The Three Prophecies of Trump’s MAGA
Executive Summary
1.Trump’s Economic Trifecta – The administration’s agenda hinges on three purportedly interdependent but intertwined prophecies:
Reciprocal Tariffs ("Liberation Day" levies to force trade rebalancing)
Austerity (Elon Musk-led fiscal tightening targeting $1T+ in cuts)
Monetary Easing (Pressure on the Fed to cut rates despite inflation fears)
2. Contrarian Insight – Markets misprice the deflationary impact of austerity + tariffs, underestimating the likelihood of Fed rate cuts. Soft data (surveys, sentiment) already signals strain, while hard data lags.
3. Recession Inevitable, But Intentional – Short-term economic contraction is framed as a necessary "detox" to achieve long-term deficit reduction and reshoring.
4. Fed’s Hand Will Be Forced – Fiscal drag and rising unemployment will likely compel the Fed to cut rates by 2025, creating a policy "synergy" with Trump’s goals.
5. Posturing: CHF Leveraged Treasuries (5 to 20 year blended)
As Donald Trump unveils his Liberation Day tariffs, investors must look beyond the noise to understand his administration’s true economic objectives—and how they could reshape markets. Contrary to mainstream narratives framing his policies as purely combative or dominance-driven, Trump’s crowning mission since his 2024 campaign has been singular: balancing the trade deficit. The rest of the MAGA agenda—reshoring, domestic investment, and geopolitical recalibration—flows from this priority. And true to form, he’s moved swiftly, implementing contentious measures within weeks of taking office.
Trump’s strategy hinges on three interconnected pillars, often analyzed in isolation—a critical oversight. Markets don’t operate in silos, and neither do policy levers. Industry, trade, finance, and politics are inextricably linked; ignoring their interplay risks misjudging the economic fallout. Like the three prophecies in Macbeth, his three pillars are each necessary to form the foundation for a much larger design, and failure of one could unravel the entire plan. The three pillars/prophecies for Trump’s second office consist of:
1) Reciprocal Tariffs/Free Trade
2) Austerity/Fiscal Tightening
3) Monetary Easing/ Cultivation of Reshoring
Prophecy 1) Reciprocal Tariffs
The first prophecy is the most covered by far, encompassing all social media websites, traditional media, and various forums. While most commentary focuses narrowly on the inflationary impact of tariffs, this misses the larger strategic play. The core premise rests on correcting decades of asymmetric trade relationships, particularly with China and other major exporters who have long maintained higher import barriers than the United States. By mirroring these trade partners' tariff structures, the administration aims to create immediate leverage in trade negotiations, forcing partners to choose between lowering their own barriers or facing equivalent restrictions on their exports.
On the one hand, reciprocal tariffs could serve to revive domestic manufacturing through more favorable trade terms and reduce the federal deficit by $100-$200B. On the other hand, they could be met with immediate retaliation for further trade barriers, risking a global trade cold war. In both circumstances, however, markets may be overestimating the inflationary impact while underestimating the deflationary pressures from reduced import demand and the long-term productivity gains from domestic reinvestment.
The table below provides a comprehensive summary of the three scenarios and their impacts on key metrics, empowering us to make informed decisions about the future of trade policy.
Our base case in the center column can see moderate short-term/transient inflationary pressures and various other cascading effects such as diversion of value chains and some decrease in deficits. Trading partners will or have already begun planning whether to retaliate with trade barriers or negotiate on finding a middle ground.
As these dynamics play out, investors should watch for early indicators in specific sectors—from industrial production data to corporate capex announcements—that will signal whether this aggressive trade policy is achieving its intended rebalancing or simply provoking costly retaliation. The coming months will reveal whether reciprocal tariffs become a transformative economic tool or another flashpoint in global trade tensions.
Prophecy 2) Austerity/Fiscal Tightening
Elon Musk’s push for austerity as Trump’s fiscal enforcer is often drowned out by political noise and emotional agitation, but investors can’t afford to dismiss it. Undoubtedly, the tech billionaire stands out as a controversial figure, especially after becoming Trump’s right-hand man, but the vehemence surrounding this topic distorts what is really critical.
Love him or loathe him, Musk’s track record as a multi-CEO speaks for itself: he understands capital allocation, long-term planning, and ruthless efficiency. Consequently, to be cynical of his efforts would be a complete blunder in judgment. Investor’s near-term perspective should assume he will execute on shaving off federal spending, even if the $1 T cut timeline for the end of 2025 is too optimistic.
The real question isn’t whether austerity will happen, but how it interacts with Trump’s tariffs. Fiscal tightening is inherently contractionary—it drags on growth, jobs, and demand. And when combined with protectionist trade policies, the pain compounds. Businesses are already recalibrating capex, consumers are pulling back, and uncertainty is rattling markets. Furthermore, Trump’s haphazard policy changes cause nerve-wracking uncertainty in the markets. And markets do not like uncertainty. On the demand side, uncertainty leads to more price-sensitive consumers who focus on necessary purchasing and value.
