What happened to the Donald Trump investors thought they knew?
Think back to the first Trump administration. It was common to see him share tweets like this:
Source: Twitter/X/CCN
Throughout his first term in office, he touted the stock market’s performance as a way to measure his success in the White House.
And in a way, I think that’s true.
Generally, what’s good for the market is good for the country. Most Americans rely on investments for their retirement prospects. The prosperity of the American populace is closely tied to the American stock market. As is the U.S.’s global reputation.
A long-term S&P 500 chart is a clear image of American Exceptionalism, and few presidents in recent memory have embraced that as much as Trump… well, Trump 1.0, at least.
But now he’s singing a different tune. Here he is in a recent interview:
You can’t really watch the stock market. If you look at China, they have a 100-year perspective. We have a quarter. We go by quarters.
And there is some truth to that. But it’s surprising coming from a man who, according to CNBC, tweeted about the rising stock market at least 60 times during the first year of his first term.
Investors, understandably, assumed Trump’s interest in the market would carry over into his second term. From election night to mid-February, the S&P 500 was up by more than 3.5%. Investors were excited about the prospects for Trump’s apparent pro-business, deregulatory, lower-tax regime.
Yet, it has all come crashing down.
In recent weeks, we’ve seen the CBOE Volatility Index (VIX) spike, meaning that investors are expecting heightened volatility in the near term. The S&P 500 is down nearly 8% this year… to levels that we haven’t seen since September.
His recent policy choices – or blunders, as Mr. Market would say – have destroyed trillions in stock market value, and now the word “recession” is on the tip of every prognosticator’s tongue.
The postelection “Trump bump” has been erased.
Or…
Maybe it was self-sabotaged.
Today, we’ll consider a curious possibility. What if Donald Trump and his cabinet are attempting to purposefully engineer a small-scale recession?
It may sound crazy, but there’s more evidence than you might think. And while the broader market would suffer, there are possible benefits to the financial health of the country… and for a handful of unloved stocks that could shoot higher.
Today’s essay will be a little longer. And it will require you to keep an open mind. But, if I’m right, understanding this one idea could be the difference between your portfolio thriving and suffering in the year ahead.
Let’s investigate.
A New Barometer
Whether it’s true or not, Trump says he’s not looking at the stock market. So, what is he looking at?
The president seems to be focused on two things: bringing down energy prices and lowering interest rates.
OPEC is largely in charge of the first item on that list, but Trump’s “drill, baby, drill” policies certainly help. The price of oil has fallen by nearly 20% since Trump took office, so he’s succeeding on that front.
As for rates, we know the Trump administration is focused there because the Treasury Secretary told us. “He and I are focused on the 10-year Treasury,” said Scott Bessent in an interview last month.
And if that is the focus, it does appear to be working. Interest rates are falling. The U.S. 10-year Treasury yield has fallen from 4.8% to 4.3% during the past couple of months. But that’s not far enough.
Why?
Because the U.S. has a ticking time bomb of debt coming due in 2025.
Depending on how you look at the data, the U.S. government has anywhere from $3 trillion to $9 trillion worth of debt maturities that it’s going to have to deal with this year.
Refinancing this debt at current levels is simply not sustainable. Think about it. Take the high range of that estimate – $9 trillion. At 4.8%, that implies roughly $432 billion in net interest per year. But finance that same $9 trillion at 3%, and net interest falls to $270 billion. Still a big number. But it’s more manageable.
There’s reason to believe that Trump is playing an odd game of 4D chess, and he could be doing the unthinkable.
After all, this is the man who, in 2016, said:
I’m the king of debt. I’m great with debt. Nobody knows debt better than me. I’ve made a fortune by using debt, and if things don’t work out, I renegotiate the debt.
It’s one thing for a private citizen to renegotiate debt. But how would a president do it for the sovereign debt of the world’s largest economy?
Well…
One way would be to use economic policy agenda to sow uncertainty… unrest, even… around the U.S. economy in an attempt to spark a recession. With enough uncertainty, investors would flee from equities and into Treasurys, thus bringing down long-term rates. A recession would also force the Federal Reserve’s hand when it comes to reducing its own key rate.
