Where does the US economy stand today after 10 months of Donald Trump?
What’s truly surprising is the resilience of the US economy, despite several different shocks. There were many things wrong with tariffs, but even that did not push the US into recessionKeep in mind the US is roughly a $30 trillion economy. About 70% is consumption-around $21 trillion. 70% of consumption is services, and tariffs don’t apply there. So, while it’s not good policy, it won’t drive the US into recession.
US tariffs have been a big worry for Indian investors. What is your reading?
India is actually in a fantastic position with respect to tariffs. To me, India is almost a mirror image of the US-a very large, relatively closed economy where trade isn’t the primary driver of growth.In India, even if tariffs are fully passed through, the direct impact is maybe 50-60 basis points off GDP growth. That’s significant, but India is not the Eurozone, starting from 0.8% growth. We start from around 6-6.5%. The worst-case scenario is a hit to business confidence. But the government has a lot of ammunition to reignite confidence. So, if the US economy is not slowing, is the market overestimating rate cut expectations by the Fed?
When the tariff announcements were made, the general assumption was that the US would fall into recession, which is why people started anticipating a massive number of Fed rate cuts. I think the market is ignoring inflation. People keep saying inflation is coming down, but it has largely remained unchanged since mid-2023-we’re stuck near 3%. The market is ignoring this because of the recency bias from the post-GFC (Global Financial Crisis) years, when the Fed repeatedly bailed markets out, but those were periods when inflation wasn’t an issue.Today, the Fed is in a tough spot. If you ask whether markets are overestimating cuts, I think so. I believe the neutral funds rate is closer to 4%. At 3.75-4.00%, the Fed has moved through neutral in my view-they’ve done their insurance cuts.
So, will the Fed cut interest rates in December?
They’d be smart not to. My base case is that the Fed will likely hold. What’s interesting is despite elections last Tuesday and market jitters over AI the previous week, Trump hasn’t mentioned the Fed. Perhaps the more sober elements-Scott Bessent (US Treasury Secretary), for example-are moderating policy direction, much like Mnuchin did in the first administration. If Trump isn’t seen as doing enough on the inflation front, Republicans could have a difficult time next year.
So in 2026, how many cuts, if at all?
I don’t see scope for many more. Maybe, they take it to 3.50%, but not much beyond that unless there’s a dramatic reversal in growth data. The total number of job cuts which are announced is 80,000. It sounds substantial, but it’s less than 2% of the workforce of all these companies put together.
What’s the one big risk the market is ignoring?
I do think that the overall fiscal outlook for the developed world is appalling-not just the US, but Europe and Japan as well. I am not saying the market will magically focus on it in the next six months, but I genuinely worry about it. When it comes time to pay the piper, it will be very painful.The other risk is the bubble issue. The market is very aware of it. Yes, it keeps you up at night and everyone knows it is there. The problem is that you can see bubbles, but you cannot call the end of a bubble and simply stay out of the market. Some bubbles last ten years. If you stayed out completely, you would miss the entire run.
How serious is the bubble risk in AI?
Bubble bursts have always been tough to kind of forecast. There are a hundred different ways of measuring it to show it is a bubble or it isn’t a bubble.All I can say is relative to historical norms, the valuations do look a little extreme. Every time I see comparisons with 2007-08 but that I disagree with that because in 2007-08, the crisis hit the individuals because the largest, most widely held asset in the US economy is housing. And this one, it’s the equities, which are less widely held.
There are also concerns about the US property market and smaller banks.
So, that one we are keeping a close eye on. There are two sets of banks– the mega banks and then the second-tier banks, which deal with local property markets, and that’s a small and medium-sized bank. These are the banks that historically have lent a lot to commercial real estate, but it tends to be localised.With SVB, the biggest problem was that there was an asset liability mismatch. The other two big defaults so far-First Brands and Tricolor appear to be fraud rather than underwriting problems. So, we are seeing idiosyncratic issues, not a broad-based problem.
Is the dollar’s resilience surprising?
At the start of the year, the dollar in real terms was at its strongest since the Plaza Accord. The US exceptionalism narrative met three developments in short order: China’s DeepSeek moment, Germany’s €1 trillion program announcement and the tariff day. European and Japanese equities became natural destinations for reallocation, and the dollar weakened sharply.The mistake was assuming the dollar would keep depreciating from there. The dollar isn’t collapsing. The US economy remains in better shape than many developed peers.
Given this backdrop, is there scope for investors to consider emerging markets?
I would anticipate that investors do look a little bit at that diversification trade because they’ve been so US-focused for so long. India remains an excellent lower correlation emerging market play relative to the US, precisely because India is so domestically driven.
What’s your reading of gold as an asset class?
Right now, gold reflects genuine uncertainty about the global outlook, and it is less about yields, which are distorted by excess liquidity. It’s more about people’s belief that medium-term inflation is not going back down. Talk of a near-term reversal may be premature. It might have overshot tactically, but from a macro perspective, there’s still space for gold. I also do think that people are holding gold, but the reality is there is no alternative yet serious alternative in scale to the dollar. Otherwise, what I would expect to see is that you have the dollar and then you have the euro.