Can the Market's Love Affair with Trump Policy Survive the DOGE Factor?

"Elections have consequences, and so does the way our government operates. In this episode of The Money Runner, David Nelson dives into 'The DOGE Factor,' Elon Musk and Vivek Ramaswamy’s bold mission to cut government waste, and how markets are reacting post-election. From defense spending to deregulation and the shifting yield curve, we explore the financial implications of big government under fire. Don’t miss this deep dive into what’s working, what isn’t, and what’s next for investors!"

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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Elections have consequences. President Barack Obama said those words shortly after his inauguration in 2009. And of course, it's true. Not only does it have consequences for policy, government and many aspects of our daily lives. Under the right circumstances, it can be a tailwind or an anchor for markets and the economy. However, that statement is nuanced. The executive branch wields a big stick and can influence and even initiate a lot of policy. But without the support of Congress. Presidential power is limited, especially on key policy issues like taxes, budgets, defense spending. And of course, the list goes on and on. We all come at this with our own political view on what took place last week. And the basis of this discussion is not political, but financial. But when you get a clean sweep across every branch of government, along with a clear mandate in both the electoral and popular vote, it is a different ballgame. We have a new market imperative that has to be included in the calculus that drives your investment decisions. If you're thinking the above wipes out risk or changes some of the basic rules of investing, I'm here to say you are wrong. It may be a new ballgame, but it is a game that has rules. And the question remains the same What's working, what isn't, and what's next? Welcome to The Money Runner. I'm David Nelson. It's been about ten days since the election and I've actually been off the grid for part of that time. It's given me a chance to take a step back and digest, you know, some of what we've witnessed, certainly a monster political move and maybe a political margin of victory that I think few were looking for. Maybe the markets got it right. They seem to be pricing in a Trump victory before even Tuesday, last week. And some of the betting markets certainly got it right. They had a high probability of a Trump victory, but the clear loser here has to be the polling industry. Since 2016, what have we had? That's eight years. There's generally a mid-cycle election every two years, so that's four election cycles there. We've had three presidential elections haven’t gotten it right once. So I don't know what's going to happen to that industry, but I don't. I think we're going to go a different direction in 2028 for sure. Some of the moves we saw in markets since that time, some obviously some some historic moves and not just stocks, sectors, asset classes. And we're trying to get a handle on this. And I think what we're going to have to learn here is that some of our favorite themes and trades that we thought we would be with us for quite some time, maybe we're going to have to rethink some of this. And I think it's going to take the next, you know, number of weeks and months to really sort that out. The first one I'm going to bring up is called The DOGE Factor, and I don't mean Dogecoin DOGE Now in government terms means Department of government efficiency. And this is a new blue ribbon panel put together by Donald Trump. And it's now being headed up by Elon Musk of Tesla and SpaceX X and Vivek Ramaswamy, a former presidential candidate who are now heading this up. And they're mandate is to eliminate government waste and fat and reduce cost. Well, once markets started to get wind of this and start to put put things together. Some stocks were pretty hard hit and a very popular trade is defense industry. One look around the planet every corner of the planet is a geopolitical hotspot. So defense seemed like a no brainer. But what markets started to put together is that there is a lot of waste in government spending and there is a lot of waste in defense spending in particular, in large part because many of these defense contractors use what is known as cost plus. And cost plus is when you have a contract, you're guaranteed your costs and then some margin of profit on top of that. The problem with that is that there is no incentive to reduce costs. And I think this is what Elon and Vivek might hone in on. At least that's what markets think right now. And I suspect with Elon, at least, you know, this is a guy who has a company that manages to catch, you know, rocket ships the size of skyscrapers with something that looks like a toothpick. You know, I think he has what it takes to maybe make a dent in this. So be that as it may, you can see in this chart here, Leidos makes a lot of the TSA equipment, Lockheed Martin, Raytheon, all hard hit. There were dozens of others, you know, smaller names as well in here were hard hit. Now, maybe this is overdone at this point. I actually reduced part of my Leidos holding. I'm going to have to examine this. So I'm not saying whether I'm buying or selling. Do not do not trade on what I'm saying here right now. I've got to do my homework on this. And you should, too. But something is shifting under our feet. And we're going to have to examine whether these these companies can maintain the level of profit profitability that they've