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Hardy’s Macro View: Rule #4 for the Trump 2.0 market era.
Macro 6 minutes to read
John J. Hardy
Global Head of Macro Strategy
Summary: In this final installment of our four-part series, we examine Rule #4 for navigating the Trump 2.0 era: we are entering an inflationary age. Unlike previous inflation episodes, this one is structural, rooted not just in policy choices but in the deeper rewiring of the global economy.
This article is marketing material and does not constitute investment advice.
In the first three installments of this series, we introduced key rules for navigating a market era reshaped by the Trump 2.0 agenda.
- Rule #1 explained why volatility is structural, not cyclical, as the U.S. challenges the very global order it once championed.
- Rule #2 explored how U.S. equity leadership—especially among mega-cap tech names—may be vulnerable.
- Rule #3 examined why the U.S. dollar may no longer be the world’s only safe haven as global capital seeks diversification away from U.S. assets.
These themes converge in Rule #4: we are in an inflationary era—not due to short-term shocks, but because the very structure of global production and capital allocation is undergoing a profound shift.
It’s Not About the Tariffs, at Least Not Directly
It’s tempting to link inflation fears with Trump’s aggressive tariff agenda. Surely, a 25% tariff on imported goods must raise prices, right?
Not necessarily. Tariffs function like a one-off tax hike if they merely suppress demand for imports without a broad-based inflationary impact. Other prices may even fall in response to maintain real purchasing power.
The real inflation story isn’t in the tariffs themselves—it’s in what those tariffs represent: a strategic shift away from dependency on foreign supply chains, particularly China’s. This shift implies a large-scale restructuring of where and how goods are produced. And that is inherently inflationary.
The Inflationary Heart of U.S. Re-Industrialization
Since the 1990s, China has risen as the world’s factory, aided by a currency devaluation in 1994 and later WTO accession. Its economic model, which some have called “predatory mercantilism”, enabled it to dominate global production across a wide range of critical inputs and outputs.
Today, China leads not just in consumer electronics and telecoms, but in critical supply chain inputs like semiconductors, rare earths, and solar components—largely powered by cheap and dirty coal.
The U.S. can’t decouple from that dominance without costs. A strategic pivot toward domestic and even friend-shored production, whether for national security, economic resilience, or geopolitical leverage, means accepting structurally higher costs. Energy inputs will be more expensive. Labor markets will be tighter. Domestic capacity building, in short, would likely drive classic demand-pull inflation.
Chart: US S&P 500 Index – with and without inflation. Even since the beginning of the millennium in 2000, when the US S&P 500 was near it’s all time high of the time, the S&P 500 has yielded remarkable returns after an ugly back and forth in the years 2000-2009. The two lines show the “S&P 500 total return”, which is the return one would have received with reinvested dividends, both in inflation adjusted terms (adjusted relative to the US official CPI series) and in nominal terms. Note the added impact of inflation in the post-pandemic years relative to the more modest average inflation from the first two decades of the chart.
What About the Debt?
A common concern: if inflation rises, won’t interest rates follow—and won’t that make America’s debt burden unsustainable?
That assumes the U.S. will allow real rates to normalize. In practice, we are likely headed toward a period of financial repression, where short-term interest rates are deliberately held below the inflation rate to erode the real value of debt. Longer rates might be allowed to rise a bit more to encourage investment, but that matters less for sovereign US debt since the vast majority of treasury is shorter-term (less than 5 years). This isn’t a new strategy not a new idea, just a politically palatable way to slowly reduce the debt-to-GDP ratio without overt default or fiscal austerity.
Inflation, in this context, is not a bug. It’s a feature. It becomes a tool to gradually rebalance the national balance sheet, assuming inflation can be directed in politically acceptable ways.
The Role of a U.S. Sovereign Wealth Fund?
The idea of a US Sovereign Wealth Fund has been thrown about as a way for the US government to invest in its new urgent priorities and is only in the "fantasy stage" of development. Skeptics laugh, pointing at the enormous US twin budget and trade deficits and therefore, the lack of US national savings or treasury reserves outside of gold.
But in a war-economy mindset, or at least a “trade war-economy mindset”, which the Trump 2.0 era increasingly resembles, priorities can change and every government has resources that it can mobilize. If the sovereign deems a project essential—say, building 1,000 ships to ensure maritime security—it can finance it outside traditional Treasury issuance by leveraging federal assets as collateral, forcing the funneling of credit to finance such a project or even deploying MMT-style balance sheet expansions. Sure, there may be a crowding out effect, but the powers of government are vast when there is sufficient motivation.
Such initiatives could further catalyze inflation—but again, that may be acceptable or even desirable, if it helps shift the US’ sense that it is moving in the right direction with its new priorities.
Other Global Inflation Pressures
It’s not just the U.S. reshoring. Inflation may also arise from:
- Europe’s own industrial policy, as the EU seeks greater supply chain security, especially in energy, defense, and tech.
- China’s transition away from overproduction, either because it stimulates domestic demand in response to a balance sheet recession or seeks to limit debt growth by reducing industrial overcapacity.
- Deglobalization, generally reducing the efficiency gains that kept inflation structurally low for decades.
Remember: Not All Inflation Is Created Equal
We are conditioned to fear inflation as inherently negative. But not all inflation is the same. The key is wage-relative inflation. If inflation is concentrated in sectors where Americans are overexposed to financial fragility, like housing, rents, or healthcare, it can be deeply destabilizing. But if wage growth outpaces inflation, especially in these over-financialized sectors, inflation could improve household balance sheets and reduce debt dependency.
In the Trump 2.0 market era, inflation is not a risk to be hedged away. It’s a central feature of a new strategic paradigm, one that markets, policymakers, and investors must learn to live with.
Portfolio adjustments for a higher inflation world
One general note for equity-focused investors is that high-growth equities should be weighed carefully against long-term interest rates. When long-term rates rise, the present value of future profits for growth stocks decreases because those profits are discounted more heavily. All else being equal, a 5% long-term interest rate should result in lower price-to-earnings (P/E) ratios for growth stocks than when rates are at 3%. This effect has not always been evident in recent market cycles, possibly because investors expect inflation to rise while interest rates remain constrained, and because some companies may be able to raise prices at least as fast as inflation—potentially even outpacing it. However, relying on this scenario is risky.
In general, the conventional wisdom in a rising inflation environment is to focus on investments that can retain their real value. This includes:
- High-dividend stocks with stable profit margins and pricing power, and a proven track record of dividend growth. Companies that can pass on higher costs to consumers—often found in sectors like consumer staples, utilities, and healthcare—tend to perform better in inflationary environments. Dividend-paying stocks also help maintain income streams.
- Companies with exposure to real assets, such as those in real estate, infrastructure, and commodities. These asset classes have historically performed well during inflationary periods. For example, the recent run-up in gold prices may be spreading to other dual-use metals like platinum and silver, and could extend to broader industrial and commodity markets.
- Inflation-protected bonds (TIPS), which will outperform their non-inflation-indexed counterparts if measured inflation exceeds current expectations. TIPS adjust their principal and interest payments for inflation, helping to preserve purchasing power over time.
- General diversification and exposure to favored sectors, particularly those benefiting from U.S. and European industrial policy. This includes defense, infrastructure, materials, and construction. However, if the public sector is the primary customer, profit margins may be more limited due to contractual constraints.