You're listening to Strictly Business Podcast with Lindsay Williams.
With me is Philip Saunders, Director, Investment Institute at 91 in London.
And he sent me a piece kindly a couple of days ago and it said, the US midterm
six-year itch, if it occurs,
won't reverse the Trump doctrine.
Philip, I watched the Trump doctrine in full sway last night because I happened to
get up at my time,
three o'clock in the morning, to watch the State of the Union address and he was
quite combative.
He's got a thick skin, that man.
I'll give him that.
He's got the hide of a proverbial rhinoceros, or what the North American
equivalent is.
Well, when you think about it, you know, he's been sued left, right and centre.
You've had all of this, you know, lawfare, and it goes on and on.
And he basically has managed to slough that off.
And, you know, he's got re-elected.
He got elected the first time.
He's not expected to be elected the first time, which is partly why it's such a
shambles.
A second time round, you know, he came back, he sort of, all these legal cases
and so forth,
and sort of on he goes.
So, you know, whatever you think about the man, you know, he's as tough as an old
boat.
Yes, he's a force of nature, and it's difficult not to talk about Trump when
reading your piece.
The six-year itch is, of course, a phenomenon because we've got the midterm
elections coming up in around about eight and a half months now.
And he's right at the bottom of the polls.
but I think that's quite normal.
He's gone a little bit further than normality, though, as he always does.
And he's one of the least popular presidents, apparently, due to the polls.
But I get the feeling, having listened to him last night,
that he's going to try and address that and become more of a populist when it
comes to the man and woman in the
street of America.
How significant are the polls that are coming up in November?
Well, I mean, I think the midterm elections are you pretty important
because, you know,
quite often if the president's party does badly,
then, you know, he can kiss goodbye to any other parts of his program he wants to get
enacted.
Yes, because Congress and the Senate have the ability to sort of frustrate those
efforts.
And we've seen it time and time again.
You know, you have the lame duck presidents after the midterms.
And so, you know, historically...
Presidents that have had two terms tend to do really badly in their second midterm
elections,
and this is Trump's second midterm elections.
But what's unusual about the situation with Trump is that he didn't have two
consecutive terms.
There was a gap in between.
And only one other president in U.S.
history has...
has become president, then lost the presidency, and then regained it.
And that was Grover Cleveland in the late 19th century.
Great name, Grover Cleveland, incidentally.
Let's have a look at Congress and the Senate.
Congress, 435 seats will be contested.
Senate, 35 seats will be there.
He should hold on to the Senate, but Congress will go.
And the lame duck president that you spoke of is a distinct reality.
Yeah, but the point I make in the article is that even if he does become a lame duck
president,
and we can talk about that in a moment,
he has moved, I think, the center of gravity of
US politics and also
America's relationship with the rest of the world in a way that's unlikely to be
moved
back in a serious sense.
And that is significant.
So whatever happens, let's say, you know, the worst case is that they lose the
majority in the Senate.
It's reasonably marginal.
They should hold on to it.
But it's not.
You know, if things go really badly, they could lose that.
Congress, definitely they could lose.
And at the moment, the polls suggest that they're on track to lose control of
Congress.
But you've seen this furious level of activity.
across all dimensions of US policy occurring in the first year of his
presidency.
So he came into this term, this presidential term, with a much more
organised agenda.
He knew how government worked or didn't work,
and he knew that he had to proceed at pace to get what he wanted done in
effectively the first year.
And it's now obviously rolling out now,
all of the deregulation now is beginning to potentially open the way for growth to
rebound.
And clearly the reset in foreign relationships are getting Europe to pick
up the tab to Ukraine,
and also its own defense, you know, which to my mind seems entirely reasonable.
Most Americans support that.
And then, you know, basically using tariffs to try and reset the level of
playing field, as they see it,
in favor of the U.S.
That, of course,
is the provider of the great bulk of final demand in the global economy at the
moment.
Philip, a lot of people that are Democrats listening to you would be bristling a
little bit now because the first point that they might make is organized agenda
and Trump don't belong in the same sentence because he's very
haphazard with his agenda.
Also, not being able to stop you there.
Yes, you can.
So I think that that is an understandable sort of Democrat perspective.
And and you've got to separate the rhetoric
and the theatre from the programme.
