Words on Trump's First Year

Words on Trump’s First Year

In this episode of Words on Wealth, CIO Tim Rocks reconnects with geopolitical strategist from BCA Research, Matt Gertken, following their discussion during last year’s US election. After previously outlining what a Trump presidency might look like, they now assess how his first year has actually unfolded, from sweeping tariffs and hard-line immigration moves to stalled efforts to shrink government. They also consider China’s stabilising posture and discuss why Russia may re-emerge as a key geopolitical risk in 2026. Tune in to find out more.

This episode is also available on Apple Podcast. 

Tim Rocks 
Hello and welcome to Words on Wealth. I’m Tim Rocks, Chief Investment Officer. And today I’m happy to be joined by Matt Gertken, who is a geopolitical strategist at BCA and always gives us a bit of a download around this time of year of what has gone on during the year and what might ⁓ proceed over the next year. And it’s certainly been an entertaining year. So anyway, welcome Matt. Thank you very much for your time.

Matt Gertken
Thank you, Tim. It’s a pleasure to be with you as always.

Tim Rocks 
⁓ So let’s just, yeah, let’s start looking back at what happened. We were saying before we started, there’s a hell of lot has gone on. There’s been a lot of noise, a lot of discussion, but actually I’m not sure that it’s amounted to all that much. It actually feels like geopolitical risk is ⁓ stabilised a little over the year. What’s your take?

Matt Gertken 
Yeah, I don’t think that’s entirely ⁓ remiss to say that. In June, of course, we did see Israel launch a unilateral attack on Iran and the United States joined the attack. Under those conditions, Iran realized that their best chance to survive as a regime was not to retaliate, which makes rational sense, but was not maybe entirely predictable. They certainly could have responded with a robust set of attacks against oil infrastructure in the region or tankers in the Persian Gulf. ⁓ So that was a major geopolitical event. You know, I’ve been doing this for 20 years now and that was something that I predicted would happen this year. There were signposts that we would lead to that attack this year, but I did not predict that the oil price would go down. And so I think in one way, 2025 will go down in history as a moment where nuclear proliferation was robustly discouraged by the United States and by Israel, but it sort of exemplifies how geopolitical risk was not the driving factor of financial markets this year. ⁓ there’s more to say there, but I would just say that that one instance in terms of geopolitical risk, that was a really striking episode. The story’s not entirely done, but I do think it signals that we will not have a widespread war in the Middle East. And so in that sense, we dodged a bullet this year.

Tim Rocks 
Yeah, yeah. And I think it’s say on China and US, they ended up having a pillow fight rather than a proper kind of skirmish on this trade war.

Matt Gertken
Yeah, I like that analogy. They did. They both backed away in May from the really rapid escalation in April. And of course, I should underscore the Liberation Day tariffs as a major geopolitical event this year. I think what we witnessed was that on April 1st, President Trump, or April 2nd, President Trump rolled out these sweeping tariffs. But by April 9th, he was already backtracking. And that was right when we reached a 19 % drawdown in the S &P 500. And so it fit with a framework that we were explaining to clients at that time that the Trump administration did not have an interest in precipitating a bear market, which could then induce a recession. so right on the line of what would be a bear market, they backed away and they delayed the tariffs. Well, that was an incredibly important signal that told the whole world and those in the markets that the administration was trying to achieve its goals, but it was doing so within a set of constraints or a set of ⁓ parameters that would still obey the traditional laws of US politics, which is that you need to have a good economy in order to get your political party votes. And so from then on, even though Trump was able to make other threats and in some cases he was able to convincingly intimidate other negotiators. The truth is that we saw the market view those threats as all part of an escalate in order to de-escalate strategy. And that was what enabled the market to basically move on and not pay all that much attention to the trade war throughout the year.

Tim Rocks 
Yeah, yeah. Okay. We might explore a bit more on that later. But I wanted to move on and focus on Trump. So it’s effectively now one year in. What’s your report card? You know, it’s just so hard to have any perspective, right? There’s just so much noise and and so much notionally going on. What do you think he’s actually achieved? What’s, and what has he failed to achieve, I guess, in terms of his sort of objectives?

