'Trump Lite' or 'Donald Dark': Which Route Will the Presidency Likely Take?

‘Trump Lite’ or ‘Donald Dark’: Which Route Will the Presidency Likely Take?

Eric Weinstein, a well-known American investor and venture capitalist, suggested in a recent podcast that the answer to the question “I don’t know” would have outperformed the consensus on many of the major global issues of recent years.

From ‘Russia will never invade Ukraine because the costs are too high’, to ‘the race between Harris and Trump means the election will be decided on a razor’s edge’, the confident image of experts turned out to be wrong.

The 2024 US election results were decisive and removed uncertainty about who the next US president would be, but predicting what comes next remains no easy task.

Yet it is not enough to say, “I don’t know.” It is the job of advisors to come up with a vision. Where lies the greatest uncertainty over the next four years and how should investors position themselves?

To help understand where the risks lie, we draw on scenarios Fathom first laid out in 2016 and has since revised to conclude that a second Donald Trump presidency offers two plausible economic paths: “Trump Lite” or “ Donald Dark’.

We take Trump seriously that there will be a change in the status quo in international trade

The uncertainty surrounding Trump is much greater than with other politicians, and the two contrasting scenarios are broadly equivalent to taking him seriously (by which we mean reading his underlying intentions rather than his actual words) rather than literally taking his statements.

In the ‘Lite’ scenario, Trump focuses on deregulation and tax cuts. He expands the Tax Cuts and Jobs Act to provide targeted relief to certain industries, such as tipped workers and domestic manufacturing companies. These policies stimulate growth, but also inflation, with economic results that resemble the pre-pandemic part of his first term.

Trump, the self-described “tariff man,” has long been critical of free trade. We take him seriously that there will be a change in the status quo in international trade.

In a Lite world, his suggested plans for a 60 percent tariff on China and a 20 percent tariff on the rest of the world are moderated, but are still consistent with a 10 percentage point increase in the effective U.S. rate.

With a tenth of that reflected in prices, U.S. headline inflation is one percentage point higher in the year the tariffs are implemented.

Paul Samuelson, America’s first Nobel Prize-winning economist, once noted that free trade was one of the few things in economics that was both simple and true.

But even he continued to qualify this view, later wondering whether more free trade was always and everywhere a good thing. Samuelson was particularly concerned about the impact on the wages of American workers as a result of the integration of major emerging markets such as China into the global economy.

We agree with that nuance and believe that there are times when it makes sense to implement trade restrictions, even if there are national security risks. Large economies may also choose to leverage their domestic markets for concessions.

By comparison, in the Donald Dark scenario, the American withdrawal from free trade principles leads to a large-scale global trade war, with all the negative consequences that entails.

Fathom’s analysis has previously shown that the period of globalization from 1990 to 2007, when the intensity of world trade (gross trade in GDP) rose from 30 percent to 49 percent, saw annual trend growth in the U.S. grow by as much as 0.6 percentage points per year caused to rise. . With US tariffs leading to a widespread increase in protectionism, the currently stalled trend in trade intensity is reversing, curtailing the nascent productivity recovery in the US.

Immigration is perhaps the area with the most uncertainty. In a Trump Lite world, we see net migrant inflows halved compared to current Congressional Budget Office expectations, reducing annual GDP growth by 0.2 percentage points.

There is room for a major underestimate, leaving the fate of some 11 million undocumented migrants up in the air. In the Donald Dark scenario, Trump makes good on his promise of “mass deportations,” deporting 6 million people, reducing employment by about 4 percent and reducing GDP by a similar amount.

A final area where we see an increased risk concerns monetary policy. The new administration has reportedly discussed announcing its pick for Federal Reserve chairmanship well before Jerome Powell’s term ends in 2026.

Developments in the financial markets are consistent with the view that the new government is more bark than bite

It appears this person would announce alternative policy decisions on the same day as the federal open market committee, presumably with the aim of steering investors toward a smoother path.

What impact would this have?

In a Lite world, this increases volatility, especially when the views of the Fed’s shadow chairman contrast materially with those of the FOMC. However, Trump’s term is not long enough to provide the committee with enough lackeys to meaningfully influence policy; and investors therefore see through the statements of the shadow chairman. Once the new chairman is installed, the other committee members can even choose to vote against to emphasize their own independence.

There is a ‘dark’ alternative: the government manages to force the current committee members to leave, allowing it to quickly install voters loyal to lower interest rates.

More aggressive monetary easing will create a sugar rush in economic activity in the short term, but it will not last. Credibility is hard to gain, but easy to lose. Central bank independence has reduced the persistence of inflation in recent decades, and lessons from around the world suggest that interfering with it leads to worse outcomes in the long run. The same appears to apply to the US.

There is a third scenario, low probability but high impact, that could tie the thread between Lite and Dark, and this concerns currency. JD Vance, Trump’s pick for vice president, has discussed how the US dollar’s status as the world’s reserve currency increases foreign demand for US financial assets, resulting in upward pressure on the dollar and trade deficits.

In 2023 he said this was a huge subsidy for consumers, but a big burden on producers. On the surface, there is an implicit contradiction here, as the Trump-Vance platform of fiscal stimulus and protectionism all point to a stronger dollar. However, there is an alternative.

After adjusting for relative prices, the dollar is already trading above its historical average against many of its advanced economy counterparts. A coordinated effort to weaken the dollar could help rebalance global trade, with fewer negative consequences than a global trade war. It has been done before: President Reagan negotiated such an agreement in the 1980s, the Plaza Accord, with positive economic results for the US.

An important difference was that last time negotiations took place with important American allies, including Germany and Japan. A Plaza Accord 2.0 would likely require Beijing’s agreement — a significant, if not impossible, hurdle.

As our three scenarios suggest, the possible spread of outcomes around a second Trump administration is wide, given the president-elect’s willingness to challenge long-held orthodoxies and bluff in negotiations.

Investors appear to be banking on a Lite world, with US indices hitting new highs even in the face of major tariff threats. Developments in the financial markets are consistent with the view that the new government is more bark than bite. Yet this is not the time for complacency.