OK, and I think that a lot of Democrats make the mistake of basically being sort
of obsessed with the tweet.
and whatever they're called now, talk sense or whatever,
and get mesmerised by the theatre, and that distracts them.
It's rather like a magician's technique, yes,
where you've got to distract the audience in order to actually sort of line up the
trick.
And that's essentially what's going on.
So there's a very clear programme that's very joined up because it joins up
basically...
economic policy with foreign policy in a way that we haven't really seen for years
in the US.
And that's the point.
And that's why I think there has been a shift in gravity.
So go back to Trump's first term.
It was a mess.
And so everybody thinks, second, he's just a mess.
And I think that's just the wrong way of looking at it, whether you like him or
not.
And I think when you're trying to make investment decisions and understand things
from a sort of macro perspective,
I think you have to try and take the personality out of the equation.
We'll get to macro in a moment, because that's very interesting, isn't it?
And we can get rid of all the X posts that he sends at 2.30 in the morning and that
sort of thing.
It's difficult to ignore that sort of behavior, but we will do.
And we'll get to macro in a moment.
What I'm saying is you've got to look through it.
If you want to understand what the MAGA team are trying to achieve.
You've got to look through it.
And, you know, you can get terribly exercised about, you know, Vance's sort
of, Vance's and so forth.
There's endless scope for all of that.
But it's really, so the point I wanted to make about the first term...
Don't forget Miller as well.
Yeah, I mean, you know, I mean, it's, anyway, let's not go there for the moment.
So in his first term,
one of the key things that he did was to change America's policy vis-a-vis
China.
Okay, so he recognized that China was emerging as a significant threat,
and the Chimerica policy of basically helping China to develop, you know,
was having very negative consequences for the US, you know, across a whole range of
areas, because the Chinese quite sensibly,
you know, look to take full advantage of this.
And, you know, what the Americans didn't understand was that China was not just a
another emerging
market that has to sort of wait in a line.
that it was going to emerge as a peer competitor and move up the value chain
aggressively, which it's done.
So under Biden, of course, there was no turning the clock back.
Yeah.
Biden actually was even more anti-China and actually did the work and the detail.
And the Democrats basically introduced a whole raft of measures to sort of address
the challenge that China
represents.
And so that's an example of, you know, policy having shifted.
whether the Democrats were in power or the Republicans were in power.
So what I'm saying is that now we're seeing a further shift in terms of
particularly America's relationship with Europe.
You know, essentially America is forcing other countries to take sides.
Okay.
And using tariffs as a sort of, Trump is using tariffs as a sort of big stick to
try and actually achieve this.
Yes, we saw that recently when he said, because he didn't get his way with the
legal system,
I'll put it politely, he said, OK, I'm going to slap 10% tariffs on.
Then the next day he said, I'm going to slap 15% tariffs on.
And then the following day, suddenly it was back to 10% again, very, very quietly
back to 10%.
But anyway, his tariff policy...
Which is why markets look through it.
They just sort of, you know, it's a sort of Trump being Trump.
You know, it's going to sort of go up and down and basically, but ultimately...
Ultimately, there is some kind of rational outcomes, OK, despite the theatre.
Yes.
And I suppose that the importer exporter sitting there somewhere with a medium
sized business isn't the markets.
Of course, they have to do the real work of changing paperwork every five minutes.
But again, that's not for us to discuss because we're talking about markets and
macro.
So let me stop you there, because I think that the reality of the situation is that
we've been living in
pixieland.
for decades after the Cold War ended.
And we believe that we sort of lived in this environment of, you know, where there
were rules,
the countries obeyed, and, you know, there was no sort of, you know,
it wasn't underwritten by sort of force and violence, OK?
We lived in this sort of, you know, world that we wanted to believe was sustainable,
and it just simply wasn't.
You know, China's rise, you know, China operates on a scale, you know, Japan
pursued similar economic,
a similar economic model, but was notionally democratic and sort of, you
know,
played more or less by the rules.
China basically on a completely different scale.
And, you know, incorporating China that plays by very different rules, actually,
into the established sort of Western liberal system.
economic system was, you know, ultimately doomed to fail.
Okay, so China was successful in its development, it was doomed to fail.
