The World According to Trump
The Risks and Opportunities of a New World Order
Great powers must be forever vigilant and never subordinate survival to any other goal, including prosperity. Professor John Mearsheimer.
Americans have spent this week giving thanks for their escape from Europe's ancien regime of absolute monarchy and the intolerable suppression of freedom of thought, belief and expression it entailed. The journey and struggle of their forebears to the New World culminated in them finally discarding the yoke of the old, casting their future to a constitutionally federated group of states lightly tethered by shared beliefs in the fundamental rights of man to pursue their wealth, health and happiness. Their unifying constitution was designed to protect their citizenry from an oversized and overly powerful government.
Over the following 170 years, the USA took shape, and its economy grew to dominate the world. The USA's coronation of what 1066 & All That termed "Top Nation" came in the 1940s. With post-war Europe lying in ruins and imperial Japan beaten into submission, it fell to America to shape the new world order that, over the following decades, faced up to and saw off the challenge from the Soviet Union.
The collapse of the Berlin Wall and the Soviet system delivered the world we understand today, a world created and protected by the global hegemon where the dollar rules our markets. Its overwhelming military strength protects our trade routes, providing Western Europe with a protective umbrella.
Our post-war international order evolved via a collection of supranational bodies such as the UN, the IMF, the World Bank, the WTO and many loosely related subsidiary and spinout entities. This alphabet soup of political bodies formulates and implements what is commonly referred to as international law. Significantly, international law operates with the consent of the nations that subscribe to it.
In our domestic legal systems, the state preserves its monopoly right to violence, typically alongside its currency issuance monopoly, as the twin bedrocks of statecraft. However, no universally accepted authority exists to enforce international law upon sovereign states. As University of Chicago political scientist and international affairs scholar John Mearsheimer puts it:
The sad fact is that international politics has always been a ruthless and dangerous business and will likely remain that way. In the anarchic world of international politics, it is better to be Godzilla than Bambi.
As Trump's National Security Advisor and Bush Junior's UN Ambassador, John Bolton, said:
All international laws are invalid, meaningless attempts to constrict American power.
For the last eighty years, the world has operated under an order established by America's protective shield. Its unintended consequence is that those under its wing have avoided the responsibilities of realism. How and why this old world order has fractured underlies the new political divisions we are witnessing around Western democracies. But change is underway, and as we approach a new world order, we should understand what the new boss man makes of it.
This week, at Mar a Lago, where Zuckerberg arrived to kiss the ring, more nominee names appeared, and social media posts emerged that offer glimpses of how the shapeshifter-in-chief wants to reshape the world he now commands. What have we learned, and how does it impact our investment universe?
The first point is that the Energy and Treasury nominees are top-drawer selections with unrivalled deep domain expertise in the form of Chris Wright (CEO and founder of Liberty Energy) and Scott Bessent (former partner at Soros Fund Management and founder of Key Square Capital). Media comments that the Department of Energy was under assault from the wildcatters and the Treasury by hedgefund guys focused on the riskiness of these moves; a moment's reflection would reveal that this was Trump’s intent. However, the implication that these people are somehow unqualified to run a significant department of state is wrong, and in the case of Bessent, the bond market verdict, in the form of the 25 bps decline in the US 10 yr Treasury yield, is already in.
Counterintuitively, the energy market has signalled its approval of Wright's elevation to the DoE via a 20% increase in the price of natural gas. While the environmental pearl-clutchers have focused on Trump's mantra of drill baby drill, the primary energy impact of Trump 2.0 is pipe baby pipe, which offers the prospect of releasing vast amounts of trapped natural gas onto world markets. The main reason domestic US gas prices are so low is that the green lobby has prevented gas released from the production of shale oil from being sold onto the world market. With European wholesale LNG prices more than three times that of the US, this provides an obvious win-win for the world economy.
While the world is holding its breath about whether Biden or whoever is running DC in the dying days of the old world order is about to start World War 3 in Ukraine, the main non-military functions of the new Trump administration that impact bond yields and energy prices have taken shape. They are under the control of two professionals, neither of whom need to embellish their CVs and both of whom have received market approval.
In the last twenty years, the collapsing old world order and the breakdown of its institutional apparatus, including the relevance of international law conventions, have threatened its only great power. While old-world-order politicians (mainly in Europe) continue to blame Trump and the populists for destroying their Post-WWI2 playground, the new-world realists are now in the ascendency.
Trump, the disrupter, is happy to threaten chaos and negotiate his way forward. People, organisations, and countries that do not bend to his worldview will pay a penalty—like any NY mobster, Trump wants respect. Buying more American LNG perpetuates Europe's delusion of net-zero piety. However, to get the best deals, we might also have to buy some of those "risk-free" long-duration Treasury bonds, which Treasury Secretary Bessent must start issuing next year.
Of course, none of this is inevitable. The old world order and increasingly united BRICS nations will challenge this threat. Critically, China's containment will feature strongly. However, according to Le Shrub's satirical sobriquet, Make Ambiguity Great Again, what are the chances that the great powers Trump and Xi can also become great mates? We must always expect the unexpected.