Matt Gertken 
Right. Well, and we can talk about these achievements in an objective sense first, and then maybe we can evaluate them later. But objectively, he has raised the US tariff from low single digits effectively to 17 percent. And going forward, that number will come down, but it may still be an average of say 15%. You know, so he has done the largest tariff increase since the 1930s since the smooth Holly tariff. The U S economy was very different back in the 1930s, but nevertheless, it was a dramatic increase in the, in the basic trade barrier. And now that’s being adjudicated by the Supreme court. And so there’s some issues here that are tentative, but he does have some other laws that he can use to, to raise tariffs. So in the end, we have a pretty good sense that he will have at least achieved a 10 % effective tariff on US imports. And that’s ⁓ something that future presidents could change because it is being done by executive action rather than legislative. anyway, it’s, what we were probably justified in believing about the, ⁓ you know, the next five or 10 years is that the US will not go back to a 2 % effective tariff, you know, so we’ve probably permanently raised the base tariff level.

Tim Rocks 
Future presidents might reduce it to selectively cut some tower of its butt. They’re probably here to stay to some.

Matt Gertken 
I think so. think future presidents will have a very strong basis for reducing tariffs on allies. don’t think there’s a really robust basis of popular support when we look at opinion polls, either for the trade war and the tariffs or especially for tariffs on allies. so going forward, what we may see is a winnowing process where Trump himself is forced to reduce tariffs for certain reasons like ahead of the midterm election next year or ahead of the presidential election in 2028 to try to support his successor. ⁓ you know, future presidents will face the same issues. If tariffs are causing problems, they’ll have a huge incentive to reduce them on the margin. And again, especially for countries that are allied. ⁓ The other thing he’s done is, of course, crackdown on immigration. you know, one thing I’ve noticed

Tim Rocks
Yeah.

Matt Gertken
⁓ sound a little bit like I’m taking sides, but I’m not, I’m really trying to be objective. ⁓ there were certain conversations and certain policies that we, that we are having this year that we simply wouldn’t be having if president Trump hadn’t won the election. So for example, he has, he has cracked down on immigration very aggressively. We’ve seen a dramatic decline, but he’s also done deportations. Now, It’s the deportations that are really controversial. Those are involving an aggressive use of the Immigration and Customs Bureau or Customs Enforcement Bureau in the United States. And that’s ⁓ in some cases resulted in the deployment of National Guard units to defend ⁓ ICE. And that is then raising the specter eventually of further militarization of forces to be used in US cities. And also there’s been some wrongful deportations. ⁓ There’s been some cases where some significant social consequences or business consequences occurred. So that’s going to be something that over time really accumulates. This was just the first year, but if you do four years of that kind of labor tightening, then there could be some ramifications. ⁓ Nevertheless, I have to say, US did have a completely unregulated border and it did have an undefended border. so I think going forward again, even though the Democratic Party will be much more inclined to allow a higher immigration level, they won’t be inclined to go back to the open borders of the Biden presidency, which Trump has probably decisively put into the past because it was an unjustifiable policy.

Tim Rocks 
Yeah. Okay, so tariffs and immigration achieved. What about other things? I mean, he wanted to reduce significantly the size of the government feels like that got stymied. The significant increase in executive power feels like there’s a bit of a question mark, whether how whether that’s been achieved or not? What other kind of things?

Matt Gertken 
Yeah, yeah, good question. Well, size of government, you I was struck by how many of the president’s supporters were so enthusiastic about his ability to rein in deficits and debt, which I thought was manifestly unlikely from the from the policies that the Republicans themselves were putting forward. And in particular, they wanted to ⁓ make permanent and extend the and expand the first term tax cuts, which they achieved in the one big, beautiful bill but it was not very likely that you would be able to significantly reduce the budget deficit if you were simultaneously enshrining these very large tax cuts and adding to them. And so what we see now today is a budget deficit of 6 % of GDP roughly, and the outlook is for it to stay around 6 % of GDP going forward. And this is a direct contradiction of just what only 11 months ago people were saying that including the Treasury Secretary, Scott Besson, that we would have a 3 % of GDP budget deficit. Well, there just wasn’t a pathway to that kind of fiscal tightening and they did not achieve it. So going forward, we will vacillate between a 5 % and a 6 % of GDP budget deficit. then if there’s a recession, of course, it’ll get a lot bigger than that. This is a 6 % of GDP budget deficit at a time of 4 % unemployment. So it’s really likely to get larger from here and there has not been a significant fiscal consolidation.

