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The Asset Class: Philip Saunders · Strictly Business

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You're listening to Strictly Business Podcast with Lindsay Williams.
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With me is Philip Saunders, Director, Investment Institute at 91 in London.
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And he sent me a piece kindly a couple of days ago and it said, the US midterm
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six-year itch, if it occurs,
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won't reverse the Trump doctrine.
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Philip, I watched the Trump doctrine in full sway last night because I happened to
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get up at my time,
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three o'clock in the morning, to watch the State of the Union address and he was
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quite combative.
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He's got a thick skin, that man.
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I'll give him that.
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He's got the hide of a proverbial rhinoceros, or what the North American
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equivalent is.
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Well, when you think about it, you know, he's been sued left, right and centre.
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You've had all of this, you know, lawfare, and it goes on and on.
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And he basically has managed to slough that off.
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And, you know, he's got re-elected.
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He got elected the first time.
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He's not expected to be elected the first time, which is partly why it's such a
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shambles.
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A second time round, you know, he came back, he sort of, all these legal cases
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and so forth,
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and sort of on he goes.
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So, you know, whatever you think about the man, you know, he's as tough as an old
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boat.
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Yes, he's a force of nature, and it's difficult not to talk about Trump when
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reading your piece.
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The six-year itch is, of course, a phenomenon because we've got the midterm
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elections coming up in around about eight and a half months now.
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And he's right at the bottom of the polls.
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but I think that's quite normal.
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He's gone a little bit further than normality, though, as he always does.
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And he's one of the least popular presidents, apparently, due to the polls.
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But I get the feeling, having listened to him last night,
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that he's going to try and address that and become more of a populist when it
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comes to the man and woman in the
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street of America.
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How significant are the polls that are coming up in November?
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Well, I mean, I think the midterm elections are you pretty important
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because, you know,
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quite often if the president's party does badly,
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then, you know, he can kiss goodbye to any other parts of his program he wants to get
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enacted.
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Yes, because Congress and the Senate have the ability to sort of frustrate those
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efforts.
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And we've seen it time and time again.
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You know, you have the lame duck presidents after the midterms.
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And so, you know, historically...
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Presidents that have had two terms tend to do really badly in their second midterm
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elections,
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and this is Trump's second midterm elections.
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But what's unusual about the situation with Trump is that he didn't have two
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consecutive terms.
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There was a gap in between.
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And only one other president in U.S.
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history has...
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has become president, then lost the presidency, and then regained it.
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And that was Grover Cleveland in the late 19th century.
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Great name, Grover Cleveland, incidentally.
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Let's have a look at Congress and the Senate.
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Congress, 435 seats will be contested.
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Senate, 35 seats will be there.
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He should hold on to the Senate, but Congress will go.
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And the lame duck president that you spoke of is a distinct reality.
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Yeah, but the point I make in the article is that even if he does become a lame duck
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president,
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and we can talk about that in a moment,
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he has moved, I think, the center of gravity of
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US politics and also
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America's relationship with the rest of the world in a way that's unlikely to be
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moved
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back in a serious sense.
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And that is significant.
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So whatever happens, let's say, you know, the worst case is that they lose the
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majority in the Senate.
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It's reasonably marginal.
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They should hold on to it.
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But it's not.
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You know, if things go really badly, they could lose that.
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Congress, definitely they could lose.
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And at the moment, the polls suggest that they're on track to lose control of
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Congress.
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But you've seen this furious level of activity.
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across all dimensions of US policy occurring in the first year of his
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presidency.
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So he came into this term, this presidential term, with a much more
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organised agenda.
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He knew how government worked or didn't work,
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and he knew that he had to proceed at pace to get what he wanted done in
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effectively the first year.
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And it's now obviously rolling out now,
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all of the deregulation now is beginning to potentially open the way for growth to
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rebound.
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And clearly the reset in foreign relationships are getting Europe to pick
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up the tab to Ukraine,
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and also its own defense, you know, which to my mind seems entirely reasonable.
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Most Americans support that.
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And then, you know, basically using tariffs to try and reset the level of
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playing field, as they see it,
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in favor of the U.S.
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That, of course,
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is the provider of the great bulk of final demand in the global economy at the
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moment.
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Philip, a lot of people that are Democrats listening to you would be bristling a
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little bit now because the first point that they might make is organized agenda
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and Trump don't belong in the same sentence because he's very
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haphazard with his agenda.
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Also, not being able to stop you there.
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Yes, you can.
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So I think that that is an understandable sort of Democrat perspective.
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And and you've got to separate the rhetoric
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and the theatre from the programme.
