American Exceptionalism was a Fiscal Facade | Marco Papic
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door. Got a very special conversation. I am joined today by Marco Popic, chief strategist at BCA Research. Marco, welcome to Monetary Matters. Thank you for having me. It's a real pleasure to be here, Jack.

Marco, I'm glad you're here. You're a specialist in geopolitics. And one of the things I really love about your process is that often geopolitical news events that make huge headlines and seem like they are going to have a seismic impact on the economy and markets actually, from a market's perspective, are something of a nothing burger. So I really like it when you tell investors that they need to calm down about whatever happened around the world, because often they do need to calm down. However,

The cocktail of policy shocks, let's say, that we currently look like we're going to hit on trade with regards to tariffs, as well as a tax bill and other things. Are you saying the same thing? Are you telling investors to calm down or are you saying something else? Well, I think on tariffs, yes. On tariffs, we've already seen that the most popular trade out there that has emerged is the taco trade, which is that Trump always chickens out.

which is, I think, an unfair way to maybe characterize it. I think a better way to characterize it is that Trump always gets a deal.

And so I prefer my seven steps of maximum pressures, which is basically a seven step strategy he has implemented almost in every negotiation. And yes, it almost always not. Sorry, did I say almost always? No, it always produces a deal, a deal that is far less epic and profound and volatile and, you know, life changing than what he originally planned.

signals, but that nonetheless creates some marginal benefits to the U.S. and ultimately makes investors realize that a lot of the fretting they did was much ado about nothing. That said, on the budget bill, I do think that that's probably the most important issue

for investors to think about, not necessarily in any sort of a way that it becomes a catalyst for the markets, but more in the profound changes that are happening to the economy and to the macro context that we live in. So, yes, I do think that the far more relevant thing for investors is fiscal policy than tariff policy.

That surprises me. Tell us why you think tariff policy relative to expectations is going to be a little bit of a nothing worker. My word's not yours. And also, do you think that the U.S. economy is already in a recession? What do you think the impact of tariff policy on the U.S. economy, but also on U.S. dollar assets and U.S. exceptionalism is going to be? Let's unpack a lot of that. So first of all, I think that

The genius of the Trump negotiating strategy is that all the hoopla about tariffs on penguins and tariffs on Lesotho and Liberation Day, a lot of the hoopla about that has forced the markets to digest a 10% import tariff across the board. So when the dust settles, probably sometimes after Labor Day, I would guess. I don't think before then. I think we're going to have a lot of twists and turns.

And if anybody wants to trade them, God bless them. I think it's going to be very difficult to time these twists and turns. You know, for example, the EU tariffs were a good example. You know, we go to 50% on Friday and then by Sunday they're off. So how do you even trade that? But what I would say is that for the most part, I think that the genius of the negotiating strategy is that we will be left with a 10% across the board import tariff.

And this is relevant because if six months ago in December of 2024, President Trump had said, I'm going to impose a 10% tariff across the board, I think that for the most part, investors would not have liked that. But after the liberation day and all the other reciprocal tariffs, if all we're left with is that 10% import tariff, I think the market is actually going to be perfectly fine with that.

And the reason he's going to be perfectly fine with it is that effectively that 10% import tariff is a form of a VAT tax on American consumers. Now, obviously, the White House and President Trump would quibble with that assertion and say, well, no, wait, wait a minute. It's going to be actually paid for by the exporters. Man, to some extent, they're not wrong.

I think many Chinese exporters will dip into their profit margins to, you know, kind of pay for that tariff. But I do think that the vast majority of it will be paid by consumers and retailers in the U.S. And that's important because, you know, Jack, there is a sort of countervailing priorities. On one hand, you want to bring manufacturing to the U.S., but if you do, you actually don't bring any tariff revenue.

You just don't because you will manufacture these things domestically. If you want tariff revenue, you actually have to be a globalist. You actually have to want to continue to import foreign goods so you can tax them. And that's where the bond market really comes in because the bond market has to approve of your tariffs. It has to give you a little, you know, hat's tip and say, okay, yes, a 10% across the board tariff seems low enough to

to allow American consumers and retailers to pay it, it seems low enough so that people still want to buy imported goods. And that leads to enough tariff revenue for you to offset some of your fiscal priorities. And so I think that's where we're going to settle. And I think that that is a nothing burger. Now, that said, you also asked me about my recession view. What I would say to you is who cares about my recession view? Are we in a recession? Sure. Whatevs.

Do you want to be bearish because we're in a recession? Well, let me give you an interesting data point. In Q2 of 2020, the U.S. GDP growth declined by 28%. That's not an error. It was a 28% decline in quarterly GDP growth. What did the S&P 500 do in Q2 of 2020? It went up by 20%.

So this is very important in a policy-induced recession. In a recession that's about lockdowns or COVID hospitalizations or fiscal policy or tariffs, you don't want to be trading the hard data. You don't want to be trading whether PMI is negative or not. Who cares? This isn't about unemployment rates. This isn't about the recession. This is about will tariff policy become coherent?

and rational and stable enough that by some point this year, CEOs of American business know where to put their capex. Consumers know how to account for higher costs. And I think the answer to that is absolutely yes, because what we've seen over the last two months is that President Trump has absolutely no appetite for actual economic pain.

All that chess beating about detoxing the economy from the Biden administration, all that nonsense about how, you know, Scott Besson and Donald Trump are willing to put the country through some pain for long term gain. That's out the window because they clearly are not because they're clearly making deals relatively quickly with even American adversaries like China.

And so because of that, I think that it's pretty clear that by sometimes after Labor Day, we are going to have a pretty coherent, like as in the volatility and the uncertainty will go away. But yes, the tariffs will exist. Some level of tariffs highest since 1945, if not highest since 1930s as well. And those tariffs will actually act as a consumption tax in order to pay for the permanence of the 2017 tax cuts.

