The current situation after 2 months of the Trump regime

Executive Summary:

The new US government is damaging consumer confidence and thus economic growth by threatening inflation-increasing tariffs and the chaotic destruction of public authorities. Tariffs are also dampening the willingness of US companies to invest, reducing their planning security. In addition, US companies are burdened by possible counter-tariffs from the USA's trading partner countries. As a result, economic policy uncertainty in the US is rising massively, while it is already falling again in Europe. These developments have significantly depressed the US dollar and US share prices in just a few weeks. Plans by one of Trump's economic advisors to "voluntarily" swap the US government bonds held by other countries as foreign exchange reserves for 100-year US bonds without interest if the US wants to continue to enjoy the military protection of the US army would massively weaken the USA's credit rating. As it has been decided on the other side of the Atlantic to significantly increase investment in the European armies and to invest in infrastructure again to promote growth, particularly in Germany, there is further potential for the euro to appreciate against the US dollar. As a result, there is a high probability that non-US stock markets will outperform the US market in the coming years. Gold will also continue to benefit from this difficult environment, particularly for the US, and a weaker US dollar.

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Just 8 weeks after taking office, consumers in the USA have already given an unflattering assessment of the new US president. In the 869 months since the survey of US consumers began in 1952, they have only been more pessimistic in 13 months than in March 2025 (chart 1). Even during previous recessions, respondents were far more upbeat (gray dashed line in chart 1) than they are today (red dashed line). The US economy is likely to suffer considerably under this regime - the serious term "government" can hardly be attributed to the Trump team - as US companies and international investors are also increasingly unsettled and are reducing their investments in the US (chart 2). The previously excellent reputation of the USA as an investment location is increasingly at risk.

Until a few weeks ago, FINVIA never shared the opinion that President Trump would be good for the US economy because he wants to cut corporate taxes and deregulate the economy. The main argument against deregulation à la Trump and Musk comes from the winner of the 2024 Nobel Prize in Economics, Prof. Daron Acemoglu, from the prestigious US university MIT. In his opinion, deregulation only has a positive effect if it is implemented by politicians who only have the common good in mind. Otherwise, bad or even fraudulent business models would be facilitated alongside good ones. However, Mr. Trump and Mr. Musk certainly do not have the common good in mind. Musk needs as little regulation as possible for his company Tesla when it comes to autonomous driving and Trump has shown with his cryptocurrency TRUMP how (as US President-elect!) investors can be taken money in an unregulated market. This "currency" was first quoted at USD 8.3 on January 18; on January 19, the day before Trump's inauguration, the price soared to USD 70.66 and had halved again by the evening of the next day. Today, the price of this worthless and pointless investment is bobbing around at around USD 10 (source: OFFICIAL TRUMP (TRUMP) price, charts, market capitalization | CoinMarketCap). In the past, Elon Musk has often promoted the "fun currency" Dogecoin, whose creators had explicitly pointed out that it was a pointless and useless Bitcoin parody. He certainly did not do this out of pure altruism. Deregulation harms the average American in other ways too. An Elon Musk does not need a Department of Education for his 14 (?) children; even after the sharp fall in Tesla's share price, there will still be enough for decent private schools and places at the top universities in the USA. Nor will Elon Musk, who was not a US soldier, or Donald Trump, who avoided being drafted for the Vietnam War, have to rely on support from the Department of Veterans Affairs, which is set to cut 80,000 jobs. For many former US soldiers who voted for Trump, the situation is very different.

With his erratic tariff policy and attempts to destroy state institutions, Trump has provoked not only uncertainty among consumers and US companies, but also counter-tariffs that will further damage the US economy.

The renowned US hedge fund Bridgewater, according to Wikipedia the fourth most successful hedge fund in history with a wealth of USD 125 billion, estimates the negative impact of Trump's tariff and trade policy on economic growth in the US at -0.7 percentage points; only Canada would be hit even harder at -1.7 percentage points (chart 3). Trump voters will be particularly offended by the estimated increase in the US inflation rate of over 1 percentage point (chart 4; in the rest of the world (except Canada), there will even be a slight dampening effect on inflation). This is exactly the opposite of what Americans are hoping for from Trump. In fact, 35% want him to focus on fighting inflation in his first 100 days in office, while only 1% want him to focus on introducing tariffs (source: BCA, March 2025). In another poll (Gallup Opinion Research Institute), respondents see the state of the US economy (16% of respondents) and inflation (8% of respondents) as the two most important problems that need to be solved by the government, not the introduction of tariffs (source: BCA, March 2025).