In other words, the president may be willing to face short-term pain for the good of the country’s balance sheet long term.
It’s an interesting thought. And if it’s true, it obviously impacts investors, at least in the near term. And as crazy as it sounds, there are a lot of data points lining up in that direction.
And the evidence is there for anybody brave enough to look…
The Problem of Debt
The U.S. government released a national debt report on March 7, showing that its debt continues to soar. The report shows that the U.S. national debt is $36.22 trillion (as of March 7).
That’s $1.78 trillion higher than it was a year ago.
The report states, “Over the past year, the rate of increase averaged $4.87 billion per day, $202.94 million per hour, $3.38 million per minute, and $56,372 per second.”
The report also said that if the same rate of growth that we’ve seen over the past three years continues, we’ll reach $37 trillion in debt by the end of July.
The government is acknowledging that we’re going to add $1 trillion in debt every 184 days… unless things change.
Furthermore, this week, the U.S. released its Monthly Treasury Statement, showing that fiscal deficits and spending are up as well.
Obviously, this path isn’t sustainable.
What’s worse, it’s a self-fulfilling problem.
It cost the U.S. $74 billion in February to service its debt.
On a year-to-date basis (looking at the government’s fiscal 2025 thus far), net interest is the fifth-largest line item on its expenditure sheet, just behind health care and defense spending.
Source: U.S. Treasury
As you can see, the U.S. government’s deficit rose to just under $1.15 trillion during the fiscal year (which begins in October).
And it’s only growing larger.
Although Elon Musk’s Department of Government Efficiency (“DOGE”) antics have been in the headlines, it doesn’t appear as though they’re working. Looking at the Treasury statement, both receipts (incoming cash) and expenditures set records in February.
The first half of that statement (more receipts) is great. However, the second half points toward increased government spending, even in the face of DOGE cuts. This is largely due to large entitlement programs (social security and health care-related programs) alongside defense spending (which was up roughly 8%) and rising net interest payments (which were up roughly 10%).
Spending cuts at places like the Department of Education are making headlines. However, spending there pales in comparison to the largest line items on the U.S. balance sheet.
It’s unclear what, if anything, the U.S. can do about its largest entitlement programs.
And with so much geopolitical uncertainty in the world right now, I doubt defense spending is going to meaningfully fall anytime soon.
That leaves lower debt costs as the best way for the U.S. to reduce the deficit.
And the country may not have a choice.
Here’s a chart that I came across on X showing just how dire the U.S.’s interest-payment situation has gotten.
Source: Kobeissi Letter
We all know what happened with Greece’s economy and the austerity programs that its government had to put into place after the Great Recession. Greek GDP fell by 24% between 2008 and 2014. In the immediate aftermath, the yields on Greek debt soared. The government’s debt was downgraded to junk.
The United States of America is not Greece. Still, the U.S. could end up on a similar track if something doesn’t change.
‘Nobody Ever Gets Rich When Interest Rates Are High’
It appears that the president understands this.
During his address to the World Economic Forum in Davos, President Trump focused on energy prices and interest rates.
He said, “I’ll demand that interest rates drop immediately. And likewise, they should be dropping all over the world.”
He doubled down on this idea in a recent Fox News interview.
When asked about tariffs and a potential economic slowdown, the president overlooked stock market volatility and, instead, focused on falling energy prices and interest rates, clearly showing where his focus lies.
“You know, nobody ever gets rich when the interest rates are high,” Trump said.
Scott Bessent echoed this sentiment in a recent interview on Fox Business with Larry Kudlow saying, “The president wants lower rates. He and I are focused on the 10-year Treasury and what is the yield of that.”
With trillions of dollars worth of debt to refinance, this makes sense.
And then there’s the Fed…
Source: Business Insider
The last four recessions were preceded by a peak, then decline, in the Fed’s key rate. And, yes, that’s the situation today. As a recession indicator, this isn’t perfect. In 1994, the Fed’s rate did peak then decline without a recession. But it’s still something worth watching.
