It was quite a first week for the Trump Administration. Close to 200 Executive Orders were signed impacting everything from immigration, deportation, and diversity to birthright and Federal employment. Missing so far are any specifics regarding tariffs. Those should be expected over the next two weeks. In general, Wall Street was happy as were the MAGA supporters. But there was little change in interest rates and a lot of the stock market strength had more to do with early earnings reports than the flurry of Trump proclamations. Perhaps the biggest announcement impacting the economy was a quickly staged event promoting a new enterprise called “The Stargate Project”, a collaborative effort led by Open AI as the operating partner and Softbank as the financing partner. Supposedly Stargate is going to raise and spend $500 billion over the next four years to build out sufficient capacity to allow U.S. companies to lead in AI training. Just to put $500 billion into perspective, Microsoft# has announced that it plans capex expenditures of $80 billion in 2025, more than any other amount from a U.S. company.
No doubt, capital spending to support AI training and inference is going to be massive over the next several years. Not all will end up being productive. There are multiple large corporations chasing similar rainbows. Markets ultimately will determine who offers the best, most robust and most economic solutions. The losers will limp toward the graveyard. As for this week’s announcement, it fits within the Trump administration’s shock and awe first week strategy. But I am reminded of the 2017 announcement that Foxconn, the Chinese company that has been the largest assembler of iPhones, was going to spend upwards of $10 billion to build a LCD factory in Wisconsin to make displays. It never materialized. None of this is to belittle the prospects for Stargate but rather put the initial ballyhoo and promises into some perspective.
With all this said, here is what I learned this week:
1. Trump’s team was much better organized this time around. Early efforts in 2017 were hampered by a lack of experience and disorganization. In many cases, Trump barely knew members of his own cabinet. Not so today.
2. Trump will never have more political capital than he had at the moment of inauguration. He knows that. He will press the envelope early to expand White House powers to the limit. With that said, he has a razor thin majority in Congress, and has already begun to see courts pushback when he oversteps. That won’t stop him from trying.
3. If Trump is going to succeed as much as his supporters want, he will have to maintain focus. He will also have to limit his mistakes. He still talks of 25% tariffs against Mexico and Canada. We will find out soon which threats become promises. He should note that we import more oil from Canada than any other country and many midwestern refineries are configured to operate with heavy Canadian crude. Mexico ranks second only to Canada. Mr. Trump screams “drill baby drill” but oil producers want stable prices, not the low prices Trump wants. He may control the political arena more successfully than the economy. The consensus among economists is that tariffs will raise inflation 20-40 basis points and cut growth by a similar amount. Those may sound like small numbers, but if inflation at the end of 2025 is closer to 3% than 2.5%, bond markets won’t like it.
4. DOGE efforts and their ultimate success is still very much an open question. Elon Musk now notes the $2 trillion savings might be more aspirational than realistic. The Federal bureaucracy is big and will fight back against indiscriminate mandates. Ramaswamy has already announced his exit as has the lead counsel. Most efficiency experts acknowledge there is lots of room for savings. Using a razor blade rather than an ax might prove more effective. We will learn a lot more over the ensuing months.
The bottom line is actually rather simple. Washington gets all the headlines but the path forward for out economy is determined by central bank and Treasury monetary policy, as well as the ability of our tech sector to increase productivity through innovation. Never has so much capital been deployed. AI is going to be a Teutonic shift in how virtually everything is done in a modern world. Legislation will be needed to ensure AI is used as safely as possible, but otherwise, Washington would be wise to get out of the way and let tech innovators do their thing.
Indeed, what is happening with technology advancements is the most profound catalyst for our entire economy. It goes well beyond the success of the Magnificent 7 to companies building the infrastructure needed to support all the data and electricity needs. It extends to independent power producers who will provide the backbone of future generating capacity needs. Over time, it will expand further into banking, lowering transaction costs while speeding the velocity of funds. It will accelerate drug discovery and development, software coding, and improve supply chains. Virtually no industry will be left untouched. While AI isn’t going to change how we brush our teeth, it will optimize the manufacturing and movement of goods, lower the needed levels of inventories and improve returns on capital. Some of those improved returns will be returned to consumers via lower prices, a powerful counterbalance to the inflationary pressures we constantly talk about.
Nothing that happened last week changes the fundamental picture framed between Election Day and Inauguration. The prospect of lower taxes (barely discussed last week), lower government spending, less regulation, and increased border security are all good news to the investment community. The key fears of higher inflation and inflated deficits still exist. Judging by the bond market reaction, or lack thereof, last week those fears still exist at about the same level as before. As noted earlier, the stock market’s reaction last week was more related to equities than any adjustments to economic outlooks related to the flood of Executive Orders. This week and next come the key earnings reports including the majority of the Magnificent Seven. How Wall Street reacts to those results will probably have as much impact on markets as any additional Executive Orders from the White House.
Today, Mikhail Baryshnikov turns 77.
James M. Meyer, CFA 610-260-2220