So that's the reality that we've all got to understand and face.
And it's a very messy reality.
And so in the great scheme of things, whether Trump says 10% one day and 5% the
next day,
in the great scheme of things, that's irrelevant.
Again.
It's not irrelevant to certain people, but that's not our job.
What about macroeconomics in the United States?
He's clearly very upset with Powell, the current Fed chair, soon to be ex-Fed chair
in May of this year.
He's got a good chap going in there in the form of Walsh.
He seems to be a reasonable fellow.
But he said last night in the State of the Union address, he said growth is 4% to 5%.
No, it's not actually.
The last print was 1.4% for the GDP.
Last year,
the American economy only produced 181,000 jobs outside of the farming sector.
That's not very many per month.
This year, it's got off to a slightly better start with 130,000 jobs in a month
being created.
But it's not the best economy that the United States has ever seen, as he
occasionally says.
Philip, what's your assessment of the U.S.
economy now and potentially during the Trump tenure?
Well, I think it's reasonably clear to my mind.
So essentially,
we've been through a phase where the Democrats under Biden stimulated the
economy.
They borrowed massive amount of money, despite the fact that the economy was
actually growing.
And so therefore, growth became very dependent.
If you hadn't had that fiscal stimulus, then the US probably would have
experienced a recession.
Okay.
And so what we've seen instead is this sort of soft landing going on.
Okay.
And you've also had the impact of interest rates being raised very significantly.
The cost of capital has gone up massively since 2020, 21.
And large parts of the American economy, you know,
that were hooked on low interest rates have been in recession.
Okay, so you've had this two-tier thing with sort of Magnificent Seven basically
shooting the lights out, and the rest of the economy,
you know, really struggling.
I mean, look at the housing market, for example.
Yes.
So you've had this very two-tier economy,
and now inflation basically is continuing to surprise on the low side.
So the consensus basically, you know, having got it totally wrong, you know, and
the chairman, Chairman Powell also got it,
the Fed under Chairman Powell, also raised rates far too late.
because they got it wrong.
OK, so they're guilty as charged, I believe.
And now they're probably keeping rates too high for too long.
OK, and so that's why basically there's pressure on the Fed to actually not be so
backward looking
and to get rates down to a sort of equilibrium type level, which is sort of
probably three-ish percent.
So that's so clearly Trump wants low rates.
But if you have low rates and the consequences higher inflation
and affordability and the cost of living is amongst voters' key concerns,
then that doesn't solve your midterm problem for you, does it?
Okay.
So going back to growth.
So inflation picture actually looks encouraging as it continues to improve.
Yes, he mentioned that last night, core inflation at 1.7%, which is pretty good.
And the CPI, which came out recently, 2.4%.
So yes, inflation has surprised on the downside.
And productivity has been very good.
OK.
And, you know, actually, in a growth economy, you want strong productivity,
which means that, you know,
you don't have to create vast numbers of jobs in order to move the economy forward.
OK.
It's the sort of it's the right kind of growth to have.
And it looks as if, you know, certainly all the data I look at,
you're seeing basically a reacceleration going on, you know, which is fairly broad.
and you're seeing this big swing back towards, you know.
basically cyclical stocks going on in the stock markets.
And that is telling you, telling you a bit about, quite a lot about positioning,
prior positioning,
but it's also telling you that we're moving into a basically cyclically more
sort of positive kind of environment.
So I think the growth picture in the States is improving and inflation is
continuing to moderate.
And so that's a Goldilocks type combination.
And if I was president looking to try and sort of do better in the midterms.
then that's a trajectory I could sort of get amongst.
I mean, if that continues through over the next eight months or so,
then that is going to help the incumbents.
So just back to macro, if employment is stagnant at best,
then that justifies rate cuts.
If inflation is benign, and it is, that justifies rate cuts.
But if growth is good, that doesn't.
But I think the two that I first mentioned mean that we are going to get cuts this
year.
Oh, I think we're definitely going to get cuts this year.
And basically, you've got the sort of Fed's view of the economy,
that the sort of maximum growth rate that you can achieve in real terms is around
2-ish percent.
And that assumes that productivity is sort of 1-ish percent, i.e.
pretty low by historic.
It's half the rate that we've seen historically.