Then there are the foreign policy changes Trump wants. If he were to call for the USA to be friends and trade primarily with Italy in future, but damage the rest of Europe with tariffs, every Trump voter would probably shake their head. Remove Italy, which generated a national income of USD 2,301 billion in 2023, and replace it with Russia, which generated USD 2,021 billion in the same period, i.e. less than Italy. Europe's economic output and thus the income of Europeans (excluding Russia and Belarus) that can be used by American companies is more than 12 times as large. Trump's foreign policy will also have a negative economic impact on the USA.  

Ultimately, Trump is also damaging US science, to which this country owes its technological superiority. Many a professor may no longer want to do research in a country whose Vice President Vance said a few days ago: "The professors are the enemy" (source: Wirtschaftswoche No. 13 from March 2025). This fits in with Trump's statement on February 24, 2016 before his first presidency: "I love the poorly educated" (if you don't believe it, just google this sentence). His affection for the well-educated is therefore less pronounced; for the particularly well-educated, e.g. professors, hostility is now already official state doctrine. In a new study, the International Monetary Fund has shown that an increase in government research spending by a third would increase annual economic output per capita by 0.2% and would therefore be self-financing after an average of ten years (source: www.manager-magazin.de from March 23, 2025). However, Trump does not want to increase funding for US universities, but rather cut it: "To date, 420 Nobel Prize winners - almost half of all Nobel Prize winners - come from the USA. The UK is far behind in second place. These successes stem from a scientific landscape that has more renowned research centers and universities and larger science budgets than any other country in the world. For many young researchers, working in the USA is a dream come true. However, this leading role is under threat in important areas since the new US president launched a veritable attack on science in his country, warn leading representatives of the US scientific community. The Trump administration recently cut 400 million dollars in funding from Columbia University and is threatening to do the same to all universities that do not fall in line with its political course." (Source: www.riffreporter.de from March 19, 2025). One of the consequences of this is likely to be the manipulation of economic statistics. This was already common practice in the faded GDR (source: www.degruyter.com). Left-wing and right-wing dictators often come up with the same ideas due to their ignorance and lack of interest in strengthening their country's economy and prosperity.  

In the Capital Market Outlook from February 2025, which you could read on February 28 and here we explained in detail why a sustained underperformance of US equities and a weakening of the US dollar are to be expected. The dollar (exchange rate on February 28: USD 1.038 per euro, currently 1.083) has lost almost 6% since then; chart 2 shows the strong underperformance of US equities relative to other major equity markets.  

Trump is now making further mistakes that will further weaken the US stock market and the dollar. The "mistake of the week" was Trump's statement that he did not care about the US stock market (source: Business Insider, 15.3.2025). Until then, the prevailing opinion was that Trump would change his agenda if share prices fell too sharply. Now we can no longer be so sure. Trump's policies are getting into difficult waters anyway. The reduction in corporate taxes has already achieved nothing positive in Trump's first term as US president (2017 to 2021), except to further increase the national deficit (chart 5), although unemployment was extremely low until the beginning of 2020 (coronavirus crisis). Corporate taxes were reduced nationwide from 35% to 21% in 2018 (source: IW Weekly Report 102 from October 22, 2020). This did not trigger an economic boom any more than the imposition of tariffs, which Trump announced from January 2018 and implemented from July 2018. Shortly afterwards, the sentiment of purchasing managers in US industry began to fall from a fairly high level to below the 50-point threshold within less than a year, signaling a contraction in industry (chart 6). However, Trump was not responsible for the recession at the beginning of 2020 (gray bar in chart 6); the coronavirus pandemic cannot be blamed on him.

As already mentioned, share prices are reacting increasingly negatively to Trump's policies to date. This could trigger the next problem for him. After unsettling US consumers in record time (chart 1, Trump voters are also consumers), he is now targeting the rich, whose wealth growth is closely linked to the US stock market (chart 7).

If there is a recession in the US, which Trump's Treasury Secretary Bessent has described as a "healthy correction" (source: www.finanztreff.de from 17.3.2025), the still very highly valued US stock market (chart 8) is likely to fall further, as in every recession in recent decades (chart 9, the previous decline of 8% is barely visible on the chart), decimating the wealth rich Americans.