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OK, and I think that a lot of Democrats make the mistake of basically being sort
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of obsessed with the tweet.
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and whatever they're called now, talk sense or whatever,
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and get mesmerised by the theatre, and that distracts them.
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It's rather like a magician's technique, yes,
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where you've got to distract the audience in order to actually sort of line up the
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trick.
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And that's essentially what's going on.
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So there's a very clear programme that's very joined up because it joins up
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basically...
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economic policy with foreign policy in a way that we haven't really seen for years
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in the US.
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And that's the point.
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And that's why I think there has been a shift in gravity.
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So go back to Trump's first term.
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It was a mess.
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And so everybody thinks, second, he's just a mess.
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And I think that's just the wrong way of looking at it, whether you like him or
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not.
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And I think when you're trying to make investment decisions and understand things
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from a sort of macro perspective,
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I think you have to try and take the personality out of the equation.
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We'll get to macro in a moment, because that's very interesting, isn't it?
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And we can get rid of all the X posts that he sends at 2.30 in the morning and that
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sort of thing.
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It's difficult to ignore that sort of behavior, but we will do.
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And we'll get to macro in a moment.
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What I'm saying is you've got to look through it.
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If you want to understand what the MAGA team are trying to achieve.
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You've got to look through it.
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And, you know, you can get terribly exercised about, you know, Vance's sort
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of, Vance's and so forth.
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There's endless scope for all of that.
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But it's really, so the point I wanted to make about the first term...
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Don't forget Miller as well.
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Yeah, I mean, you know, I mean, it's, anyway, let's not go there for the moment.
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So in his first term,
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one of the key things that he did was to change America's policy vis-a-vis
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China.
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Okay, so he recognized that China was emerging as a significant threat,
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and the Chimerica policy of basically helping China to develop, you know,
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was having very negative consequences for the US, you know, across a whole range of
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areas, because the Chinese quite sensibly,
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you know, look to take full advantage of this.
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And, you know, what the Americans didn't understand was that China was not just a
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another emerging
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market that has to sort of wait in a line.
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that it was going to emerge as a peer competitor and move up the value chain
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aggressively, which it's done.
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So under Biden, of course, there was no turning the clock back.
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Yeah.
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Biden actually was even more anti-China and actually did the work and the detail.
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And the Democrats basically introduced a whole raft of measures to sort of address
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the challenge that China
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represents.
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And so that's an example of, you know, policy having shifted.
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whether the Democrats were in power or the Republicans were in power.
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So what I'm saying is that now we're seeing a further shift in terms of
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particularly America's relationship with Europe.
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You know, essentially America is forcing other countries to take sides.
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Okay.
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And using tariffs as a sort of, Trump is using tariffs as a sort of big stick to
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try and actually achieve this.
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Yes, we saw that recently when he said, because he didn't get his way with the
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legal system,
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I'll put it politely, he said, OK, I'm going to slap 10% tariffs on.
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Then the next day he said, I'm going to slap 15% tariffs on.
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And then the following day, suddenly it was back to 10% again, very, very quietly
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back to 10%.
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But anyway, his tariff policy...
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Which is why markets look through it.
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They just sort of, you know, it's a sort of Trump being Trump.
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You know, it's going to sort of go up and down and basically, but ultimately...
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Ultimately, there is some kind of rational outcomes, OK, despite the theatre.
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Yes.
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And I suppose that the importer exporter sitting there somewhere with a medium
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sized business isn't the markets.
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Of course, they have to do the real work of changing paperwork every five minutes.
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But again, that's not for us to discuss because we're talking about markets and
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macro.
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So let me stop you there, because I think that the reality of the situation is that
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we've been living in
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pixieland.
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for decades after the Cold War ended.
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And we believe that we sort of lived in this environment of, you know, where there
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were rules,
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the countries obeyed, and, you know, there was no sort of, you know,
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it wasn't underwritten by sort of force and violence, OK?
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We lived in this sort of, you know, world that we wanted to believe was sustainable,
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and it just simply wasn't.
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You know, China's rise, you know, China operates on a scale, you know, Japan
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pursued similar economic,
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a similar economic model, but was notionally democratic and sort of, you
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know,
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played more or less by the rules.
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China basically on a completely different scale.
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And, you know, incorporating China that plays by very different rules, actually,
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into the established sort of Western liberal system.
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economic system was, you know, ultimately doomed to fail.
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Okay, so China was successful in its development, it was doomed to fail.
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So that's the reality that we've all got to understand and face.
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And it's a very messy reality.