And so you say recession, who cares? And of course, you're right about the second quarter of GDP. It had a contraction from, I guess, beginning of April to the end of June. But the stock market was leading that. So the crash in the stock market was in late February and March. So, I mean, normally during recessions, and actually some guests said this to me, so this is why this is my head, like in the median drawdown in the S&P during a recession is 31%. So, you know, I mean, do you

Do you think that the worst is kind of over? Because I mean, if we are in a recession, it doesn't... If I knew for a fact that we were in a recession right now, I wouldn't be particularly bullish stocks, but maybe I'm wrong. What do you think? Yes, you would be wrong because it depends on the depth and the length of the recession. So if we are in a recession right now, but the uncertainty is over by September, do you still want to be shorting stocks? Maybe. Maybe we go back to 4,800.

But I struggle to see how we go below it. So can we go from the current level back to where we were at the bottom? Maybe. It would require a significant pivot by President Trump. And he has certainly done this in the past. Almost every negotiation he has ever done, there's always a pivot, a scary, scary pivot in the middle. I call it a step five, where he leaves the bride at the altar just as the deal is being done. He says the deal is off.

I just fear that the market is desensitized to that. And I think that the market is going to look through the chasm of bad data. So in other words, the way you should think about it is this. In a policy-induced recession, what needs to change is policy, not animal spirits. Animal spirits are fine. What needs to change is policy. So if I decide to force every American to buy a teal Hyundai Sonata,

Like, this is what all of you have to do or I will enslave you. Like, as you know, this is my, like, this is what King Poppich wants to do. Okay. Everybody has to set aside like 25, 35K to buy a teal Hyundai Sonata. That would be pretty harsh. But then if you know that this policy ends by September, you move on.

you move on from that source of uncertainty. And that's how the tariffs play. They're like a canyon of bad data is going to come across. But we have a bridge across that canyon. And that's the fact that clearly President Trump does not want an autarkic international trading system

He is open to making deals with American adversaries, even China, in terms of trade deals. He is completely open with it. And as such, what the tariffs are designed to do really is to raise some revenue. But onerous tariffs will not satisfy the bond market because the bond market is not stupid. It can do mathematics. And so the bond market knows that if the tariffs are too onerous, there will be no tariff collected.

And as such, over the next three months, I do think that we're effectively going to end with that 10% across the board tariff. And obviously, some of the more national security year tariffs like aluminum and steel, I think that's going to stay as well. The effective tax rate in that case is going to be above 10%, probably about 12%, 13%, 14%. That is higher than expected. But nonetheless, once that is set, right?

the economy can move on from that. It can digest it and move on. And I think that that's probably going to be done by September. So no, I would not be overly bearish. That said, tactically, with the S&P 500 approaching 6,000 again, you know, there are other things on the horizon, including the tax bill,

geopolitical risks. There's all sorts of reasons why stocks could go down. But I think that being secularly bearish has clearly been a mistake this year and could continue to cost investors quite a bit.

Let's talk about the soft data, hard data. There was extremely bearish readings in the soft data that has limited fidelity about you. You ask a small group of people how they feel, basically, even if they're purchasing managers and they give an answer. And that's been very negative. But in terms of the actual hard data, would you say that there has been no real apparent slowdown or not a real slowdown in the hard data?

And actually, a lot of spending was being front run because people said, I got to go and buy this before the tariffs go in. And the only negative actually in the hard data was in GDP, but that's because imports were so large to front run those tariffs. So

Would you say that characterization is roughly accurate? And are you sort of expecting negative hard data over the next few months? And you're just saying, oh, the hard data is going to be here, but the market is prepared for it because it's expected. I'm not sure to what extent the market is prepared. And that's why...

Is there a straight linear path to 7,000 in the S&P 500 by the end of the year? No, absolutely not. I think the hard data is going to be negative. It has to be because all that front running is going to then collapse. So there is going to be, as I said, a chasm. Think of it as a canyon. There's a canyon that we have to go through of negative hard data. The issue is we have a bridge over it. Why? Because this hard data that's going to come, it's going to be negative.

is not caused by some sort of a banking crisis. It's not caused by some sort of overleveraged private sector. It's not caused by some imbalance in the economy that requires five to six years to digest. No, it's caused by policy. And that policy is clearly not going to last for 18 months because President Trump and his administration does not have

the high pain threshold that they would need to impose onerous tariffs over the next two years. They clearly don't have that. I mean, they've proven that they don't because they continue to walk back tariff threats. And so because of that, I do think that by basically September, October, the tariff issue will be behind us. We will have set tariff policy. And so that chasm of hard data is going to be, you know, basically we're going to walk over it because we have a bridge

And that bridges the policy. And so people should not trade the data. They should trade policy. And they've been doing that so far. I mean, we're effectively all collectively, you know, trading tweets, not because we're dumb, but because that matters more than what some PMI reading is.

And the PMI reading is influenced by the policy uncertainty. So as long as policy uncertainty ends by after Labor Day, which is my view, I think that the hard data is not going to really matter. But I also do think that hard data, which has been held up thus far, as you correctly point out, by just front running, I do think it's going to have to start showing weakness. Absolutely. That has to happen. So you think the uncertainty is going to go away before September 1st? Absolutely.

Let's talk about the event risk in trading the events. I think that the 90 day pause on tariffs is going to set, I think, in early July is going to be set. So if Trump does nothing, those tariffs that were on the big board are going to go back in place. It sounds like you think that the 10 percent deal is going to the 10 percent is going to be the floor and

Trump will announce deals. So you think that there will be either substantial concessions reached from foreign nations or President Trump will just say, hey, I reached a huge deal. It's the best deal ever. But the concessions aren't that real. And that will be 10%. And then also 90-day hence from China, I think, is later in July or early August. So in terms of the next few months, just walk us through that, please. It's very difficult to walk you through this, Jack. You know, it's funny because

I'm constantly being proven both right and wrong on this same day. So, for example, it was my high conviction view that of all the countries, the one economy that President Trump would choose to make an example of would be Europe. Like Europe is going to get the short end of the stick. He's going to take Europe and kind of like punch it in the face a couple of times.

to allow him in a way to make soft deals with other countries. You know, it's kind of domestic political cover. Now you might say, well, that's petty. Why do that to Europe, an American ally? Well, because, you know, Europe is an American ally. One of the reasons that President Trump constantly kind of bullies allies is that allies can't retaliate in uncomfortable ways. The European Union is not like going to, you know, invade Europe.

neighboring state as retaliation to the US. American allies are going to retaliate in quite gentlemanly ways. And so it's easy to make an example out of them. So anyways, I'm proven correct last Friday and then by Monday it's over. And so that's why it's very difficult for me to walk you through this. But what I would say, roughly speaking, based on every other negotiations that President Trump has ever done in the past,

He does like to pull this kind of a step five of my steps of seven steps. And it's usually when the deal is about to be done. He likes to kind of renege on the deal and get some more concessions. And I do expect that there's going to be a lot of volatility in July.

