One week / one topic: One of us?

What happened?

After weeks of speculation, President-elect Trump has picked Scott Bessent – a storied hedge fund manager – to run the US Treasury.

Market participants welcomed the development (“He’s one of us! He gets it!”) assuming that – among other things – he’d be able to implement his stated ‘three arrows’ agenda:

• Cutting the budget deficit to 3% of GDP by 2028;

• Spurring GDP growth of 3% through deregulation;

• Producing an additional 3 million barrels of oil or its equivalent a day.

This program aligns with Bessent’s expectations that "We are going to have to have some kind of a grand global economic reordering”, and it clearly resonates with investors’ concerns.

Despite a booming economy, low unemployment and stocks at all-time highs, the US keeps running a very large deficit.

While the bar is (much) higher for investors to properly challenge the status of US Treasuries of the Dollar, most observers agree that this cannot last forever…

Real GDP growth remains solid, and in line with its long-term average. If anything, what stands out here is the willingness to keep this going via deregulation.

As per Jon Stewart’s recent comments, in the US there seems to be a rule to prevent you from doing anything… but also a loophole to exploit so that you can actually do it. (Try Europe…)

Lastly, increasing oil production by ~25% – beyond delivering obvious political dividends – would help both bring the deficit (more) under control, and boost economic growth.

What’s not to like, you may ask?

Is this yet another reason to be bullish US assets vs the rest of the world?

Our observations

• Fundamentals: Perhaps the problems being addressed here are intractable, but any serious attempt will likely move prices nonetheless. It was only 13 months ago that US 10yr yields breached 5%, so we should not underestimate how much markets will be paying attention.

• Price action: Following Bessent’s nomination, yields came down as bond vigilantes circumspectly sighed in relief. Correlation is not causation, but the next installments in this saga might provide further insight.

• Investor beliefs: Two words should suffice to dispel any unfettered optimism about Bessent’s nomination: Gary Cohn. Markets similarly cheered when the former Goldman Sachs executive joined Trump’s cabinet in 2017, only to see him resign a year later in protest over trade tariffs... Don’t forget who’s boss here.

So what?

While no one really knows what’s going on in the room where it happens, we are still left trying to make sense of the present situation.

Policy intentions can often be a far cry from what’s actually implemented in the end, but we can at least say that recent, post-election developments have done nothing to undermine the perceived supremacy of US assets.

In equities, the ~40% discount on a forward P/E basis for European vs US equities comes down sharply once you account for index composition and lower return on equity.

As for government bonds, the US – despite all its problems – still commands the exorbitant privilege of issuing Dollars as the international reserve currency, and its creditworthiness remains backed by unmatched hard power.

While US equities remain (very) expensive on a historical basis, we should also note that backward-looking comparisons have not worked for a long time.

‘The Most Misunderstood Bull Market Ever’ smacks of hyperbole, but looking at the below you’d be excused for concluding that something structural has indeed changed…