enjoyed over the last number of years. All right. What else happened with the markets? Obviously, there's, you know, some of the some of the positives for markets under a Trump presidency are are are pretty easy to see. Certainly under this president, we should see a lot of deregulation and deregulation usually can go a long way to profitability. Now, in a market economy, we have to have regulations. But I think many would agree that maybe the previous administration or the outgoing administration maybe overdid it. And this is an opportunity to role opportunity to roll some of that back and markets are going to start to price that in. So profit margins might go up for a lot of these companies. M&A, M&A activity has ground to a halt under this administration. Why is that important? Well, I don't think any of us want large, you know, monopolies getting together. You know, or two companies getting together and forming a monopoly. But when you have no M&A and you don't let larger companies buy, even smaller companies it eliminates an exit in venture capital. What do I mean by that? Well, certainly venture capital isn't a real fan of of of President Trump for mostly, you know, social reasons. There are some out there like David Sacks, Chamath Palihapitiya, but most do not. However, the one thing I think they'll endorse is the M&A structure that this administration, this incoming administration seems to be putting forth. Because when you don't have the ability for takeout, right, there's no exit. You know, not every venture capital company can get big enough to IPO and go in the public markets. Some need to be taken out by a larger company. And if those companies don't get taken out, then venture capital can't redeploy that capital into a new company. So capital formation starts to slow down. And I think under this administration, I think that's going to change. I think that's certainly healthy for markets and certainly healthy for innovation coming, you know, certainly for the tech sector, the biotech sector and any emerging company out there. Next chart, the broadening of the market rally. This really was a homerun last week. I'm not sure I have to go back and check, but small cap stocks were up huge last week and maybe for the first time, as you can see here in this chart of the Russell 2000 total return index going back five years finally broke to an all time high, even though the S&P 500 has repeatedly broken to all time highs, it shows that some of that market capital is is shifting. I'm going to go into why I think that's happening. But nevertheless, these smaller companies really got to push last week. Some other good news, this chart of the S&P 500 up against earnings and that's a blended 12 month earnings. And what I'm doing there is when I go blended, I'm looking six months forward, six months backward. And you can see there that that earnings were starting to roll over before the election. Not a lot, but they had started to come in maybe in anticipation of something a little bit concerning coming out of the election. However, they started to roll over. Now that the election has passed, they've started to go back up and I think they'll push higher. And a couple of things to consider. Markets and economists and and analysts, I think, going to be forced to raise some of their estimates here for the following reason. At a minimum, the 2017 tax cut, which was supposed to sunset in 2025, that's not happening. All right. So we can take that that negative drag off the table. We also have to start pricing in the possibility, you know, may not be a large possibility, but the possibility of a corporate tax cut sometime in the next two years, not everything is good. And we're going to have to discuss some of the market headwinds that come about here. And the biggest one I see here is on this next chart and and that is yields where you're looking at there is that that line on top, that is the US yield curve as it exists today. Right underneath that in the middle is the yield curve from a month ago and below that at the bottom, that's where we were in the middle of September, just about two months ago when we had, you know, our first 50 basis point cut by the Federal Reserve. And the thinking back then was that the short end of the curve was going to come down, bonds were going to come down. The yields on bonds, rather, were going to come down across the yield curve. And that was good news for a lot of things. It was going to help relieve our credit card debt for a lot of Americans. It was certainly going to be a boost for the for the housing sector, which has been under siege. Mortgage rates are high, prevents a lot of homes being sold. Nobody can afford to buy a house. Nobody can sell a house and nobody can refinance a house. And so the thinking was that that was going to be good news for for stocks for for these industries and with its stocks as well. Well, that didn't happen. In fact, quite the opposite is happening. And that that those gains that we had in those bonds were all given back. And if you look at the five year tenor, their yields are up 87 basis points. That's fairly substantial here. And I think at a minimum, it's going to force portfolio managers like myself to start to rethink what we think bonds are going to do over the next couple of years. I think what I'm coalescing around is the idea that the terminal rate, the level where I think the Fed is going to, is going to be higher than we originally thought. I was originally thinking somewhere around 3%. I think we'll be lucky to get under 4% on on the short end of the curve. That's the Fed