When this 90-day, when the original April 2nd tariffs were imposed, the reciprocal tariffs, he basically allowed there to be negotiations until July 7th, I believe, is the exact day. And I suspect that we will have a lot of volatility. In other words, some reciprocal tariffs will be imposed on some countries.

Otherwise, the whole thing will be empty, vacuous, and a joke. And so I do think that Europe probably is the easiest country to play hardball with, the easiest trading block. This doesn't mean that I don't expect there to be a trade deal with Europe or a trade deal in air quotes. I do think that by September, even with Europe, there will be a deal. But if investors want to be bearish,

If they're looking for a time period when there will be volatility, I would suspect it will be when those April 2nd tariffs, the reciprocal pause, the pause on the reciprocal tariffs expires in July. And then you have another, you know, all of July and all of August to resolve those differences.

Now, a lot of critics of President Trump say things like, well, you do realize that trade deals take between 18 and 48 months to negotiate, right? Like you actually understand that. And I'm like, yeah, but, you know, you lack imagination. These are not necessarily trade deals. These are made for TV moments. If you want to be harsh on President Trump, if you want to give him credit, you know, they are.

marginally positive for the U.S. in that they will extract some concessions. There'll be some investment in the U.S., some tariffs on American products will come down. And I think that this is, generally speaking, you know, what he's seeking. He's seeking trade deals and things he can show marginally benefit the U.S.,

And I think they will. I think every single deal that President Trump concludes will marginally benefit the U.S. However, in the long term, this entire bout of volatility is negative for the U.S. In the very long term, I think it's negative because large economies and trading partners of the U.S. will begin to hedge volatility.

their reliance and perhaps addiction on American consumer by finding alternatives, whether that's domestic consumption, whether that's domestic reforms, whether that's external trading partners. I always use the example of Canada because it's the easiest one for Americans, I think, to understand. You should think of Canada as a milkshake. This very, very, very juicy and tasty milkshake had just one straw in it.

That straw went directly to the U.S. for various reasons, including overstated environmental concerns. The Canadians have failed to produce any other infrastructure to carry their energy resources to the Atlantic and the Pacific basins. And therefore, they only had one straw. That straw was sucked by the Americans and destroyed.

The Canadians are going to build two more straws over the next 12 months as a result of President Trump's, you know, aggressive negotiating tactics. That in the long term is not in American interests. And that's going to be replayed across the world. The straws, where are they building the pipeline to? I mean, like underwater or over the Arctic or don't they have no option but the U.S.?

No. So they do have options. First of all, you reverse a pipeline that used to import crude through Montreal. Montreal sits on the St. Lawrence River, which is really one of the world's largest estuaries. And so effectively, it's a seaway that goes all the way into the Great Lakes. And so connecting that pipeline from Montreal and reversing it

Two, the energy supplies in Alberta would allow you to export crude through the river and then the estuary eventually to the Atlantic Ocean. And finally, the tar sands can be, if mixed with various other ways to liquefy it, you can actually ship it through a pipeline across the mountains into British Columbia.

So there are, you know, there are ways to do this. I mean, like it is 2025. We can build pipelines over mountains. Who are you? That is very interesting. Thank you, Marco. How, if at all, does this tariff stuff impact your relative view on U.S. assets versus the rest of the world?

Is it making you a little more bearish on U.S. assets? And if the rest of the world's assets do outperform U.S. assets, is it, you know, tariff will just be a convenient excuse to point a finger to find a reason. And actually, you know, U.S. assets were going to underperform no matter what. Jack, I think you nailed it.

And I mean, it's so rare to hear anyone say that, by the way, because that's often how markets work. You reach an extreme level of valuation and then you need something like a catalyst. So I think there's going to be many investors, many journalists, many commentators who are going to blame President Trump for ending this period of American exceptionalism. And in some ways, that's a fair statement, but not actually necessarily in negative ways. First of all,

Where do we begin? Let's start with the fact that the rest of the world has a lot of problems. Europe has never completed its single market. There's a single market for goods in Europe. That's a fact. It's very, very well oiled machine of trade, but they don't have a single market in services. The service sector, which is what advanced economies actually are supposed to produce, is quite fragmented.

China is stuck in secular stagnation, as we were after 2008, and they need to boost domestic consumption to get out of this debt super cycle. And then finally, Canada, if you want to point to it, not only does it have only one straw to the United States of America, but on top of that, Canadian provinces for the last 150 years have not had free trade between them.

So basically, Canada has just relied on sending the goods and services to the U.S. because it's just across the border. So all of these economies have all sorts of domestic issues. They're not huge problems. You know, they're still like running, chugging along. But here comes Donald Trump. And in a way, I would argue that Donald Trump is truly the best thing that's happened to pretty much every country on the planet. He's like cod liver oil.

Which you're obviously too young, I think, to have ever tasted cod liver oil. And I'm pretty young, too. So I only had it in pill format. But our grandparents used to actually drink cod liver oil because it's full of omega-3 acids. So it's really good for you. But it's very stinky and it tastes horrible. That's Donald Trump.

Why? Because by repeatedly punching the rest of the world in the face over the past three months, President Trump has finally proven to the rest of the world that no, they can't just depend on American consumers overconsuming for the rest of the world, for the rest of humanity. Like Canada has to solve 150 years of domestic economic inefficiency. Why don't they have free trade between provinces? How are you a country and not have free trade between provinces? That's crazy.

