Take aways

• Production hikes means the end of OPEC

• We present a long list of what to expect on the geopolitical front from Trump

• On trade/economy don’t expect Trump to be overly hawkish/reckless 

Before we get to Trump, we need to quickly discuss OPEC and their recent cut in demand forecasts. This reduction hints at an unwillingness to increase production in the near future. Saudi Arabia is key here, as it holds the largest excess capacity, and a production hike from them could swing the market and send prices below $50 USD in the blink of an eye. MBS needs to balance two opposing pressures. On one hand, the Saudis may need to act to prevent increased U.S. drilling, and flooding the market could be a strategic move. On the other hand, it’s clear that the Russians—and possibly the Chinese—are pushing hard to delay any production hikes, and a significant increase could even signal the end of OPEC. If MBS ultimately decides to dismantle OPEC, Trump might have to offer a sweetener, perhaps in the form of Western investments in projects like Neom City. 

Chart 1.a: The Saudis are carrying the load wrt. production cuts

Chart 1.b: Lower crude oil prices will have a toll on the Saudi economy

What should we make of Trump’s cabinet?

We’re getting a lot of news on Trump’s cabinet appointments, along with some early insights into what his foreign policy doctrine might look like this term. Most observers expect this Trump administration to be significantly different from his first. Susie Wiles is set to be the all-important Chief of Staff; she also ran Trump’s recent campaign with great discipline, eliminating the impromptu Twitter rants and random outbursts and keeping the inner circle free of figures like Steve Bannon and Roger Stone. This shift in management style suggests that Trump’s foreign policy team will operate in a much smoother and more structured way than last time. That’s why it’s worth paying close attention to these appointees and their positions on key issues.

We expect Marco Rubio to be named Secretary of State, Mike Rogers as Secretary of Defense, and Mike Waltz as National Security Advisor. This is an all-political team without career diplomats, but they’re still experienced and bring strong political clout. So, where do they stand on major issues? Here’s my take:

Israel/Gaza: Full support for Israel, with an approach that seems to favor “finishing the job.” They’re strong opponents of a two-state solution.

Ukraine: They advocate for ending the war but oppose an immediate pullback of funding, as some, like JD Vance, have suggested.

China: They’re expected to take a hardline stance, pushing for aggressive trade measures and sanctions. The policy will likely include arming Taiwan and encouraging other Asian nations to align with the U.S. in countering China.

UN: The team is likely to take a very skeptical approach toward the UN. They see the Security Council as dysfunctional and believe many UN agencies and boards are compromised by authoritarian regimes and religious fundamentalists.

NATO: Trump’s team believes his past criticism has “awakened” European allies, and they’re now committed to remaining in NATO, with a focus on strengthening it from within.

This potential cabinet lineup suggests a foreign policy that’s more structured and consistent but also unapologetically assertive, particularly toward China and the UN. The shift in tone and personnel may signal that Trump’s second term could feature a more conventional approach in terms of process, but not necessarily in terms of policy direction.

Trump’s economic policies have kept bond markets on edge and pushed yields higher. Scott Bessent, who is looking to become Treasury Secretary, has outlined a “3-3-3” economic plan, which focuses on achieving 3% real economic growth through deregulation, reducing the budget deficit to 3% of GDP, and increasing U.S. oil production by 3 million barrels per day.

Beyond these key objectives, Bessent has also tried to address concerns about potential inflationary impacts from the administration’s proposed policies, including substantial tariff hikes. He has dismissed fears of rising inflation as “absurd,” pointing to the 1.9% average annual inflation rate during Trump’s first term as evidence that such policies don’t necessarily lead to inflationary pressures. Appointing a former Soros disciple with hawkish leanings as Secretary of the Treasury doesn’t exactly signal a free-for-all in bond markets or a surge in yields.

Overall, Bessent’s economic approach seems designed to reassure markets that Trump’s policies will be more disciplined than expected, with a focus on sustainable growth, fiscal restraint, and a boost to domestic energy production. The “3-3-3” framework suggests a commitment to both growth and fiscal responsibility, which could help temper market fears of runaway yields. 

Crude and bond yields have had an interesting divergence over the last month. The current divergence seems to be based on assumptions of “drill, baby, drill” alongside “deficit spending” in a Trump administration. However, Trump’s main policy platform has been to reduce inflation, so it’s questionable whether he would actually allow inflation to surge dramatically. We’re skeptical and expect a more tempered approach from Trump this term. Additionally, concerns about Trump’s trade tariffs and deficit spending may be overblown, especially on the long end. His proposed 60-100% tariffs on China seem more like a negotiating tactic, and it’s hard to imagine that figures like Elon Musk would sit back and let that happen without a fight. It seems unlikely that such extreme measures will come to pass.

Chart 2.a: When will this divergence end?

Chart 2.b: Fiscal balance ex interest payments at 3%.. Pressure on Powell to cut about to come?

With the newly appointed border czar, Tom Homan, preparing to start his work over the next 2-3 months, it will also be very interesting to assess companies’ hiring expectations, especially among small and medium-sized businesses that rely on immigrant labor. Similar to Trump’s tough rhetoric on China, the immigration issue could also become a market theme that investors view with caution. If mass deportations lead to increased wage pressures in the US, don’t expect Trump to push it too far. Inflation played a role in costing Biden and the Democrats the presidency; Trump will likely try to avoid making the same mistake. In the end it might just end up with a lot less border passes and some toughness on crime, but no labor exports due to wage and labor shortage fears. 

Chart 3.a: Slowly but surely border encounters are becoming fewer

Chart 3.b: Trump cannot afford wages to spiral out of control 

While much has been said about bond vigilantes potentially punishing government deficits, perhaps we should start paying more attention to “stock vigilantes” as well, given that the median American is increasingly exposed to the equity markets. Any Trump tariff policies that negatively impact corporate earnings and stock indices could directly harm the average American investor, potentially deterring Trump from pursuing the most aggressive tariff policies. All in all Trump should be taken with a grain of salt when it comes to tariffs, labor/immigration and fiscal recklessness.  

Chart 4: The American stock vigilants to hold Trump in a short leash