By Ernst Knacke, head of research at Shard Capital
For decades, globalisation had one overriding objective: efficiency. Produce goods wherever labour, capital and energy were cheapest, move them freely across borders, and allow consumers to enjoy the dividend.
That era is behind us as we entered the fiscal age.
Trump 2.0 started with the same mercantilist rhetoric as the first: tariffs, trade deficits and an obsession with who was winning and losing from global commerce. However, the US administration increasingly looks different. Tariffs remain, but they now sit alongside subsidies, strategic investment, energy security, defence spending, semiconductor manufacturing and attempts to rebuild America’s industrial base.
This looks increasingly like Hamiltonian economics, a term referred to many times by the administration in recent months.
Alexander Hamilton believed economic policy should do more than simply facilitate trade. Government should actively build productive capacity, encourage strategically important industries and reduce dependence on foreign powers.
See also: Something’s brewing: Lauren Hardy in conversation with Ernst Knacke
In modern language: resilience matters more than efficiency. That sounds sensible. But resilience has a price.
Rebuilding supply chains, factories, power infrastructure and defence capacity requires enormous capital expenditure. Domestic production is more expensive than importing from the lowest-cost producer. Labour demand increases. Commodity demand rises. Fiscal deficits expand.
The result could initially be extremely powerful: higher investment, higher growth and higher inflation. Reflation.
If capital investment eventually delivers a sufficient return and productivity, Hamiltonian economics may prove enormously successful. For investors, that might be a wonderful environment. But economic regimes never stand still.
If government spending instead outruns productive capacity, return on investment falter, higher prices drive stagnation and tighter demand, and reflation becomes stagnation. Tightening liquidity conditions and a higher cost of capital then plants the seeds of the next recession.
One should expect the age of resilience to prove considerably more cyclical than the age of efficiency. That matters for portfolios.
Market leadership will rotate more frequently between equities and commodities during reflation, real assets and gold during inflationary stress, and high-quality government bonds when tightening eventually breaks demand.
Crucially, Hamilton himself believed activist economic policy had to coexist with sound money, credible public finances and trustworthy government debt. Intended or not, it is not the direction of US policy.
Equity market participants, and indeed the US administration, seem enthusiastic about rediscovering the first half of Hamilton’s philosophy. Whether we rediscover the second remain to be seen.
What’s clear, is that diversification across economic regimes is an imperative for the decade ahead.