Europe, you've had the single market for 40 years. Why have you not made it easy for an Italian bank to buy a German bank and consolidate and make a bigger bank, better bank, you know, better return on shareholder value? Same with China. China's been effectively for the past five years just addicted to American consumption and has been completely whistling by the graveyard as their private sector continues to carry this huge, enormous debt burden. So the point is that

If I were to blame Donald Trump for the pivot to international assets that investors should absolutely do, it would be in that way that he has catalyzed a lot of countries to either fiscally stimulated to domestic economies or he's catalyzed them to actually start doing painful structural reforms. They would have probably never done. However, I do think that that's a marginal issue. This is a minor point.

The reason that investors should pivot out of US is not because of Donald Trump. And if you're an allocator, if you're a professional allocator, or if you're just looking at your own portfolio and you're going to make a decision because of Donald Trump, you have to be very careful. President Trump does not have set preferences. I think he kind of feels his way through constraints. And so anything you do, if you do it just because

of Donald Trump, you have to be careful because Donald Trump, more than any other president in U.S. history, I think is liable to make a 180 degree turn to pivot and twist based on, you know, the moment. So to me, this is really not about tariffs. To me, the pivot out of U.S. assets has to do with the fact that the previous five years of American growth, which we like to call American exceptionalism, and I don't like that term. We can go back to why.

But the last five years of American growth, in my view, are not a product of American awesomeness. They're not a product of AI. They're a product of fiscal policy. They're a product of the fact that basically the U.S. ran an absolutely unsustainable fiscal policy. And it's a truly bipartisan effort.

will generate a 7% to 8% deficit. It's both Joe Biden and Donald Trump and Nancy Pelosi's fault. All of them put together. God bless them all. They blew out the deficits to 7%, 8%. And the fact of the matter is that that is kind of the limit of that fiscal gravy train.

And so U.S. growth has been artificially inflated over the last five years, as has the performance of U.S. assets. And we're going to have to go through a period, probably three years for sure, maybe five years, maybe 10, where American assets will underperform. This doesn't mean that you should expect S&P 500 to be in a bear market. It doesn't mean that S&P 500 is not going to be positive every year.

it could still return 4% to 6%, maybe 7% annually. But the argument is that the rest of the world will outperform the U.S. And particularly, the problem is going to be that the U.S. dollar

likely has to significantly decline as the American fiscal policy stops being a tailwind to U.S. growth. And how are you thinking about China? Do you think China is going to be able to stimulate consumption, which has been talking about for decades now, but it's kind of been struggling on that front? China is like 2% of most investors' portfolios, and that's globally. In the U.S., it's probably zero.

So I almost am not sure that it matters. I think that all China needs to do, for me to be right, is to prove they're not suicidal. That's it. You know, at this point, we really don't need a big bazooka stimulus. We just need them to offer a modicum of support for domestic consumption. For example, last year, industrial metals, copper, steel, pretty much everything,

They ended the year flat. There's a huge rally early in 2024 in particular copper. And then by the end of the year, metals basically were flat, which is an extraordinary sign of irrelevance of China. And I say that because in 2024, China had one of the worst years ever. And yet metals did not collapse. They were flat on the year. So what that should signal to you as an investor is that if China so much as shows a pulse

All they need to do is show a pulse and all China associated assets, including commodities and emerging markets, are going to do well. And also that means that U.S. dollar is unlikely to do well over the next over the period of this sort of China proving that it's not suicidal.

But the real culprit of all of this is the U.S. dollar and the fact that American assets are so much more overvalued relative to everything else based on fiscal policy. Now, your counter to me might be, well, wait a minute, time out. Isn't America stimulating with this latest deficit-expanding bill? A couple of things. First of all, I have a very hot take on this. The bill expands the deficit between $2 trillion to $3 trillion.

which is far less than the expectations of everyone last year. So when President Trump was elected, the expectation was that the deficit would be increased by a lot more. Remember, his campaign promises, if you actually put a number to them, were $10 trillion to $15 trillion dollars.

And so this bill has actually been whittled down by the House of Representatives, which effectively staged a revolt in December and January against President Trump. And we're now down to $2 to $3 trillion of extra deficits. If we take those 10% tariffs seriously...

That's about $1.5 trillion. I mean, if you want to be generous to President Trump, it's $2 trillion. I don't. So I'm going to say it's $1.5 trillion. So if you add $1.5 trillion worth of tariff revenue to $2 to $3 trillion deficit expanding bill, you get $1.5 trillion over the next 10 years of deficit expansion, majority of which is not to any new growth-inducing measures, the majority of which is to keep your and my taxes the same.

That costs $5 trillion. So when I put all of this together, there's absolutely no actual economic growth impulse out of this bill. And in fact, it's quite conservative. It's quite like, you know, is it big and beautiful? I would say it's moderately sized and decent looking. You know, it's not that big or bold or beautiful.

And so the two to three trillion expansion in the deficit, does some part of that actually include just a mere rolling over of current tax cuts? So the bean counters at the Congressional Budget Office had a model where they said, oh, the Trump tax cut and Jobs Act 1.0, those are going to expire. So they priced in basically a huge tax hike. And now those tax hikes are just not going to happen. But it's not a tax cut. It is just rolling over tax cuts that already happened.

That costs $5 trillion. So the vast majority of what is passing Congress right now will do absolutely nothing to you, me, or corporates in this country. The vast majority. $5 trillion. President Trump, during his campaign, said, no, no, no, no, no. We're going to do more. A lot more. Keen trillion dollar blowout in deficit. That's how much more I want to do. I want to cut taxes across the board.

he's going to get none of that. There's going to be some taxes and tips and some other stuff that's kind of irrelevant. So when you think about where is deficit explosion coming from, the vast majority, 70% of this bill goes to paying for something that's already law. We're just extending it. And why are we extending it? Why is it expiring, Jack? Because in 2017, the political context of America was so vastly different.