Okay, it's been higher and lower during different periods.
And I think, you know, Besson and Walsh and that crowd, they say, you know,
actually, no,
if we deregulate, you know, we free up the economy,
and we remove a lot of regulation, which they've done,
and we set interest rates at the right level, and we encourage productive
investment.
Then actually the economy can grow quite a lot faster because we can improve
productivity.
And that means that inflation doesn't take off.
It might tick up again.
But it means that actually the sustainable rate of growth might be 3 and not 2% in
real terms.
And so it's a sort of philosophical difference.
You've got basically a group who are basically fundamentally pro-growth, you
know, release entrepreneurship.
move things internationally in America's favor,
try and get the deficit down.
You know, that's the longer term objective because that's a key challenge.
So it's basically they're in that camp.
They want to be pro-growth and they want to basically create the conditions that
will allow
America to grow out of its problems.
Now, if you contrast that with other countries, yeah, Um,
It's very different because Europe clearly needs to deregulate extensively in order
to...
It's getting a bit of a cyclical uplift at the moment because the germs have come to
the party with fiscal spending.
And they were quicker to lower rates as well, of course, the ECB.
Entirely, they've been quicker to lower rates and basically consumer balance
sheets are pretty strong in the EU.
But that fuels a cyclical rebound that...
that basically is not going to be particularly dramatic in terms of the
actual long-term growth rate.
And the problem of low productivity remains, whereas America is trying to
solve its problem of low productivity.
That's the point I'm making.
OK, we've spoken a little bit about foreign policy, the foreign policy of
Trump.
We need not get into that now because we're running out of time.
But you've mentioned his approach towards China, and I see your points there.
Canada.
I don't really see any point there.
Greenland, well, we don't even need to get into that.
Invading Venezuela, another one that needs to pass us by.
It's about the midterms.
It's about low oil prices.
It doesn't matter what it's about.
Is it right or wrong?
And polishing the missiles on the Abraham Lincoln or the Gerald Ford ships that are
currently parked strategically
close to Iran, that's another story.
But as you say, it's a midterm play.
What does this mean for positioning, though?
Does this mean that the word Goldilocks can apply to the markets in 2026 Philip?
Yes, so I think it can.
And I think that's, you know, in a way, basically, you're seeing a very
significant rotation within markets.
So if you look at how well sort of non-tech is doing at the moment, you know,
that is a testament to a Goldilocks environment.
Now, a cyclically positive environment does eventually, you know, employment is a
bit of a backward looking indicator.
And, you know, just having a look at the number of jobs created in January, for
example,
is not really going to tell us much about the number of jobs that are going to be
created come sort of the midterms.
But, you know, that's the point.
So Goldilocks environment is generally good for markets.
And, you know, because the bond market doesn't misbehave if inflation is sort of
under control and
short term rates are moderated.
And so that's helpful.
Oil prices seem to be, you know, unless we get a spike as a result of conflict in
Iran, you know, which, you know,
clearly the Trump team doesn't want.
They want low oil prices because they see that as part of the sort of proposition to
the electorate come the midterms.
You begin to see a pattern here.
So it's all about the midterms.
Foreign policy is all about the midterms.
Domestic policy is also all about the midterms.
It's pretty joined up.
Yes, it is.
And hopefully for him, he can reverse the polls showing him as the least popular
president since World War Two.
The polls move around.
I think that if he loses Congress, will that bother him unduly?
No, because the course is set.
And so the Republicans will be thinking about the next presidential elections.
and teeing things up for that.
So that will become the next.
It's already on the horizon.
So in terms of their thinking, you know, midterms, electorates punish incumbents
typically, you know,
that's what tends to happen.
And because, you know, we're sort of in a febrile state, whereby basically,
large part of the US electorate still feel pretty hard done by, they haven't really
sort of seen the benefits coming through.
They're also seeing this foreign conflicts.
which was not what they thought they signed up to.
So we'll see.
But opinion polls are mercurial, and we shouldn't just extrapolate from the
current situation.
You finish your piece saying it will take a lot more than an itch to reverse the
Trump doctrine, and that really came across in this chat that we've had.
Philip, thank you very much for your time.
Philip Saunders is director, Investment Institute at 91 in London.
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