Some quick background on the macro. Let’s look at the potential impact on a Trump re-election if he does what he is talking about on tariffs. Roughly speaking to set the stage, in President Trump’s first term he placed a set of duties on Chinese products in the America First economic policy to shrink the trade deficit and rebuild the U.S. manufacturing base. The world generally operates under large multilateral trade deals; he wanted to move to more bilateral deals and renegotiate the large deals. Exit TPP, redo NAFTA for example. Tariffs were planned/enacted on a variety of goods imports across finished products and raw materials: steel, washing machines, solar panels, flat screen TVs, batteries and many more Chinese goods in response to IP theft. Retaliatory measures from partners ensued, escalations etc. At the same time, he leveled lots of (correct) charges of currency manipulation by trading partners. Short version that underpins President Trump’s thinking – countries that keep their FX weak increase the attractiveness of their products at the expense of others, cause large trade surpluses, encourage overproduction/under consumption in the country with weak currency and underproduction/overconsumption in the strong currency country. In single product basic terms – if China keeps its currency very cheap it makes washing machines produced there unfairly cheap vs those produced in the U.S. Over time it is the currency naturally strengthening that should close that gap – keeping it weak on purpose as China does/did prevents that natural correction. When you zoom out to the macroeconomic level – the important part is China’s currency manipulation leads to not just exporting cheap washing machines but exporting unemployment from China to the U.S. as manufacturing jobs slowly leave the country due to U.S. products being unnaturally uncompetitive. Clearly it is impossible for all countries to run trade surpluses, someone must run the corresponding deficit, so the practice is damaging. At the same time, Trump discouraged companies from moving production overseas with reduced tax incentives via BEAT and GILTI, reduced domestic corporate tax rates, and used the bully pulpit to shame those that did. Some deal making ensued.

So where we are today. Generally speaking, the Biden administration kept most of these policies in place and added other measures to encourage domestic production – the largest being the CHIPS Act. President Trump is now campaigning on reupping it – some talk of 60% tariffs on China, 10% on other countries, reducing corporate taxes to 15% and also weakening the USD to be more competitive. These are significantly higher than the first go round. This is where political views come in – to some people these are a tax on consumers as it raises prices, to others the benefits of domestically producing things outweigh. And to some these are bargaining positions to move production here (e.g. recent Taiwan/TSMC chip production being linked to Taiwan’s defense which quickly led to asset shifts away from Taiwan).

As it relates to us. If we do get higher prices and a stronger medium to long term domestic economy with higher wages and a reduced trade deficit, investor portfolios that rely on US bonds going back to very low 2010s yields may find it tough. Non-U.S. economies would struggle, and foreign currencies should weaken as the trade deficit shrinks. Hard to know though, FX is complex.

Managed Futures strategies are generally the only place we can think of that can give direct exposure to that world of:

• Higher yields in the U.S. through short positions in bonds.
• Non-U.S. countries relatively struggling and low growth through non-U.S. fixed income long positions.
• Currency moves that will impact equity markets as U.S. firms earn a lot overseas, the value of those earnings in USD terms falls, hurting equity markets here all else equal.
• Moves up and down in different parts of the commodity space as trade gets reoriented. On the commodity side, if investor portfolios even have commodity exposure, it is long only. In a tumultuous world with shifting production, long and short is even more key.

So, 60/40 portfolios need to shift to things that can perform well during periods of inflation, increasing rates, and can take direct exposures to the markets and moves that most impact portfolios but are hard to access – long and short bonds, long and short currency and long and short commodities. Relying just on the long side of U.S. bonds misses a lot of moving parts in a more macro driven world.

Our previous blog runs through how managed futures strategies maintained the negative correlation to stocks that portfolios need while bond markets did not, and also shows how the stock bond correlation that underpins many portfolios is a function of low inflation. No more low inflation…? Need something different.

Additionally, this blog has a good visualization (snipped below) of how Managed Futures benefits portfolios by taking long and short exposures across fixed income, currency and commodity sectors.