Americans were so sick and tired of austerity and the Republican Party had moved away from their conservative foundation so far in 2017 that they passed the original 2017 tax cut with no offsets. So the reconciliation process in Congress forces you to effectively sunset anything that isn't offset. And that's what's happened. So now, eight years later,

That costs $5 trillion. To extend this costs $5 trillion. And that's why, you know, the bill that's actually, you know, going to be passed, $2 to $3 trillion expansion of the deficit, depending who you listen to. And then if you add to that $1.5 trillion worth of tariffs, you know, you're looking at somewhere between $500 billion to $1.5 trillion expansion of the deficit over the next 10 years, which is nothing.

Now, the reason that this is still not conservative, and I think it's fair to point this out, the reason this is still profligate is that we're at 7% to 8% budget deficit, 7% to 8% GDP. And so we're not reducing that. We're maintaining it over the next 10 years. And that seems like a pretty dumb thing to do. But my point is that this illustrates a significant delta rate of change, basically,

The delta in American fiscal policy is collapsing.

And that's really important because that was the engine of our growth over the last five years. And that's why I want to be in non-US assets while America digests this period over the next five years of less fiscal thrust, less fiscal contribution to GDP growth in the US. That's going to be negative for the US dollar. And so for international investors, if they look at prospects of S&P 500 returning 5% to 7% annually,

their own equity markets returning maybe 10 to 12% with a higher volatility. But when they take into account currency implications of what I just said, they're going to GTFO out of U.S. assets. And so the current fiscal deficit as a percentage of GDP is 6.2, 6.3% as a percentage of GDP. Scott Besson, Treasurer's ticker, he said he wanted to get to 3%. Now he's saying by the end of four years, he wants it to have a three handle on it. So 3.8, something like that.

Where do you think deficit as a percentage of GDP is going? And let's set some baseline conditions that there's not some huge boom or some huge recession, because obviously it depends on some things. But just if the things stay as they are, but we have this physical policy and tariffs, roughly what zone are we? 5% deficit, 7%, 4%? What do you think?

Well, I mean, CBO already has a forecast. You know, who cares what Marco Popic thinks? At the end of the day, I have three degrees in political science, so I'm not sure you want to use my math. But I would say...

You know, 6% to 7%, and I'm being generous. I think most analysts would say 7% to 8%. I'm going to be generous to the Trump administration and say 6% to 7%, even though Scott Bassett says it's going to be 3 point, let's say, handle, 3 point something. I don't think you're going to get to that. I think it's going to require a mix of tax increases, higher growth, and cuts over the next five years to bring it to 3%. Unfortunately, there is no easy way out of this. There is no free lunch.

We're going to have to raise taxes in the U.S. We're going to have to cut more programs. So both sides are going to be angry. The right and the left is going to have to be angry. But yes, we're also going to get some growth because Scott Besson is going to deregulate the economy. I'm not I'm not you know, I'm open to that being correct. But I think it's going to have to require a holistic approach to get us to 3 percent. Now, most of your listeners are going to say they're going to scoff at this. You're going to say that's never been done ever.

False. I hear this all the time. Voters always approximate towards socialism. You know, you've heard this, Jack, like voters always vote for more benefits, right? They don't. They really don't.

They actually quite often turn to, you know, fiscally prudent policies and policymakers. I mean, David Cameron in the United Kingdom did not get elected on a platform of, you know, spending. Neither did Margaret Thatcher. Neither did, quite frankly, Barack Obama. In fact, the, you know, unholy alliance of Barack Obama and the Tea Party brought the U.S. budget deficit from 10 to 3%.

Now, I would have argued they did it in a way too harsh of a manner. Interest rates were low. They could have used those low interest rates to actually stimulate the denominator and so increase GDP growth. But I think that the point still stands. There's a guy in Argentina who campaigned with a chainsaw, if I remember correctly.

So, yes, deficits do get reduced through a democratic process. And I think that this bill, which is far less profligate than it could have been, is a first sign that the American political zeitgeist is moving towards a solution to the deficit crisis.

I have a high conviction of you, Jack, high conviction that over the next five years, the deficit will be lower, which is not a profound thing to say because it's so high. You know what I mean? As a percentage of GDP. Yes, as a percentage of GDP. Yes. So, you know, we're going to over the next 12 months, we're going to blow out from the six figure that you've mentioned to probably seven and a half. Maybe we peak at 8% over the next 18 months. My point is that it's going to be over the course of this decade, we're going to go back down.

It's not a profound comment because it's so high already. But for that to happen, American assets have to underperform. So in order for you to have a positive view on American policy and legislative process and the future of America, in order for you to be optimistic that, yes, American policymakers will sit down in response to voter concerns about deficits, which are rising according to the polls,

In order for all of that to happen, you also have to be negative on U.S. assets, particularly the dollar, because the dollar, the value of the dollar is simply a reflection of growth differentials between different economic blocks. And what I'm saying is that America is going to have to be a little bit more prudent. It's going to have to go on a diet for the next five years. The rest of the world, both thanks to Donald Trump's meanness, but also given the domestic context in the rest of the world,

They're going to spend a little more. They're going to eat a little more. And then the currency will adjust to this growth differential, which will favor non-U.S. economic blocks. Now, a lot of people at that point freak out. They start throwing demographics at you. They're like, but did you know Europe has no young people? And I'm like, I don't care.

It's a five-year forecast. Demographics are like a hundred-year forecast. Relax. I think Europeans can stimulate the economy for the last five years. Plus, there's a lot of other things going on in Europe. Structural reform. Energy prices are going to collapse as energy supply goes through the roof. China's going to do some reforms as well, some stimulus. The point of this is not some profound end of America thesis. It's just that the U.S. is massively overvalued.

Our growth was a product of effectively stimulus that's unsustainable. We're going to have to go on a diet for five years. In those five years, you probably want to be non-American assets. That's it. Marco, you referenced a man with a chainsaw in Argentina that the head of Argentina, Javier Millet. I want to ask you about another man who had a chainsaw, Elon Musk, who ran the Department of Government Efficiency. He has since stepped back somewhat from that role. So we're, let's say, four months into 2020.

the Trump administration and the department of government and fish efficiency, you know, there were wildly high figures of they're going to cut a trillion and 2 trillion. You know, I don't think those were ever really taken seriously, but just how much has that program cut? Just how much, um, you know, quote waste, fraud and abuse has been, has been found. And how significant is that for our budget math that we've so far been discussing? I have no idea. And it's insignificant. Like I don't even have to know the data, you know? And the reason for this is that, um,

Appropriation is constitutionally awarded to Congress. So you cannot just say, hey, I'm not going to take the money if appropriated. I'm sure there is waste. I'm sure that there is inefficiency. However, Congress has to appropriate a new level of funding. And that's why I've always told my clients, don't think of Doge as a literal like thing. Think of it as proof of the political zeitgeist that we're in.