Tim Rocks 
Yeah, yeah. And then ⁓ I guess the future for Trump power is going to be very dependent on the midterms next year. So ⁓ and presumably he loses the House, he may not lose the Senate, but ⁓ what does that mean for his control over Congress and more broadly, his policy agenda?

Matt Gertken
Right. ⁓ A few things. ⁓ well, first of all, he Republicans still have full control in 2026. So they will likely try to pass another reconciliation bill. As you know, reconciliation is a special process that enables them to pass a bill in the Senate with only 51 votes rather than the 60 that would normally be needed due to the filibuster rule. So this is still difficult for them because they only have a two seat majority in the House and they have a effectively a four seat majority in the Senate. And when the Democrats passed their second reconciliation bill, the Inflation Reduction Act in 2022, it took them all year to do it. They got it in August of 2022, right before the midterm election. So they did get it done and they did get it done before the election. But it was a struggle and they had larger majorities today. So we don’t have any reassurance that in that in the next year, the Republicans will be able to pull that off. And they also they face two Supreme Court cases on tariffs and the Federal Reserve that are both very significant and could and I think at least one of them will go with the president largely and the other on tariffs, but then it’ll go against him on the Fed. And so he’s going to sort of have one feather in his cap, but then he’s going to have a black eye. He’s going to struggle to get anything through Congress. And then we have the midterms where I think you’re exactly right. Well, Democrats will take the House. That’s very likely, but they probably won’t take the Senate. ⁓ And then finally, ⁓ after that, leaves him even more reliant on something you mentioned earlier, executive power, because with a split Congress, his only options will be to use executive decrees to keep using tariffs if the Supreme Court allows him, like I think, but then also to keep cracking down on immigration and to keep ⁓ deploying the military at home to fight drugs or crime. So it’s going to be an internally focused heavy-handed federal government approach, but without the ability to make permanent change through legislation. And since Trump will be in his 80s and people will be able to see the 2028 election looming, he will rapidly become a lame duck. And it’s hard for people to wrap their heads around that now because we still think of Trump as this survivor who overcomes all odds. But within probably 12 months or certainly 18 months, everyone in the world will start to see that his time has passed and they’ll be looking toward a younger generation of leaders that will be heading both parties in the entirely open election of 2028.

Tim Rocks
Yeah, very interesting. We might explore that next time we’re on. So perhaps just quickly looking at some other things. So China ⁓ feels like they defuse the trade bomb, other things going well, electric vehicles and the like. ⁓ How is Xi feeling? ⁓ any, it feels like that Taiwan risk is sort of is faded more than anything else, do you think China is a source of risk or opportunity in 2026?

Matt Gertken 
That’s a good question. It’s a tough one for me, given my own strategy. My strategy has typically been quite bearish about China. I never really argued that they were uninvestable, but I did argue that they were not to be overweighted or preferred within an emerging market portfolio. But we have had a good year for Chinese equities. In fact, ⁓ aside from Latin American equities and Eastern European equities, Chinese have been the best performers among emerging markets and even outperformed Europe, for example, this year in the US. And the basis is that they did a modest stimulus of about 2.5 % of GDP, and that’s combined credit and fiscal. Then they did the trade truce with the United States in May in Geneva, and then they stuck with that all year, including in the Trump-Xi Jinping summit in October. And then, of course, also… had some breakthroughs with innovation and it was beginning the year with DeepSeek and artificial intelligence. even beneath that, think one really important signal is that the Trump administration increasingly shifted its stance within a debate within the Republican Party about how to handle China and semiconductors. There was an approach at the end of Trump’s term and the Biden administration that was trying to constrict China’s access. And the critics said, well, yeah, but then they will have to develop their own alternatives and the U.S. will lose market share. And that debate has now shifted. And so, in fact, you see people within the Trump administration and within the cabinet sort of arguing that view that really it would be better for U.S. companies to retain the market share, keep selling computer chips to China and prevent them from developing indigenous alternatives. You know, there’s still security risks around that and I wouldn’t overdo it, but it is true that Trump did not implement one of Biden’s final decrees to restrict their access to chips that could be used in artificial intelligence. And he also has loosened the controls on Nvidia. And of course, Nvidia and others have enormous ability to lobby the government. So. That means that China’s getting some advanced chips ⁓ and they’re moving forward with their own with their own fiscally ⁓ motivated innovation. So these things are all okay. I still don’t think we should overdo it because, you know, if you’re looking at tech companies that are listed offshore, then yes, that play probably can continue and we’ll be tied to whatever happens globally in tech. But the domestic economy is actually still very much hurting. And in fact, we’ve had a series of pretty weak releases recently, including in domestic investment. So I think it’s a two tier economy there, you know, as the U S is, but it’s more drastic because what you see in China is a true deleveraging process and a debt deflation process that’s remorselessly grinding down the ability of companies and households to spend and invest. And, ⁓ that’s just ongoing. Their monetary easing has not affected it and they’ve been very unwilling to use more robust fiscal policy. So they’re stuck in a deflation trap that’s reminiscent of Japan. It’s actually even worse in terms of the abruptness in the magnitude than Japan experienced in the 1990s. And so they’re going to have this separate track where they’re trying to innovate through state-guided means, but they’re also not really seeing entrepreneurs or households jump up and private private business or households and really start to drive growth.