In view of the enormous government deficits (chart 5) and national debt, Trump should be very careful about negligently accepting a recession, as the already extremely high national debt has risen particularly sharply during recessions since the turn of the millennium (chart 10). As the "successful entrepreneur" Trump has personally freed himself from high debts with various bankruptcies and deprived many creditors of their money, he possibly believes that he could also try this "trick" with the US national debt (see on Donald Trump's various bankruptcies: US presidential election: Is Donald Trump leading the US into national bankruptcy? and Donald Trump and his wealth: the illusion of success - ZDFheute). According to a plan by his new economic advisor Stephen Miran, Trump could ask foreigners to pay up by forcing Europeans, Japanese, Chinese and the Gulf states to swap their US government bonds, which are held as currency reserves, for interest-free US government bonds with a term of 100 years (source: Wirtschaftswoche from March 14, 2025). Only then would these regions continue to receive US military protection. At the current yield on long-term US government bonds of 4.61%, exchanging these bonds for interest-free 100-year bonds would lead to a price loss of 98.9%, because USD 1.1 will grow to USD 100 in 100 years at 4.61% interest if the interest is constantly reinvested; USD 100 in 100 years is therefore worth USD 1.1 today. This is almost equivalent to a total default on US government bonds and would certainly weaken the dollar massively. There was a similar initiative in a much more moderate form 40 years ago by the Americans under President Reagan, who was also a Republican. In 1985, the USA agreed with Great Britain, Germany, France and Japan, under threat of tariffs, not to oppose a lowering of the US dollar exchange rate by selling dollars in order to improve the US trade balance. 2 years later, the dollar exchange rate had fallen by 40% and the US trade balance began to recover. Tariffs were therefore not introduced. Since the end of February, the US dollar has already lost almost 6% against the euro. If it is politically desirable, a country can depress the value of its own currency at will, e.g. by having the central bank buy foreign currencies, if necessary with freshly printed money. Of course, you can also simply ruin your own reputation as a solid debtor by trying to blackmail creditors into waiving 98.9% of their claims. This will automatically result in a weak currency without Trump having to take any further action.  

Implementing the Miran plan would be at least the mistake of the decade.

In February's Capital Market Outlook, I already quoted the famous American President Abraham Lincoln, the victor of the US Civil War from 1861 to 1865: "You can fool all the people for a time and some of the people for all the time, but you can't fool all the people for all the time." (Source: www.zitate7.de). Loosely applied to the economic policy of Donald Trump and Elon Musk, one could say: you can make policy against the little people (consumer confidence falls), you can make policy against the "rich" (share prices fall), you can also make policy against foreign investors and creditors (not servicing the claims of foreign creditors and/or causing the dollar exchange rate to fall). But it is not possible to pursue a long-term policy against all three groups without causing considerable damage. In any case, Trump's current policy amounts to a sustained fall in the dollar exchange rate.

If the correlation between the euro-dollar exchange rate and the relative performance of European and US equities (chart 11), which has existed for 56 years for good reason, continues to hold true in the future, European equities will outperform US equities in the future when the dollar falls (rising blue line in chart 11 on the left-hand side) after a long phase of underperformance. This also applies to emerging market equities (see capital market outlook from February 2025, which you can find here which you can find here).  

A weaker US dollar would not only help the equity markets outside the US, but also the gold price (chart 12).

An economic recovery in Europe will further increase the downward pressure on the US dollar. The exceptionally strong expansion of government debt in the USA since 2008 has significantly boosted productivity development and thus growth there (charts 13 and 14), while the debt brake in Germany is largely responsible for the weak productivity development and the ongoing crisis in recent years.

Compared to the USA, the eurozone now has considerably more opportunities to stimulate the economy. Chart 15 shows the unusually large gap in government debt in relation to national income between the eurozone and the US, which has built up particularly since the financial crisis from 2008 onwards. The same period also saw the strong outperformance of US equities (chart 11). Trump and his obviously overburdened chief advisor Elon Musk are trying to cut government spending by haphazardly laying off numerous civil servants in order to finance the tax cuts for companies that his backers want. The only problem is that the reduction in government spending also weakens the economy and thus tax revenues, as a growth-promoting wave of corporate investment that could lead to rising tax revenues did not take place during Trump's first presidency in 2018 (Figure 8).