So Doge is not going to do anything. It's a joke. And it always was a joke. In fact, I think that President Trump, Elon Musk basically got together and they did it because they tried to avert a bond market riots that was happening in November and December. And then finally, they realized the only way to do it is to appoint Scott Besant as the Treasury Secretary.

Scott Besson by himself was worth 60 base points rally in the bond market, which is like, you know, may we all one day be worth 60 base points in our careers. So what your listeners have to understand, Jack, is that that's not how America works. You can't just return money to the people. Like, no, it's been appropriated by the people to the federal government. It needs to be spent. If you decide to fire Ethel,

from the Department of Transportation, you can just then take the money that would have gone to her salary and set it on fire. Do whatever you want with it, but you cannot return it to the people. It doesn't work like that. So the only way to cut government spending is to go back to Congress and cut it through the legislative act that we have in the country. It cannot be done by some vizier of efficiency, which is what the Trump administration tried to do. So that's the first point.

It's completely irrelevant is what I would say, Doge. However, it is an indication of where political zeitgeist is. And so I can show you, for example, polling President Trump. So this is a Harris poll.

The Harris Poll looks at President Trump's popularity on a number of things. His popularity on the economy, just generally the economy, has gone down from 49% to 43% in April. Immigration, he's down from 56% to 51%, so he's still popular on immigration. Foreign affairs, 48% to 44%. Administering the government, 49% to 47%. So he's under 50% on pretty much everything. Handling inflation, 45% to 41%.

But when it comes to two issues, this is very interesting. Immigration is still popular, 51%, and reducing the cost of the government. So that's actually holding up. Those two things...

are holding up. Immigration, which is getting a lot of criticism from mainstream media, I mean, for good reason, you know, like sending like sick kids who are American citizens back to their home country of origin or whatever, of their parents' origin seems, you know, like I would say just personally seems overdone. Nonetheless, the overarching thrust of dealing with illegal immigration still remains popular.

And the second thing that remains popular, and again, this is why I think Doge does matters as sort of a sentiment test, is reducing the cost of the government, even after all the nonsense that Doge did do. For example, like, you know, accidentally firing air traffic controllers. As somebody who flies every month, seems like you shouldn't do that, you know? Well, that's where I would say, Jack, that's yet another evidence. Aside from the polling I can show you,

that shows that Americans are starting to be concerned about budget deficits, that's another kind of like smell test that the country is moving in a different direction and that investors should take note of.

And so it's interesting what you said about Ethel, a government official. Let's say that she works at the Parks Department and she was let go by Elon Musk and Doge. You're saying that the savings from her not being on the payroll literally is still in the, what do I say, the Department of the Environmental Department and that money is just there. So it has to be spent on something. They've got to buy more chairs or printers or something.

Look, our contractors, our private contractors taking the government for a ride. Yeah, absolutely. There's this wonderful interview with Donald Trump, maybe one of his best, where he describes how he bullied Boeing into reducing... You know what I'm saying? Yep, that is one of his best moments, yes. Yeah, and you're sitting there, you're like, yeah, like, why did...

The Joe Biden administration just signed off. Like what? Boeing walked into the White House and Joe Biden was like, it's $5 billion? Like, this is what you want? The president of the United States of America to be someone who's negotiated with a used car salesman once in a while in his life, you know? So, yes, what you can do, Jack, is you can reduce the cost of various contracts that the government pays out.

And that means that there will be savings, you know, so you can you can save some money and they can carry over for the next year. However, you cannot just decide to shut down the department, you know, and then like return money. That money was appropriated for that department.

And so it is, you can't, the federal government, the executive of the government cannot decide to just permanently reduce the costs of government. It has to come from Congress because the money that you save is still appropriated. It's still there. It's still in the Department of, it was sent to the Department of Treasury, Department of Transportation. You fired Ethel, but the money that went to paying her salary

is still appropriated by the people of the United States of America, i.e. the Congress, their representatives, to that Department of Transportation. It cannot just disappear. You cannot just burn it in a pyre.

And that's why I think the DOJA's efforts to me always made sense from a perspective of like, hey, let's look at fraud and waste. Let's look at how some of these contracts were negotiated. But firing federal employees, you know, that's kind of to me neither here nor there. I think a much better way to do this is to go through Congress because that's how the Constitution is set up. Congress decides how much money goes to various departments and they can on a permanent basis set a new baseline.

What is the appetite of Republicans and Democrats in Congress to cut or at least slow the growth of the defense budget, which is a large line item for the U.S. government? And President Trump has spoken about wanting to make cuts there and get rid of waste, fraud and abuse. But is there is there follow up there? I would say no, but it's absolutely going to happen.

Yeah. Like, so this is another one of those things where I'm going to guarantee a bunch of things to you and your listeners are just going to light themselves on fire because they're going to say that's impossible. And I'm going to laugh and point to them what happened from 2010 to 2015 when two diametrically opposing groups who certainly did not love each other, the Tea Party and the Obama White House, took our deficit from 10% to 3%. It didn't happen. And it absolutely involved the defense spending.

And if you want to look at fraud and abuse, I mean, there is no place like the defense and intelligence system

superstructure of the United States of America. There's a whole slew, and most people don't know this. They think that the Defense Department and intelligence community is just public officials, people who work for the government. And this is not true. There's a whole lot of private contractors in there as well, consultants, people making PowerPoints for a living, not necessarily fighting terrorists in various parts of the world.

There is absolutely way too much fraud and abuse. The way the procurement process works is terrible. Most of American military platforms are way overpriced, way over-engineered. We're watching a Ukraine-Russia war that's basically fought with children's toys, i.e. drones, that have completely incapacitated some very expensive platforms like main battle tanks are completely useless. Fighter jets are very difficult to fly.