funds rate on the long into the curve. I think it's going to steepen, in fact, push higher for a couple of reasons. One, we're going have more growth. I think that will price it. And I don't think inflation is going to come down as easily as as as markets had predicted. And the biggest issue is we're running debt and deficits so large that some of the traditional buyers of U.S. Treasury debt are kind of pulling back and saying, you know what, I want more I want more food on my plate. I want a higher yield if I'm going to buy all this paper, because they're coming hand over fist with with paper to fund this very, very large deficit. And and and a ballooning, you know, a balance sheet that continues to get larger. So I think yields are going to remain elevated. And that in itself presents a challenge for markets. Guys, bring up the chart that we had a couple of podcasts ago. We have the we have yields. And underneath that, we have the S&P 500 going back at least a little more than a year. Because I want to capture October last year. Think back to October last year when ten year yield started to get close to 5%, stocks didn't like it. Why? Because almost every valuation model starts with the risk free rate. That's the alternative asset class. If yields go up, that's another place to put capital. That means at a minimum, the stocks that you're buying have to be growing fast or they have to be cheaper. One of the other. You can't keep paying higher and higher multiples for stocks unless either the growth goes up or the risk free rate goes down. One of the two has got to take place. So it becomes a challenge. You can see here in this five year chart of ten year yields, looks like we're starting to break out there and maybe this next chart is the most telling. It's the way bond traders are reacting to even good news or I took this snapshot from Wednesday this past week and at 830 that morning we had the CPI. It was relatively benign, you know, fairly good news. And what you're looking at here, this is this is a bond chart, not a yield chart. So this is the price of the bond. So price up, yield down. A bond spiked on the news. It was really good news for bonds. Maybe the first good news in weeks. They jumped up, took less than an hour for four bond traders to give it all back and then some. And bonds seemed to consistently be sending us a message that we might be looking at yields higher for longer. You can see it in the Fed funds chart. The mandate there seems to have changed. You know, a month ago. Look in the middle of that page, a month ago, markets were pricing in about 140 to 150 basis points of cuts by the Federal Reserve by March of next year. Now, we're lucky if we're going to get 50, going to get maybe one more cut of 25. But again, another chart, they're sending a message of yields that are going to be higher for longer. This presents headwinds for for for stocks. Next chart. Oh the dollar the the dollar. This is really in conjunction with the yields. When yields go up, generally the dollar seems to follow suit. Now there are some excellent you know, there are some good aspects to a dollar going higher. It's certainly it's it it makes it you know our dollar buys more goods and services. Good for inflation. We like that. I get that. But there's a real negative as well. A higher dollar for US multinationals makes our goods and services less attractive. If you're selling overseas and your dollar is going up, it's costing them more money. They're going to go elsewhere. And I think this is in part part of the reason why largecap, you know, secular growth stocks have been somewhat challenged of late. But the only reason a lot of it is, you know, you know, because of the individual outcomes in some of these companies. But the dollar going up isn't a help 40% of S&P 500 revenue resides offshore. So if you have a lot of exposure in your revenue to international markets, it's going to impact your earnings, your income statement. And I think this is a part in part part of the reason why some of this capital has shifted to small cap stocks and mid-cap stocks, because generally these companies are more domestic in nature. The dollar going up or down doesn't affect them. Everything here is priced in dollars. So it's a challenge for, you know, some of the traditional growth stocks out there. And the more it goes up, the more it's going to play havoc on on some of these companies and other asset classes. Take a look at gold. Gold is you know, the alternative currency is the alternative to the fiat currency has been for 5000 years as a store of value. And this was, you know, the safe haven trade for most of the last year, really most of the the last two years. And look look at what's happened here. It is just, you know, cratering in the last couple of weeks, even more so since the election. If you zoom in there, you can see we've we've gone through some levels support. Maybe our next level of support is somewhere around 2550. So again, the dollar going up while it's good news for some things, it it it does create headwinds for some some asset classes out there and it does for this one as well. Let's turn to emerging markets. I can't take credit for this this chart I was looking on Twitter the other day or rather X and I saw a good friend, Charlie Beillo had a chart just like this. Only his data was more accurate than mine. He went all the way back to 19 1980, I believe. I couldn't get data going back that far, but I wanted to put it together. Put it together for this podcast. What you looking at here? This is not a price chart. This is a ratio chart. And what I