Media & News

November 22, 2024

Letter: Scott Bessent, Uncertainty and Volatility

Dear friends and colleagues,
Political uncertainty is back as a major force shaping global markets. For years, this was mostly an issue for EM investors. But the line between EM and DM is getting very blurry. US politics are driving markets in a new way, and investors, even if they are equity focused, have to pay attention to macro forces to manage risk.
Over the past few weeks, we have seen dramatic market moves, with many resembling those observed in 2016 (bond yields higher, dollar higher, etc).
The latest catalyst has been news around cabinet appointments, especially the US Treasury Secretary role.
We are happy that Scott Bessent now has achieved the formal nomination. Scott was one of our very early supporters of Exante Data when the company was founded back in 2016 (see his public endorsement from back then here) and he was also kind enough to speak recently on a client call on the likely policy outlook under Trump II (in a personal capacity). We would like to thank Scott for his support over the last several years, and wish him the very best in his important future role.
We think Scott has a unique skill set that will allow him to navigate the different cross currents ahead. Specifically, Scott has intellectual curiosity and a deep historical perspective that will allow him to operate in a highly uncertain new regime, and serve as a strong independent analytical voice at a time of mounting economic challenges for the US and the global economy.
When Donald Trump was elected the first time in 2016, markets looked ahead to a regime of lower taxes and expansive fiscal policy. And we did get a growth boost from both lower taxes and larger government expenditure, especially in 2018.
But 2024 is different from 2016. The Federal debt level has grown from 105% of GDP to 123% of GDP. And the fiscal deficit has doubled, from 3.1% in 2016, to more than 6% in 2024. Hence, it will be hard to pursue expansive fiscal policies in the same way as in the first Trump administration. 

Linked to this, we have seen much more volatility in US bond markets, with supply concerns contributing to yield spikes during 2022 and 2023, and perhaps recently too. The 10-year government bond yield is currently around 4.50% compared to less than 2% when Trump was elected in 2016, with important implications for the debt service bill and debt dynamics (the government interest expense has grown from 1.3% in 2016 to around 3.1% in 2024).

It is against this background that thoughtful leadership at the US Treasury is so crucially needed. An approach that is realistic about what tax cuts are possible (including their impact on growth). An approach that is realistic about what amount of bond issuance the market can take, taking into account the relationship the US has with key bond buyers around the world. An approach seeks to reduce uncertainty for market participants and investors in the US economy, and to avoid unnecessary disruptive tail risk around funding markets and for the US dollar and to support growth via investment.

We have known Scott for many years now (going back well before 2016). And I personally think Scott will work very hard to reduce extreme tail risk for markets, including importantly for the US bond market and the dollar, and for the US economy.

Congratulations to Scott on his well-deserved nomination!

And then one paragraph on the work we are doing at Exante Data at this time. The incoming US administration is embarking on a new policy mix, with an important focus on tariffs, immigration and deregulation. Meanwhile, the outlook for fiscal policy remains highly uncertain (also given the narrow majority the GOP holds in the House and in the Senate). Exante Data’s global team of specialists are analyzing these new impulses for the US and global economy day and night, drawing on our always data-driven approach to forecasting. We have recently hosted a number of in-depth client calls analyzing these topics (including one with Scott as guest speaker, as mentioned). If you are interested in our insights on these important topics, just reach out. There is plenty to analyze. And remember. Macro uncertainty is also an opportunity!