Chris Wood was recently interviewed by Richard Byworth, partner at Syz Capital, on what Trump’s election means for the markets, his outlook for the Chinese economy, potential risks in the private markets and his portfolio positioning in the current environment. Worth a listen – some of my notes are included below (these are for personal reference only and not meant as a comprehensive transcript; any mistakes are also my own).

On what Trump means for the markets: so far, the markets have responded to Donald Trump’s better than expected margin of victory in the way he would have expected, in the sense that the stock market has rallied, the dollar has rallied and the bond market has sold off. The other thing that has happened is bitcoin has rallied and gold has sold off. That is mostly in line with what he would have expected, although he is surprised the energy sector hasn’t fallen more because of the expectation of a deal on Russia/Ukraine. In his view, the dollar rally we are seeing is more of a short-term thing. On a five year view, his base case would be bearish for the dollar. In fact, Trump has said he wants a weaker dollar. He thinks the reason the dollar has rallied is the pro-growth agenda of Trump, so there is a focus on the tax cuts being extended, a deregulatory push etc.

His base case since 2020 is that treasury bonds have entered a bear market after a 40 year bull market. People have been talking about rising fiscal deficits in the US for many years, but he never thought that would hit the US treasury bond market because we were in this disinflationary era. But when he saw the Fed engage in this massive monetary expansion in March of 2020, then his base case became that massive money printing would lead in due course to a pick up of inflation and that is clearly what has happened. His view is the fiscal situation will continue to deteriorate until the markets make an issue of it (i.e. the bond market putting a premium on long-term debt). But we also now have this announcement by Musk that he is going to cut US$2 trillion of spending from the federal budget. If he is able to do such a thing, it would be hugely bullish for treasury bonds and the dollar, but it would initially create a deflationary shock in the US economy which would hit the stock market big time.

He thinks that Musk is serious, but he wouldn’t be investing money today on the base case that it is going to happen (although it is something to watch). The difference this time vs. in 2016 is that Trump didn’t expect to be elected in 2016, so he wasn’t that prepared, and a lot of the people around him were trying to undermine him. This time, he is better prepared if he really wants to back Elon Musk since the Republicans also have control of the legislature. However, the conventional wisdom in Washington is that the so-called entitlements (Medicare and Social Security) are not touchable. If you look at net interest payments + entitlements, they were running in the 12 months to September 2024 at 91% of total federal government receipts. So basically there is no room for maneuver on the fiscal situation in the US in any kind of real downturn.

His thoughts on China: the Chinese have been very critical since the beginning of when the Fed started quantitative easing in 2008. They said that QE is an abuse of the US dollar’s reserve currency status, and the formal Chinese stance since 2009 is we should have a new reserve currency based on the SDR. Over the last 10 years, the PBOC has been the most orthodox of the world’s major central banks, they are the nearest thing to the old Bundesbank. A lot of foreign commentators say the Chinese have to devalue because they have got all these problems, but the last thing the Chinese want to do is a big devaluation. They are trying to preserve the value of the Renminbi as a serious currency and last month they had a record trade surplus, so it is not clear why they need to devalue.

Growth, however, has materially slowed in the last several years and the best way to highlight that is nominal GDP growth. The technical problem for China is that nominal growth has been weaker than real growth for the last 6 quarters, so there is a real deflationary issue. Also, the technocrats who ran the Chinese economy very efficiently in the first 10 years of Xi’s government stepped down a year ago, so there is no one with any real seniority running the Chinese economy. From late September, we have finally had a more urgent reaction in China. The reason Xi is now moving more aggressively is he has become aware of growing stories of local governments not being able to pay salaries, the receivables of companies etc. The proposed debt swap will give more room for maneuver for local governments, but the other very important thing is they made a statement saying they want to stabilize the property market. So his political capital is now invested in stabilizing the property market.

He thinks there is at least a 50% chance that the Chinese property market can bottom around these levels because we have already had a hell of a decline. The other good news is that despite the scale of price declines, we haven’t got ways of bad mortgage debt. The reason for that is because they have always done mortgage lending very conservatively in China. In October, we started to see a pick up in residential property activity. If they can find a way to stabilize the property market, he thinks the Chinese equity market has probably bottomed. His current advice to global emerging market funds which need to own China is to add here on these current concerns of what Donald Trump means for China. What matters for China is not what the foreign investors do, it is what the mainland investors do. So far, the mainland market is behaving quite calmly towards a Trump victory. The authorities are also trying to promote the stock market (e.g. Chinese companies have been under real regulatory pressure all year to buy back their shares).

US treasury holdings by central banks: the real big issue is that foreign central bank holdings of treasuries peaked back in 2014, so it is domestic American money that has been buying more and more treasuries. The other big buyers are hedge funds engaged in the basis trade, which is arbitraging the difference between cash and futures. Then, apart from the size of the deficit, we have also got a dramatic reduction in the duration, so there is a growing rollover risk in terms of funding the US government. So they are funding short-term and the buyers are increasingly lower quality because they are leveraged hedge funds engaged in arbitrage, not sovereign wealth funds or central banks.

His thoughts on private equity: he was a big believer in the original LBO model back in the 1980s. At that point in time, US corporates were very fat and happy, there was all kinds of excess and they needed to be restructured. That was with the backdrop of the whole junk bond movement. More recently, private equity has become almost a parody of its former self. The entire alternative asset class has grown dramatically and it is completely unregulated. What is interesting to him is that we have just had the biggest monetary tightening cycle since the late 1970s and the real stresses caused by monetary tightening are not on regular US households (because they have fixed rate mortgages), or big corporates (either they have cash like the hyperscalers, or they locked in their bond yields).

Instead, the real stress is on the companies acquired by private equity, because they have had all this debt put on them post-crisis, it is floating rate, and in most cases they didn’t hedge the interest rate risk. But these stresses are being covered up because there has been another asset class that has been booming, and that is private credit. The estimates are that ~60-70% of private credit is funding private equity companies. So if there is an area in the US where we are suddenly going to get a problem coming out of left field, this will likely be it. Because it is unregulated, however, no one is going to blow a whistle on it. The obvious risk is a downturn, but the other risk is that rates stay higher for longer than most people are assuming.

On his capital allocation today: he would advise everyone to have an investment in India. Although in the short-term India is very expensive, it remains the most interesting long-term equity story. The big difference between India and the US is that the US has been a very narrow market, while India is a very broad market. You also don’t have to worry about a recession in India, it will be growing at 6-8% for the next 10 years. He would also own both gold and bitcoin, to him they are the same trade. His other firm view today is to avoid all exposure to G7 government bonds. If you have to own fixed income, he prefers local currency emerging market government debt, which has dramatically outperformed US treasuries and G7 government bonds since March 2020. The reason why is very simple. If you are the finance minister or central bank governor of an EM country, you operate on the basis that you have to conform to some basic orthodoxy or else foreigners won’t buy your bonds. By contrast, if you are the finance minister or central bank governor of a G7 country, you have the mentality of an entitled trust fund kid and (erroneously) believe your government bonds are risk free.