mean by that, this is a this is emerging markets relative to the S&P 500. So what you're looking at here is when that line is going up, it is outperforming emerging markets are outperforming the S&P 500 or U.S. markets. When it's going down, it's underperforming. Now, you can see after 2000, after the bursting of the Internet, the US markets were under pressure. Relative, relative, relatively speaking, emerging markets did well and they peaked really versus the U.S. market in prior to the financial crisis of late 2007 and then, you know, sold off like everything else and then of course recovered after, after 2000, uh, after the financial crisis. Since then, it's, it's been one way drifting downward and really accelerating in the last couple of years. Now part of that is the dollar. It puts pressure on those economies, but part of it is just U.S. exceptionalism. This is where the innovation is. This is where technology is. This is where biotech is drug discovery. Much of the innovation of the world starts and ends with this country right here. And that's why capital comes into this country. And the fact that we have the rule of law, it's not surprising the rest of the world wants to put their money here. So the emerging markets have been, you know, a source of pain for some time. I've I've made a couple of stabs at it over the last number of years. Even recently on the China stimulus, I stopped out of that a number of weeks ago. I take that back. I think I actually still have a small piece of that, but I intend to sell the rest of that. But this has been a lot of pain for for for very good reason. And got some investors out there saying this is the moment to go in. It is oversold, maybe close to a low versus U.S. markets. But look at that chart. I'm sure a lot of a lot of investors said that same thing over the last 10 to 15 years each stair step lower. So maybe you're going to catch it right. Maybe this is the time to get in. Good luck. All right. Final chart, final asset class to discuss Bitcoin. Now, this is probably the most controversial investment that I've seen in my career. I've been very negative on Bitcoin for, you know, much of my career. I was probably a more and more along the lines of, you know, Warren Buffett certainly never liked the Bitcoin. Charlie Munger, his partner, who since passed away, Jamie Dimon has come out hard. Again, there are a lot of bears on Bitcoin and for good reason as a store of value is pretty volatile. It routinely goes down 50% and I believe it's gone down even more than that. I've traded traded it poorly since I had the opportunity to, in the form of ETFs, since that came out, made a little money right at the beginning, gave it all back and then some. I have a very small position right now, but what I what I see in this chart here is there's something different here. This is not just the acceleration from a speculative fever, although it is speculative for sure, is we now have an incoming president who isn't necessarily backing this, but he certainly he's certainly endorsing it. All right. And by endorsing it, Bitcoin, the regulatory structure for Bitcoin is going to improve. Now, this administration, current administration very has really held Bitcoin back in many ways and maybe for some good reason. There's been a lot of fraud, Sam Bankman-Fried or all that. We've all seen that in the newspapers. However, this this asset class has continued to grow and grow and grow. One of our advisors here, you know, gave me a way to look at it. I was trying to think of what else could I compare this to? Because really, when you look at Bitcoin, the utility isn't there. What you can say about it is, is that it's worth what the next person is willing to pay for it. All right. What else can I compare to that? So he brought up the idea of art. A monet, right? It doesn't have utility. It's nothing you can really do with it except look at it. And maybe it's a source of pleasure for for you. Maybe it isn't for others. So your idea you're buying that Monet today and maybe you're going to be able to sell it at some point in the future for a higher price. So you're looking for that that person. Maybe that's where Bitcoin is right now. There's a lot of young people that are distrustful of of the current financial infrastructure. They look at fiat currency and the idea that we keep printing money, printing money, printing money. And what is it backed by is backed by the good faith and credit of a government. All right. They're not buying into that. They're embracing Bitcoin. Nevertheless, it's a force that has to be reckoned with. It is here. I don't think it's going away any time soon. And I think it's big enough at this point that you might see an attempt to make it in some small way part of a see a balanced index that that embraces, say, most of your money in stocks, some money in fixed income, and maybe some very small amount of Bitcoin. And for us as financial professionals, for you as investors at home, we're probably going to learn more about this and adjust to the fact that it's not going away anytime soon. All right. We covered a lot of ground today. And obviously, this is a living, breathing animal. I'm going to have a lot more to learn over the next days, weeks and months. If you want to learn more about the Money Runner and David Nelson and what I do here or if you just like access to maybe my network appearances on Fox, CNBC and some of the others or would like access to these charts. Some of the things that I write, you can go to my Substack site dcnelson123@substack.com. I'm David Nelson and this is the Money Runner.