In general, this happens because the Fed’s data points toward an economic slowdown. The central bank begins to lower rates in an attempt to ignite economic growth to fend off deep recessions (or worse).
Remember, the Fed has a dual mandate – promote maximum employment and stable prices. Since late 2021, the Fed has been focused on the latter. It raised rates quickly to beat back inflation. But in the event of a recession, it will have to switch gears.
When recessions occur, people lose jobs. The Fed doesn’t like that. So, they use monetary policy to fight off recessions to keep Americans’ paychecks rolling in (as best they can) by cutting short-term rates.
The problem for Trump and Bessent is that the Fed isn’t going to lower rates without proper cause to do so. Fed Chair Jerome Powell has stood firm in the face of pressure to lower rates from the White House. He says that the Fed is going to stay “data dependent.”
And so, one way the White House could force the Fed’s hand is to give it some new data.
Finding a Place to Hide
The most recent consumer price index report showed inflation easing to 2.8% year over year. That points toward the Fed’s goal of a soft landing. Yet, tariffs could change everything.
All else equal, tariffs are inflationary. That would seem counter to the White House’s goal of lowering rates. After all, the Fed originally hiked rates to get ahead of inflation back in 2022.
But the erratic nature of the on-again, off-again trade-war policies has caused so much uncertainty for investors that they’re selling stocks and running to bonds.
This may seem counterintuitive in the face of rising inflation and a national debt issue. But bond vigilantes be damned. At the end of the day, the U.S. bond market is still where fearful investors will hide. And the president may be forcing them to do just that – for a while, anyway – until he’s able to refinance near-term debt.
Is this Trump’s primary goal?
Probably not.
There’s a good chance that tariffs will bring back domestic manufacturing and increase the government’s receipts as well.
But forcing Powell’s hand and pushing down long-term rates could be a nice cherry on top.
The Good News
I understand if you’re skeptical. I’m essentially arguing that the current administration may be introducing chaos into the market/economy in an attempt to engineer a brief recession to push down rates and force the Fed to do the same. And I’m arguing Trump is attempting to do all this for the long-term benefit of the country’s balance sheet.
It sounds like a wild conspiracy theory, I know.
But even if the President isn’t intending for this outcome, it appears we’re heading in that direction regardless.
And so, the obvious question: What’s an investor to do?
During the recent sell-off that the stock market experienced, there was a clear bright spot – real estate investment trusts (“REITs”). See for yourself.
What you’re looking at is the S&P 500 alongside Realty Income (O) and VICI Properties (VICI) over the past month. Realty and VICI are two of the REITs we track in our Wide Moat Letter portfolio. And as you’ll see, they’ve performed very well during the recent bout of volatility.
That’s for a few reasons:
- Quality REITs like these tend to be very reliable dividend payers (reliability is great during uncertainty).
- Similar to bonds, the value of REITs tends to rise in a falling-rate environment.
- Relative to the wider market – and many of the tech names – many REITs are dirt cheap.
We’ve been saying that REITs are too cheap for years now.
They sold off a few years back when interest rates started to rise. However, we knew this negative sentiment would quickly change when rates began to fall. And seeing as how rates could not stay this high forever, it seemed like only a matter of time before REITs came back into favor.
Not only do stocks like these provide safe, high yields (which will become more and more attractive as bond yields fall), but their valuations are still very cheap (despite recent rallies).
Trump’s a real estate investor at heart.
When he says, “Nobody ever gets rich when the interest rates are high,” that’s what he’s talking about. That’s what he knows best.
And the good news is, you don’t need billions of dollars to build a well-diversified property portfolio. You can do it with REITs, which is a specialty of ours at the Wide Moat Letter.
I’d encourage current subscribers to review our current REIT portfolio right here. And if you’re interested in joining us, and begin building your own portfolio of REITs, you can learn more right here.
Regards,
Nick Ward
Analyst, Wide Moat Research