Beyond The Noise

Investment Note #25 - 28th February 2025

Beyond The Noise

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Introduction

The blitzkrieg approach to government that the new US administration has embarked on over the last month is probably best thought of as a continuation of former White House strategist Steve Bannon’s “flood the zone with sh*t” strategy. He viewed the media as the opposition rather than the Democrats, and his approach was to disorientate rather than persuade.

In the short time since his inauguration, Donald Trump has threatened tariffs on allies, ended USAID, culled federal employees, vaguely threatened to default on US debt, threatened to renege on NATO obligations, suspended the enforcement of the Foreign Corrupt Practices Act and suggested the creation of a US sovereign wealth fund (SWF).

The zone is being flooded.

Trying to discern between signal and noise can be difficult, but two proposals in particular are worth diving into in more detail, given their potentially far-reaching consequences.

A simple framework for evaluating the current situation is the fact that we know Trump is motivated by the projection of power and the accumulation of wealth.

US Debt – Deficit and Default?

Two themes Trump consistently highlighted during his campaign were the need to reduce the federal deficit and to weaken the dollar.

Reducing the deficit via spending cuts is a classic small 'c' conservative priority; this has been outsourced to Elon Musk's Department of Government Efficiency (DOGE), which has promised $2trn of spending cuts. The results so far have ranged from underwhelming to outright lies.

The other two prongs in his debt reduction effort have been an attempt to strongarm allies into hefty tariffs (fitting right into our view that he enjoys projecting power – even if those tariffs breach trade deals he signed in his first presidency) and incredibly, threatening to default on US debt!

Looking at that second part first, per Trump himself:

“We’re even looking at Treasury. There could be a problem—you’ve been reading about that, with Treasuries, and that could be an interesting problem because it could be that a lot of those things don’t count. In other words, that some of that stuff that we’re finding is very fraudulent, therefore maybe we have less debt than we thought of.”

This is a buck-wild statement for a sitting US president to make. US Treasuries are the ultimate safe-haven asset and are used as collateral for everything, suggesting the US might default would throw markets into chaos.

So, should this be taken seriously? Going back to our framework, that Trump values his ability to project power and his own wealth as sacrosanct, it is maybe not surprising that the bond market did not react strongly to these comments. Trump has a habit of repeating himself, so it is worth watching to see if he returns to this point.

A policy proposal to be taken more seriously on the deficit front comes from Steven Miran, an advisor on economic policy in the Treasury from 2020 to 2021 during Steven Mnuchin’s tenure and is the current nominee for Chair of the Council of Economic Advisors. He recently wrote a paper advocating that a “user fee” be applied to foreign holders of US Treasuries to lower the interest burden on the US. He also argues that this could help weaken the dollar; with Treasuries earning a lower interest rate, foreign central banks would be more likely to sell their Treasuries for other debt, lowering the demand for dollars and weakening the currency; this has the benefit of making US exports more competitive.

Another of Miran's suggestions is a sort of debt swap, trying to force foreign holders of US debt to swap their treasuries for 100-year zero-coupon bonds. The implication being that Trump will make the US’s NATO allies an offer they can’t refuse – accept the swap or face tariffs. Indeed, if tariffs aren’t sufficient stick, Trump has suggested in the past that he may eject any holdouts from the US security blanket, NATO commitments notwithstanding.

The Sovereign Wealth Fund

The most potentially consequential policy directive Trump has enacted has been to ask the Treasury secretary to explore the creation of a sovereign wealth fund for the US. Usually, sovereign wealth funds result from budget surpluses, something the US has not had in a long time, but this is not a strict requirement. The US, while cash-poor, is asset-rich, and the incoming Treasury secretary has already suggested he is happy to monetise the asset side of the US balance sheet. This monetisation could come in the form of asset-backed “MAGA” bonds collateralised by non-financial public assets.

The initial size of a potential fund is anyone's guess, but it's safe to say that Trump would not be happy with anything less than the world's largest. The US currently has $5.7trn of non-natural resource assets that could be used as collateral for the SWF. This includes assets like $1trn of student loan receivables. The US also holds its gold at Fort Knox at a book value of $11bn (or $42 per ounce). Using today’s market price puts its value at $732bn. (that is assuming the gold is there and Goldfinger didn’t nuke it; more zone flooding!).

How the SWF might work is a more interesting question, again thinking of the personalities involved, it's difficult to imagine the fund operating like the, say, the Norwegian fund with its commitment to transparency and good governance, and easier to think it will operate like a levered hedge fund. When signing the order, Trump suggested the fund would buy TikTok; this kind of politically useful investment, as favoured by the Saudi investment fund, is more likely to be the blueprint.

The deployment of this level of capital especially if done with an America First! mindset will have significant, largely unknowable ramifications. Generally speaking, though, a sudden influx of capital on this scale is not good for longer-term returns.

Bringing it Together

As mentioned, the administration is engaging in a deliberate game of three-card monte to distract the media and analysts.

However, the policies around US debt and the SWF are worth taking more seriously as they work well together and also lean into Trump's Corleone instincts for wealth and power.

Using asset-backed MAGA bonds funded by cajoling allies to invest in strategic and/or politically useful sectors and companies would allow Trump to both project power and potentially deploy capital for the American people and/or himself.

Summary

For investors, the upshot of all of this is a stark reminder that despite its strong relative returns over the past few years, the US may no longer be as friendly a place for foreign investors. As a result, Europe and Asia may start to see more capital flows. Although it's only eight weeks into 2025, there are signs this has started, with both European and Asian markets comfortably outperforming the US at the time of writing.