Trump’s team acknowledges the short-term fallout, framing it as a necessary “detox” for long-term fiscal health. But investors beware: this austerity-tariff cocktail all but guarantees a recession. The only unknown is how deep it goes—and who gets squeezed first.
Prophecy 3) Monetary Easing/Cultivation of Reshoring
Monetary easing remains the missing piece to Trump’s three prophecies — often dismissed too quickly by fear of inflation. The Fed’s reluctance to move on rate policy stems from stable employment and inflation figures, aggravated by the recent inflation trauma. But bear note that the administration’s pressure to cut rates is more than just nagging.
Markets are failing to bridge the links between the three prophecies. The FOMC’s most recent March press conference highlighted the steady pace of growth in the economy and solid labor market conditions, keeping interest rates at 4.5%, which satisfied investors. Unfortunately, as we observe historically, the Fed likes to be behind the curve. The hard data used to enact changes in monetary policy are backward-looking. It is also not mandated for the Fed to act as a predictive, preventive force, and Jerome Powell often reminds the public of that.
During the same press conference, the Fed board reduced the GDP forecast and increased it for unemployment. The Fed also slowed Treasury rolloffs, quietly conceding that while the Fed has decided not to move interest rates, it recognizes that the hard data do not yet reflect the dragging impacts of Trump’s new administration. The soft data, which tends to give an indicator of producer and consumer confidence, does.
Here’s the critical link: Trump’s first two prophecies manufacture the conditions for Fed dovishness. Without the third, the first two prophecies will cause much more damage than benefit in totality. To successfully pressure rate cuts sooner rather than later, the hard data must promptly print moderate/tamed inflation, higher unemployment, and lower economic growth. Markets betting on stagflation may be blindsided by the coming policy symbiosis.
This vital mistake leads to an extremely muddled and smoky outlook, which immobilizes investors from making a sound decision because the forecast on inflation and, hence, interest rates is unclear. But the net effects of all of Trump’s actions likely will lead to lower interest rates. The table below summarizes this.
+, -, o denotes positive, negative, and no pressure respectively
P1, P2 and P3 denotes the three prophecies
The “Net” column sums up the effects of P1 and P2 and justifies the case for monetary easing. We believe the large short-term pressures on employment and U.S. GDP will lead to the Fed activating its employment mandate and cutting interest rates. This last piece has not been factored in many of the forecasts provided by the banks, and the prices of the middle and longer-duration treasuries reflect that. Along with that view, we think corporate profits will take a massive hit in the coming quarters from both demand and supply pressure.
Posturing to take advantage of uncertainty - U.S. treasuries CHF carry trade
Following the train of thought in our forecast above, we have mainly positioned ourselves with a U.S. 10, 20-year, and inflation-protected treasuries CHF carry trade as a negative beta tilting allocation. An examination of asset classes did not reveal any attractive or bullish options, except for treasuries and precious metals. The characteristics of some of the options are shown in the table below.
CHF could now be borrowed at a 50bps spread on top of SNB’s 25bps base rate, giving roughly a 3.79% excess yield on 20-year treasuries. At the same time, the currency is now at all-time local high levels and near all-time high levels (ATH is 1.27 CHF/USD, ~8% above current levels) after the dollar weakened significantly this past few days. Though we are purchasing direct treasuries, we’ve provided a rough estimate of the characteristics of a simpler and more accessible trade: the IEF ETF, which is a 7-10-year rolling maturity U.S. treasuries ETF.
The base case above simply measures the distributed return on equity (not including the minor price appreciating factor) for a one-year 80% LTV position in IEF, providing no changes in interest rates and exchange rates. We’ve also provided a return matrix that gives a better idea of return on equity in case the two levers have moved.
Depending on the strength in conviction on the long end of the curve for these two years, investors could adjust price sensitivities on similar maturities by picking treasuries issued during 2020-2021, where low coupons mean higher modified durations, to capture higher capital gains at the expense of lower coupon distributions. These low coupon bonds and even strips have a built-in “premium” as a result of the pull-to-par factor.
We do not prefer to hedge the exchange rate risk primarily because of the costs associated with that leg, but we will be open to locking rates if CHF weakens drastically. Historically, the SNB is notorious for intervening during imbalanced strengths in the CHF/USD pair to mitigate effects on the country’s large net export position.
Furthermore, based on historical movements, the relationship between the carry exchange rate and treasury yield/price allows one end of the trade to be closed before the other.
Black: CHF/USD
Blue: IEF ETF (5-7 year U.S treasuries)
Purple: TLT ETF (20+ year U.S. treasuries)
The historical chart indicates outperformance in CHF/USD in the early parts of a downturn and a convergence between the performance of Swiss francs and treasuries later in.