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And so in the great scheme of things, whether Trump says 10% one day and 5% the
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next day,
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in the great scheme of things, that's irrelevant.
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Again.
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It's not irrelevant to certain people, but that's not our job.
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What about macroeconomics in the United States?
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He's clearly very upset with Powell, the current Fed chair, soon to be ex-Fed chair
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in May of this year.
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He's got a good chap going in there in the form of Walsh.
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He seems to be a reasonable fellow.
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But he said last night in the State of the Union address, he said growth is 4% to 5%.
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No, it's not actually.
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The last print was 1.4% for the GDP.
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Last year,
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the American economy only produced 181,000 jobs outside of the farming sector.
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That's not very many per month.
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This year, it's got off to a slightly better start with 130,000 jobs in a month
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being created.
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But it's not the best economy that the United States has ever seen, as he
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occasionally says.
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Philip, what's your assessment of the U.S.
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economy now and potentially during the Trump tenure?
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Well, I think it's reasonably clear to my mind.
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So essentially,
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we've been through a phase where the Democrats under Biden stimulated the
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economy.
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They borrowed massive amount of money, despite the fact that the economy was
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actually growing.
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And so therefore, growth became very dependent.
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If you hadn't had that fiscal stimulus, then the US probably would have
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experienced a recession.
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Okay.
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And so what we've seen instead is this sort of soft landing going on.
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Okay.
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And you've also had the impact of interest rates being raised very significantly.
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The cost of capital has gone up massively since 2020, 21.
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And large parts of the American economy, you know,
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that were hooked on low interest rates have been in recession.
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Okay, so you've had this two-tier thing with sort of Magnificent Seven basically
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shooting the lights out, and the rest of the economy,
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you know, really struggling.
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I mean, look at the housing market, for example.
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Yes.
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So you've had this very two-tier economy,
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and now inflation basically is continuing to surprise on the low side.
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So the consensus basically, you know, having got it totally wrong, you know, and
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the chairman, Chairman Powell also got it,
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the Fed under Chairman Powell, also raised rates far too late.
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because they got it wrong.
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OK, so they're guilty as charged, I believe.
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And now they're probably keeping rates too high for too long.
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OK, and so that's why basically there's pressure on the Fed to actually not be so
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backward looking
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and to get rates down to a sort of equilibrium type level, which is sort of
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probably three-ish percent.
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So that's so clearly Trump wants low rates.
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But if you have low rates and the consequences higher inflation
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and affordability and the cost of living is amongst voters' key concerns,
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then that doesn't solve your midterm problem for you, does it?
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Okay.
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So going back to growth.
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So inflation picture actually looks encouraging as it continues to improve.
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Yes, he mentioned that last night, core inflation at 1.7%, which is pretty good.
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And the CPI, which came out recently, 2.4%.
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So yes, inflation has surprised on the downside.
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And productivity has been very good.
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OK.
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And, you know, actually, in a growth economy, you want strong productivity,
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which means that, you know,
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you don't have to create vast numbers of jobs in order to move the economy forward.
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OK.
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It's the sort of it's the right kind of growth to have.
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And it looks as if, you know, certainly all the data I look at,
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you're seeing basically a reacceleration going on, you know, which is fairly broad.
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and you're seeing this big swing back towards, you know.
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basically cyclical stocks going on in the stock markets.
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And that is telling you, telling you a bit about, quite a lot about positioning,
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prior positioning,
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but it's also telling you that we're moving into a basically cyclically more
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sort of positive kind of environment.
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So I think the growth picture in the States is improving and inflation is
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continuing to moderate.
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And so that's a Goldilocks type combination.
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And if I was president looking to try and sort of do better in the midterms.
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then that's a trajectory I could sort of get amongst.
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I mean, if that continues through over the next eight months or so,
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then that is going to help the incumbents.
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So just back to macro, if employment is stagnant at best,
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then that justifies rate cuts.
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If inflation is benign, and it is, that justifies rate cuts.
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But if growth is good, that doesn't.
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But I think the two that I first mentioned mean that we are going to get cuts this
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year.
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Oh, I think we're definitely going to get cuts this year.
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And basically, you've got the sort of Fed's view of the economy,
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that the sort of maximum growth rate that you can achieve in real terms is around
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2-ish percent.
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And that assumes that productivity is sort of 1-ish percent, i.e.
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pretty low by historic.
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It's half the rate that we've seen historically.
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Okay, it's been higher and lower during different periods.
