What lies ahead

The U.S. economy heads into the second half of the year with the equity markets at all time highs, with year on year inflation relatively contained, but with a 5 years accumulated high price increases and with potential new spikes due to tariffs. On the international front, it has pivoted from a more globalist approach into a more nationalistic approach, which is not the best way to maintain good diplomatic relationships with your allies. What President Trump wants is high growth, lower cost of debt (not necessarily less debt as he is a person that is used to high levels of debt), roaring equity markets, low taxes, and a resurgence in US manufacturing. But if you look at the chart below, that scenario does not seem to be in the books for him. Even in the Goldilocks scenario, where equity markets keep going up, stretching valuations, rates don’t go down, which makes debt service a great burden. The most likely scenario is stagflation, where the debt weight pushes rates up and ends up pulling from the equity markets. And the worst part is that no one in his inner circle seems to have the gravitas to tell him that his agenda is against all odds. As he has a tendency of surrounding himself with yaysayers, the big question is what will happen if, and most likely, when, the markets do not behave as he thinks they will.

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