Almost everything comes down to pretty interesting innovations in technology. The U.S. military has to move into that direction, and that will require a lot of savings. That will produce a lot of savings because a lot of these very expensive platforms are not needed. Similarly, there's a whole cabal of private contractors that do business both for the Defense Department and the intelligence community that probably should be out of a job as well.

And are probably not necessary for the security of the U.S. So, yes, definitely defense spending will be on the docket, but it's not now. And so President Trump, you're right, Jack, he's tapped into a vein, which is really weird vein for a Republican president to be tapping into because it's mostly a Democratic kind of dovish vein.

But he hasn't executed on it. He clearly has not. He hasn't followed through with it. And I think that maybe it will require some other president to do that. But you cannot reduce the deficit of the United States of America without some cuts to the military. My point is just that it will not endanger American security because American security is not really benefiting from extremely expensive, over-engineered platforms that don't really make a lot of sense.

As you're saying, in the Russia-Ukraine war now, a lot of the weapons and damage is being done by drones, not the traditional tanks and planes. Tell us what's been going on there as well as President Trump's efforts to get a peace deal going. How are you assessing that? Well, actually, this is another one of very important points where President Trump's actions lead to less demand for U.S. assets.

So I'm going to talk about geopolitics, but first let me give you the last five years. American assets are buoyed by fiscal policy, unnatural growth that was not product of some sort of awesomeness, but rather unsustainable fiscal policies that President Trump has correctly criticized. But there was another tailwind to American assets over the last five years.

And it was this, you know, real increase in geopolitical volatility and uncertainty, starting with the withdrawal from Afghanistan, Russian invasion of Ukraine, subsequently Iran and Israel lobbying like ballistic missiles at one another for the first time ever in an already pretty troubled neighborhood. Suddenly you have that happening. That created, Jack, a persistent tailwind for American assets.

And this isn't my view. I mean, this is just what happens. Geopolitical conflict increases the appetite of foreign investors for U.S. assets, whether they are treasuries, whether they're the U.S. dollar, whether they're just like Magnificent Seven as stocks. I spend a lot of time talking to CIOs of wealth managers around the world who manage trillions of dollars, literally sometimes a single firm. And they would tell me things like, look, Marco, like when Russia invaded Ukraine,

You know, the biggest implication of that is that my clients, wealthy Europeans, don't want to own Siemens. They suddenly want to own Netflix. It may not seem logical, but from their perspective, it very much is. So President Trump is the first U.S. president, although I would argue that Barack Obama and President Trump are actually quite similar when it comes to foreign policy.

And that's obviously going to make everyone listening to the show absolutely lose their minds. And that's just too bad for them. But President Trump and Barack Obama were similar in that they were both realist and they were both relatively comfortable with the fact that the world is multipolar. In other words, both presidents effectively said like, oh, so America is not in charge anymore.

OK, I'm just going to pivot to American priorities. Famously, Barack Obama made a point of meeting with Kissinger all the time. I don't know if you remember this, Jack, but it was a very important point for him to show to the American public that he was a realist. Bush wasn't. Barack Obama also talked about the pivot to Asia. In other words, he wanted to abandon, to some extent, American commitments to Europe and Middle East. Not completely. Don't get me wrong. And he certainly never said NATO's useless like Trump did.

But Barack Obama asked Europeans to spend more on defense. He reduced American footprint in the Middle East. Similarly, Trump is comfortable with multipolarity. And the reason this is really important for investors is that it means that he's quite comfortable making deals that normatively, morally,

don't sit well with American establishment, we tend to have a more ideological normative approach to foreign policy. So in other words, Ukraine is our ally. We cannot allow an inch of Ukrainian territory to go to Russia. Whereas Trump is like,

Okay, fine, cool, whatever. Like you want Crimea? What else do you want? You know, he's willing to make a deal because he's comfortable with the concept of spheres of influence. In a multipolar world, multiple countries on planet Earth yet to have their sphere of influence. Whereas if you believe in American unipolarity, like Hillary Clinton did, who famously said the United States of America does not recognize spheres of influence. That was a direct quote from Hillary Clinton.

You know, that's a different approach. That's an approach that says, no, no, no. America is going to decide every square inch of planet Earth and what happens to it. So we will defend our allies, Ukraine. We will give them a blank check. We'll support them in this war forever. Trump is of the other school of thought. And so the reason this is relevant to investors is that it does create a higher probability or geopolitical equilibria emerging out of these conflicts.

But ironically, ironically, that reduces...

the appetite of foreign investors to hide in Netflix or Magnificent Seven. Ironically, if Trump is successful in creating stable equilibrium around the world, he will also reduce that tailwind, that persistent albeit small tailwind to U.S. assets that's existed over the last five years. Do you think that spheres of influence applies to China as well? Like Trump would not allow China to invade Taiwan, right?

Yes. Well, first of all, I don't think it's in China's interest to use military force for a number of reasons. I don't think China wants to basically do America's... Like, it's in America's interest in a way that China invades Taiwan. And I don't mean that, like, you know, in a glib way. What I mean is that if China were to do that, it would serve the purpose of convincing the rest of the world that Americans were right.

that China is going to use military force in a hostile, aggressive manner, which to China's credit, they haven't done. Let's be clear here. America has used military force a lot more than China has, and so has Russia. So I think that China's not going to invade Taiwan for a number of reasons, including domestic politics. It's just not necessary.

And so I agree with you that Trump is not going to necessarily allow China to do that, but I also do believe that he is open. He is open to negotiating with China a sort of a broader deal where he allows for a acceptable space where China does have a sphere of influence.

So for example, one of the things that most people don't talk about is how Thailand, a longstanding military ally of the United States of America has increasingly had a very good relationship with China. Over the past couple of years, Taiwan has done, sorry, Thailand has done something unthinkable. It's bought military equipment from China. Very interesting. That's the kind of a thing that I think a president before president Trump would have cared about. I think Donald Trump would be like, okay,

Like, cool with me, you know, free market. So this is a very important point. Once the U.S. as a country becomes aware that the world is multipolar, a lot of things shift. And one of the things that shifts is that the U.S. is not necessarily going to

try to push back against every square inch of planet where some other country says, that's my sphere of influence. That's where long-term sustainable equilibria can be produced, particularly with Russia, but also with China.