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And I think, you know, Besson and Walsh and that crowd, they say, you know,
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actually, no,
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if we deregulate, you know, we free up the economy,
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and we remove a lot of regulation, which they've done,
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and we set interest rates at the right level, and we encourage productive
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investment.
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Then actually the economy can grow quite a lot faster because we can improve
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productivity.
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And that means that inflation doesn't take off.
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It might tick up again.
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But it means that actually the sustainable rate of growth might be 3 and not 2% in
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real terms.
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And so it's a sort of philosophical difference.
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You've got basically a group who are basically fundamentally pro-growth, you
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know, release entrepreneurship.
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move things internationally in America's favor,
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try and get the deficit down.
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You know, that's the longer term objective because that's a key challenge.
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So it's basically they're in that camp.
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They want to be pro-growth and they want to basically create the conditions that
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will allow
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America to grow out of its problems.
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Now, if you contrast that with other countries, yeah, Um,
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It's very different because Europe clearly needs to deregulate extensively in order
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to...
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It's getting a bit of a cyclical uplift at the moment because the germs have come to
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the party with fiscal spending.
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And they were quicker to lower rates as well, of course, the ECB.
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Entirely, they've been quicker to lower rates and basically consumer balance
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sheets are pretty strong in the EU.
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But that fuels a cyclical rebound that...
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that basically is not going to be particularly dramatic in terms of the
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actual long-term growth rate.
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And the problem of low productivity remains, whereas America is trying to
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solve its problem of low productivity.
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That's the point I'm making.
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OK, we've spoken a little bit about foreign policy, the foreign policy of
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Trump.
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We need not get into that now because we're running out of time.
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But you've mentioned his approach towards China, and I see your points there.
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Canada.
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I don't really see any point there.
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Greenland, well, we don't even need to get into that.
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Invading Venezuela, another one that needs to pass us by.
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It's about the midterms.
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It's about low oil prices.
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It doesn't matter what it's about.
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Is it right or wrong?
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And polishing the missiles on the Abraham Lincoln or the Gerald Ford ships that are
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currently parked strategically
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close to Iran, that's another story.
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But as you say, it's a midterm play.
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What does this mean for positioning, though?
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Does this mean that the word Goldilocks can apply to the markets in 2026 Philip?
20:03
Yes, so I think it can.
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And I think that's, you know, in a way, basically, you're seeing a very
20:10
significant rotation within markets.
20:12
So if you look at how well sort of non-tech is doing at the moment, you know,
20:16
that is a testament to a Goldilocks environment.
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Now, a cyclically positive environment does eventually, you know, employment is a
20:26
bit of a backward looking indicator.
20:28
And, you know, just having a look at the number of jobs created in January, for
20:31
example,
20:31
is not really going to tell us much about the number of jobs that are going to be
20:37
created come sort of the midterms.
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But, you know, that's the point.
20:40
So Goldilocks environment is generally good for markets.
20:44
And, you know, because the bond market doesn't misbehave if inflation is sort of
20:49
under control and
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short term rates are moderated.
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And so that's helpful.
20:54
Oil prices seem to be, you know, unless we get a spike as a result of conflict in
21:00
Iran, you know, which, you know,
21:02
clearly the Trump team doesn't want.
21:03
They want low oil prices because they see that as part of the sort of proposition to
21:09
the electorate come the midterms.
21:11
You begin to see a pattern here.
21:11
So it's all about the midterms.
21:13
Foreign policy is all about the midterms.
21:15
Domestic policy is also all about the midterms.
21:18
It's pretty joined up.
21:20
Yes, it is.
21:20
And hopefully for him, he can reverse the polls showing him as the least popular
21:26
president since World War Two.
21:28
The polls move around.
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I think that if he loses Congress, will that bother him unduly?
21:39
No, because the course is set.
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And so the Republicans will be thinking about the next presidential elections.
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and teeing things up for that.
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So that will become the next.
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It's already on the horizon.
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So in terms of their thinking, you know, midterms, electorates punish incumbents
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typically, you know,
22:00
that's what tends to happen.
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And because, you know, we're sort of in a febrile state, whereby basically,
22:06
large part of the US electorate still feel pretty hard done by, they haven't really
22:11
sort of seen the benefits coming through.
22:13
They're also seeing this foreign conflicts.
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which was not what they thought they signed up to.
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So we'll see.
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But opinion polls are mercurial, and we shouldn't just extrapolate from the
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current situation.
22:27
You finish your piece saying it will take a lot more than an itch to reverse the
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Trump doctrine, and that really came across in this chat that we've had.
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Philip, thank you very much for your time.
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Philip Saunders is director, Investment Institute at 91 in London.
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22:44
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