Tim Rocks 
Yeah, yeah. Yeah, okay. And then perhaps sort of finally, ⁓ what else is kind of lurking in the long grass out there, if you like? What other things do you think could become an issue in 2026?

Matt Gertken 
Well, you mentioned Taiwan and I do think you’re right that that has taken a backseat. It’s not that the future is bright. There’s still a very bleak outlook on the long term with Taiwan and China and the US. But Taiwanese domestic politics have shifted in a way that is really more accommodative toward mainland China. And I think we’ll see that in the 2026 midterm elections. That will be clear that the Guomintang, which is the institutional ruling party and also nowadays more willing to negotiate with China over trade, they are likely to do very well in the local elections in Taiwan. so this will reinforce an environment in which basically the US president is negotiating a trade truce with China and the Taiwanese people are voting in a direction that empowers legislators to go and negotiate with China and push bills through the legislature that are positive for China. And so the isolated figure will be the president of Taiwan who is nominally pro-independence and he will increasingly look like a lame duck well before he should. that will help to create an opinion globally that there’s really not much going on there because even though China’s preparing for some future war, they don’t need to invade if the politics of Taiwan are already moving in their direction. So in that sense, it really does fit with the way you started by saying that some of the geopolitical risk might’ve stabilized and that might actually marginally fall next year. in other words, we dodged a bullet in Middle East. We talked about that. We probably don’t have a massive alarm over Taiwan. There will be things that happen, but they probably won’t be massive or market moving. So that means that interestingly, Russia and Ukraine is probably back in 26 as the premier geopolitical risk. And you could see this percolating in the way that Russia is violating NATO’s airspace with drones. And today, or you saw Poland accusing Russia of sabotaging the railway that goes from Warsaw ⁓ into ultimately into Ukraine. And that’s a way of Russia signaling that they want Poland to stop supporting Ukraine It ⁓ didn’t kill anyone, but the trajectory that we’re on is eventually one of these acts of sabotage is going to cause casualties and then NATO is going to have to retaliate in some way. And there’s a risk that the United States does not ⁓ forthrightly back NATO. And so we could have a bit of a crisis of confidence in NATO ⁓ or we could have the U.S. overreact. That’s also a possibility since Putin is thumbing his nose at President Trump’s offers of negotiation. But I would say that you could have a short term escalation of really significant tensions with Russia over the next zero to six or nine months. And that could be the main geopolitical event of 2026. I still tend to think that it would ultimately lead to a ceasefire in Ukraine. But right now, the trajectory is going the wrong direction.

Tim Rocks 
Yeah, yeah, yeah. Okay, look, thank you very much, Matt. That is very interesting. As always, and I’m sure you’ll have plenty to think about through the year as it evolves and something will pop up that we didn’t expect. And that’ll probably be the driver of markets. It always seems to be that way. But yes, look, thank you very much. Really appreciate your time again.

Matt Gertken
Same here, thank you, Tim.