment manager, investment advisor, to try to sell to your clients. I mean, that doesn't require elaboration. It's nevertheless one of those themes that I think at some point one has to want to consider, right?

It's also interesting that foreign allies of the US will be trying to appease Trump by buying stuff off US defense contractors. Taiwan is promising a huge package of purchases of fighter jets and whatever else. Maybe skewed disproportionately towards the US military industrial complex. I don't disagree with that. Let's hope those bombs never have to be used. Indeed.

I hope you're enjoying our interview with Larry Hathaway. He certainly taught me a great deal about investing over the years. And if you want to learn from us in turn and from our community, you can do that very easily. You can find out more simply by going to our website, pensioncraft.com slash membership.

Okay, today's dumb question of the week is, are trade deficits actually a problem? An economist would say no for the following reason. If you're running a trade deficit, it means that you're attracting capital from abroad.

And therefore, if that capital is being put to good productive use, it's helping you build more factories, create more jobs, invest in more technology that will promote stronger growth in the future, then run up that deficit because essentially someone's giving you money to improve your future. If, on the other hand, running a trade deficit simply defines your current consumption.

Individuals want to spend more than they earn, or the government not only wants to spend more than it takes in on taxes, but wants to spend it on current entitlements, current benefits, and giveaways to its citizenry. Well, then a trade deficit is a pretty bad idea. In general in life, you don't want to borrow just for fun. You want to borrow to grow into the future. So the answer, the shortest answer to trade deficits being they're good or a bad thing is it really depends.

So I remember when talking to economists who worked in EM, they were always talking about double deficit and how it was a huge problem. But if you look at the US right now, I think it's the case that you have a double deficit. So why isn't that the problem for the US? And why is it typically seen as a problem for EM countries?

Right. Can I put my hand up as the anonymous economist here? Can we define double deficit, please? Yeah. And the term that I always heard, but it's the same thing as the twin deficit problem, double this deficit, twin deficit. So, first, just terminology, right? There are many deficits that we could imagine, but the two that we're talking about here is a government budget deficit. The government spends more than it takes in taxes.

A story familiar worldwide, but certainly familiar to the United States the last time the U.S. ran a government budget surplus was in the final year or two of the Clinton administration at the end of the 1990s perennially and ever since the end of the second rule for the government.

of the United States runs budget deficits. That's deficit number one. The second deficit is the trade deficit, which occurs when you import more than you export. That is, you buy more from folks abroad than you sell to them. The two of them can be linked. They are necessarily linked at the hip. One has to also incorporate things like domestic investment and savings.

to really come up with a robust framework that links the two. But loosely, they are in Raman's question, therefore, gets at an important issue that we quite often do see these twin deficits, those deficits occurring at the same time. In the emerging complex, there is some limited degree tomorrow, right? So if you're running a trade deficit and you are borrowing from abroad, you may, at some point,

reach a point where you no longer can borrow. And that's typically because, at least historically, governments in those countries often borrowed not their own currency, but in a foreign currency. And they ultimately had to be able to generate enough of that currency to repay the amount that they had borrowed, at least to service the debt. And that would only occur if they turned those trade deficits into trade surpluses.

Not only is the easiest thing in the world to do, so you did have these sudden stocks of foreign financing in the emerging market crises.

U.S. is in the privileged position, which, by the way, Great Britain was in the 19th century, and even perhaps early 20th century, that it can borrow in its own currency. So it certainly doesn't face the problem that it suddenly has to raise yen or euros or renminbi or anything else to repay its debts in. It tends to borrow U.S. dollars. So it does not share that in common with those emerging countries that I just mentioned.

Moreover, the US has an exorbitant privilege that people generally want to hold the US dollar.

And therefore, they're very happy, as it were, to also pull assets in US dollars called US debt instruments like US Treasuries. And that gives it even greater borrowing capacity than, again, those emerging currencies. But that doesn't mean that US can borrow without any restriction or any limitation over time. There are limits to everything. That's where trees don't grow forever into the sky. But the US is probably a long, long way away from any such limit

of borrowing something that it does to jar people's confidence in its own bond market that is the instrument in which it borrows for its own currency, both of which are possible. We shouldn't exclude those possibilities. But given those starting points,

The US can and has in the post-war period generally had relatively large budget deficits and excess of spending over taxation, typically in the area of 2% to 3% of GDP and often much more than that. They were in the 67% of GDP range. And it's typically run trade deficits also in the vicinity of 2% to 3% of GDP, sometimes a little bit larger than that.

So it's a privileged country. Long made the privilege last, but let's try not to abuse it along the way. So on the trade deficit point, Trump has talked about narrowing that or reversing it. Is that even possible given the setup of the world?

So there is an economist will note, and there is an unholy trinity. You cannot promote investment in excess of your savings, the savings of ordinary people. At the same time that you run a large budget deficit,

and have a trade surplus, that is, a mathematical impossibility. It is not about economic theory, and it doesn't matter what school of economics you went to, the most conservative church of economics, the University of Colorado, for example, or the furthest left

the School of Social Research at in New York City, the economist trained in eye of those places would give you that same answer. It is an accounting identity and a mathematical certainty. So if a president comes along and says, I want to have an investment boom because I'm going to create very favorable conditions for firms to operate in through low taxes and light touch regulation.

I'm going to provide a huge tax cut to everybody and then turn around and say, and I'm also going to run a trade surplus, which you've identified as one thing and one thing only. And that is a fool, someone who does not understand the basic principles of accounting or economics. Trump's never got into problems with accounting before.

for joining us for many happy returns. Do send us your questions no matter how dumb at the email address, mhr at pensioncraft.com. And do remember to check out pensioncraft.com for all the information about our membership and investment coaching options.

Many happy returns is a pension craft production. Co-hosted and executive produced by Romino Kiese and Michael Pugh. This podcast is for informational and entertainment purposes and is not financial advice. We do not provide recommendations or endorse any decision to buy, sell or hold any security. We cannot be held responsible for any actions listeners may take and investors are encouraged to seek independent financial advice.