Markets Hail Trump's Economics

"Twenty-three Nobel laureates in economics warned two weeks ago that Donald Trump's economic agenda would be disastrous for the U.S. Immediately after Mr. Trump's landslide victory, financial markets showed they vehemently disagree. Let's hope none of the Nobel laureates adjusted their retirement portfolios; otherwise their 401(k)s may be suffering as badly as their reputations.

Asset prices are fickle, and long-term economic performance is the ultimate measuring stick. But recent days prove markets' unambiguous embrace of the Trump 2.0 economic vision. Markets are signaling expectations of higher growth, lower volatility and inflation, and a revitalized economy for all Americans.

Mr. Trump's election drove the largest single-day increase in the U.S. dollar in more than two years, and third largest in the last decade. This is a vote of confidence in U.S. leadership internationally and in the dollar as the world's reserve currency. The Russell 2000, an index of small-capitalization stocks, also rose by the most in two years due to investor expectations that the Trump economy will disproportionately benefit smaller businesses. An exchange-traded fund that tracks the Russell 2000 index saw its largest single-day inflow in 17 years.

The rally in equities was particularly unusual given that interest rates also moved higher. The combination of the steepening yield curve, stable inflation expectations and the rise in stocks indicates that markets expect the Trump agenda to foster noninflationary growth that will drive private investment. Even amid the expected pro-growth agenda and the associated increased demand for energy, the price of oil fell. Energy stocks rallied at the same time, signaling expectations of more energy production and geopolitical stability.

While markets expect a reinvigorated American economy, the Biden administration's mismanagement has created serious challenges that Mr. Trump will need to overcome. Economic growth has been propped up by the out-of-control federal deficit, which hit 7% of gross domestic product last year. Mr. Trump has a mandate to reprivatize the U.S. economy through deregulation and tax reform to spur the supply-side growth that he delivered in his first term. That will be essential to restarting the American growth engine, reducing inflationary pressures, and addressing the debt burden from four years of reckless spending.

The U.S. economy also faces the consequences of the Biden administration's distortion of capital allocation. U.S. competitiveness has been weakened by destructive energy policies and the channeling of investment toward a quixotic energy transition and semiconductor fabrication plants subject to government mandates that render them uneconomic. Mr. Trump will deliver a renaissance in American energy investment and ensure that trade is free and fair, supporting long-term U.S. competitiveness.

Allowing the private sector rather than the government to allocate capital is crucial to growth. The U.S. must reform the Inflation Reduction Act's distortionary incentives that encourage unproductive investment, which has to be sustained by a lifetime of subsidies. Overhauling the regulatory and supervisory environment will encourage more lending and reinvigorate banks.

Mr. Trump must also address government borrowing. U.S. interest expense exceeds the defense budget. Treasury Secretary Janet Yellen has distorted Treasury markets by borrowing more than $1 trillion in more-expensive shorter-term debt compared with historical norms. Terming out that debt in favor of a more orthodox borrowing profile may increase longer-term interest rates and will need to be deftly handled. The only way to return to a prudent borrowing strategy without upsetting financial markets is restoring investors' faith in the economy and preserving the dollar's global role.

The failure of Bidenomics is clear. But Mr. Trump has turned around the economy before, and he is ready to do so again. Twenty-three Nobel laureates might not understand this, but the financial markets have clearly spoken.

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Mr. Bessent is founder, CEO and chief investment officer of Key Square Group." [1]

1. Markets Hail Trump's Economics. Bessent, Scott.  Wall Street Journal, Eastern edition; New York, N.Y.. 11 Nov 2024: A.19.