And so what do U.S.-China relations look like in that world that you would envision? I mean, there are some folks in the geopolitical sphere who take it almost as a given that the U.S. and China are going to go to war and that we don't have enough long-range naval missiles, that they'd only last a week if we had a hot war with China.

which would, I mean, obviously would have a huge way more problems than that. But yeah, this is kind of, you know, the argument that Xi is not only more authoritarian than his predecessors, the leaders of China, obviously, that's true, but much more militaristic and ambitious in terms of, you know, ruling the world.

So first of all, if you accepted the world is multipolar, you also accept that you don't have normative ideological supremacy. I mean, that's the fundamental point. And so then if China has an authoritarian leader, meh, so what? You know? Okay. That's their thing. Have fun with that in China. And that was why that speech that Donald Trump made in Riyadh was so profound.

I don't know if you encourage everyone to watch it. I mean, I forgot the verbatim quote, but it was sort of like, I leave judging to God and I focus on American national interests. That's a profound statement by a U.S. president. Profound. Because since 1945, the U.S. presidents have judged, for example, responsibility to protect. That was the ideological baseline for bombing Serbia in 1999.

You know, Serbia has failed in its responsibility to protect its own citizens, particularly a minority in Kosovo, Albanians. Therefore, NATO is going to bomb you into Stone Age. There you go. You know, the problem with a multipolar world is that everyone can make that argument. In a multipolar world, countries like Russia, China, India, Pakistan, Turkey, Saudi Arabia can suddenly use the same normative arguments to justify their own actions.

And so the U.S. is retrenching its normative ideological approach to foreign policy, not because it's like seeing the light, but because it no longer can prevent other countries from doing the same.

And what I would say to you is that I think that that's the profound kind of shift in US foreign policy. And I think it's very sustainable. So when it comes to US-China, I don't think that they are necessarily going to go to war. I think a lot of geopolitical strategists, particularly American geopolitical strategists, lack imagination. They also lack historical depth and perspective. They can only really envision two worlds, a world of American empire

or a world of bipolar Cold War-like structure. There are other worlds. In fact, the planet, through its history, has been multipolar 80% of the time. Not unipolar, not empire, and not two empires. The vast majority of human history

has been lived in a multipolar distribution of power where multiple countries can pursue their foreign policy independent of one another. And that's a world where America and China are not the only two games in town.

And that breaks people's brains. But political scientists have spent the last 50 years doing a lot of in-depth research on these three different worlds, unipolar, bipolar, multipolar. There's a plethora of research. And a multipolar global environment has implications for war, for conflict, for peace, for behavior of states, for behavior of states in commercial endeavors, for trade, for globalization.

for globalization, for movement of capital and for asset prices. And pretty much nobody in the investment world is aware of any of these because they keep getting this, I would say ideological propaganda that the world either has to be an American empire or a China in the US in this kind of the cities trap. And I think that shows a profound lack of understanding of history

and also profound lack of creativity in terms of where the world is headed. I don't think China and the US are going to divide the world in half. I think the odds of that are incredibly low. I would actually, if you forced me to bet between that and return of American empire, I would just say the return of American empire is so much more obvious than some sort of a bifurcated world. Preston Pysh : It's a very, very compelling critique of received wisdom from geopolitics. Marco, final question for you. What about the Middle East? Marco Ciasi :

So I think that President Trump is, again, in a way, a factor of stability, right? But by being open to spheres of influence, he's open to ending conflicts and rivalries without an existential battle. You know, because if you tell Russia or Iran, you're not allowed to have any sphere of influence at all. You're basically telling them, like, look, we're going to go to war, like maybe nuclear too. So tool up.

And President Trump is not saying that anymore. One of the most interesting things about this Iran deal that's being negotiated is that over the past 15 years, Republicans have consistently said that if they're going to have a deal with Iran, Iran needs to effectively remove its influence from various countries in the Middle East. In particular, there's four of them. There's Lebanon. There's Syria, where obviously Iranian influence has waned with the fall of Assad.

And then there's Yemen, where the Houthis are allied with Iran. I don't like to use the word proxy. The Houthis have much more of their independent thinking than people think. Then finally, Iraq. Iraq is effectively a vassal state of Iran. And I think this is the biggest failure of American foreign policy in the last 25 years, in that the invasion of Iraq handed this rule of the Middle East, incredibly important geographically and commercially and economically, piece of real estate to Iran.

I haven't heard a single thing from the Trump administration about Iran needing to remove its influence from these places. In other words, it's a tacit acceptance of an Iranian sphere of influence in some of these countries. The other country that's also made this tacit acceptance is Saudi Arabia. The Saudi-Iranian detente since 2022 has effectively ceded to Iran influence in Iraq.

Saudi Arabia used to counter it quite actively over the past 10, 20 years. It stopped doing that. And I think this is a path to stability in the Middle East. I do think that Israel may lash out against this reality. I think Israel may attack Iran this year. But if it does so, it will do it alone. Without American support, that attack will not be sustainable. It won't be effective.

It won't be as effective as if America participated, mainly because U.S. has never given Israel the largest bunker buster technology, the largest bombs.

And the second thing that Israel does not have is strategic strike capacity with, you know, basically bombers. It would have to use fighter jets to do this. It's very difficult to attack Fordow, which is the facility that's 40 meters underground where the Iranians have their centrifuges. So, yes, Israel may last shot against the deal.

But the deal will be very beneficial for Iran. And so what I would say to investors is this. I would actually expect oil prices, if they spike due to an Israeli attack against Iran, they're an incredible short opportunity. We'll leave it there. Marco, thank you so much for coming on Monetary Matters. A reminder to everyone listening, check out today's sponsor. Also subscribe to the Monetary Matters YouTube channel and leave a rating and review on Apple Podcasts and Spotify. Thanks again. Until next time.

Thank you. Just close this f***ing door.