Unsettled companies tend to remain thrifty, as do unsettled consumers who have now spent all of their coronavirus payments (chart 16). Chart 17 shows that the growth in investment in the construction of new factories, which was strongly stimulated by President Biden's administration's Inflation Reduction Act, has now almost come to a standstill.

In Europe, on the other hand, a significant increase in debt is perfectly financeable, especially if a considerable proportion of it is channeled into growth-promoting infrastructure investments, as is urgently needed in Germany in particular after 20 years of inactivity. The European Union would also like to mobilize 800 billion euros for armaments investments via a new fund and a relaxation of the stability criteria. Arms spending can also boost economic growth in the long term if it is channeled into European rather than American companies (see the statements by the Kiel Institute for the World Economy, which you can find here in the Capital Market Outlook from February 2025). With the prospect of high arms orders over a long period of time, companies can spend a lot of money on research, as was done in the USA for decades. This has resulted in numerous technologies that can also be used outside the military, e.g. the internet or the GPS system.  

The need to catch up is particularly great in Germany, as the long-term trend in productivity per hour worked shows (Figure 18), which is mainly driven by investment in education, infrastructure and technology. These have been consistently neglected since Chancellor Merkel took office at the beginning of 2006. Fortunately, the new government is prepared to finance substantial investments. However, it is not yet certain that the money will be used efficiently and that the financing will promote growth. "Investments" in an extension of the maternity pension are a waste of money. Financing it through higher taxes would weaken the growth potential. Unfortunately, the SPD is pursuing exactly the wrong course by calling for an increase in the flat-rate withholding tax and the top tax rates as well as the reintroduction of wealth tax. Economists, e.g. Prof. Schularick, head of the Kiel Institute for the World Economy (IfW), from whom future Chancellor Merz will hopefully continue to seek advice, recommend financing through debt instead of taxes because this is the only way to achieve higher growth (source: IfW, February 2025).

The approximately 350 economists and financial analysts surveyed monthly by ZEW (Leibniz Center for European Economic Research in Mannheim) were very positive after the announcement of the future German government's plans to finance infrastructure and armaments spending with high levels of new debt. The assessment of the development of the eurozone in March 2025 is significantly better, but for Germany, which also has a lot of catching up to do in terms of infrastructure, the sudden optimism has increased even more (charts 19 and 20). Both charts show that the respondents recognized recessions early on - only in 2022 did the pessimism prove to be unjustified - and also correctly predicted the upswing during the recessions (grey bars).

Overall, economic policy uncertainty in Europe is decreasing again because it is now becoming clear that the problems that arose when Trump took office are being resolved and can even help the economy. The Americans, on the other hand, are now realizing that Trump poses a considerable risk to their economy. With the exception of the coronavirus crisis, American uncertainty has never been as high as it is today in the last 40 years (chart 21), which is likely to prevent some consumer spending and investment in the US.

Consequences for the portfolio

We remain significantly underweight US equities and are focusing on defensive sectors such as healthcare, consumer staples and utilities. These sectors are generally more stable during economic downturns and could be less affected in the event of a recession. At the same time, we are overweight in Europe in order to benefit from the economic recovery there.  

Overall, we are underweighted in equities and overweighted in gold and liquidity. This positioning not only offers protection against market volatility, but also increases our flexibility to react quickly to changing market conditions. Gold serves as a safe haven in times of financial uncertainty and can provide a hedge against currency devaluation and inflation.

Finally, our key statements from the first FINVIA Capital Market Outlook from March 19, 2020, which you can read here here:
5 years ago - at the beginning of the corona crisis - we predicted "very attractive opportunities for long-term investors on the stock market". On that day, the DAX stood at 8900 points and has since risen by over 150%. We also expected gold to perform significantly better than bonds. Since then, the price of gold has risen from USD 1,497 per ounce to USD 3,083, i.e. by 106%, while German government bonds, including all interest rates, have lost 8.5% since then. Finally, we expected that "in a more compartmentalized world ... higher inflation rates are likely to prevail". Over the last 5 years, the inflation rate has averaged 3.8% p.a..
This means that all forecasts have come true.

You can also download the capital market outlook here.