The Pain Begins

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Trump’s economic team continues to signal that hard times are coming.

Scott Bessent, Trump’s Treasury Secretary, has made a flurry of recent media appearances. And he’s setting expectations low.

Bessent recently admitted to CNBC that America has “become addicted to government spending, and there’s going to be a detox period”.

A detox period, you say? Hmmm.

More recent commentary from Bessent:

Could we see this economy that we inherited starting to roll a bit? Sure. And look, there’s going to be a natural adjustment as we move away from public spending to private spending,

A natural adjustment, eh? That doesn’t sound pleasant.

And we’re not done quoting Bessent yet. The new Treasury chief had a busy week:

Over the medium term, the focus is on Main Street. Wall Street’s done great, Wall Street can continue to do fine, but we have to focus on small business and consumers. We are going to rebalance the economy and bring manufacturing jobs home.

Scott Bessent is one of the best investors of his generation, and he is clearly signaling that the stock market now takes a backseat to the real economy.

Another signpost is that during Trump’s first term, he was constantly tweeting about how well the market was doing. In year 1 of his first term, he posted about stocks more than 60 times.

This time around he’s only posted about the market once. Even as the market raced to all-time highs after his election, he resisted the urge to shout it from the rooftops. This is a new, more disciplined and focused Trump.

His economic playbook is becoming clearer. It appears Trump is willing to accept short-term pain in exchange for long-term gains.

The key point here is that it looks like much of that pain will be felt in the stock market. Jim Rickards and I have been warning about this, and now we’re beginning to see it play out.

The Pain Begins

So far, the Nasdaq is down about 10% from its highs, and the S&P 500 is down around 7%. It’s not even a bear market yet, technically speaking.

Perhaps this will prove to be just another minor correction. Yet another opportunity to “buy the dip”.

But with U.S. stock prices at such ridiculously high levels, I’m not buying this line of thinking. According to almost any metric you look at, whether it’s price/book, the Buffett indicator, CAPE ratio, etc, American stocks have never been so expensive.

When you combine record-high valuations with an economic “detox period”, it’s not exactly a recipe for stock market gains.

Will Trump Stand Firm?

Mike Tyson famously said, “everybody has a plan until they get punched in the face”.

So, what will happen if the stock market crashes 40%? Will Trump and Elon continue slashing government spending, even as it harms the economy over the short-term? I hope so. It has to happen eventually.

And if inflation spikes higher, will Bessent’s team keep the tariffs in place? I suspect so. This administration is determined to rebuild America’s manufacturing sector, and doing that without tariffs is going to be nearly impossible.

If Trump stands firm, and pushes through his reforms, I believe the market will continue to fall. This adjustment period will indeed be a challenging one.

Just remember that there is a plan here. Short-term pain, long-term gain.

It is time to fulfill the old adage and take our medicine. Unfortunately, this medication may have some side effects.

To prepare, I am minimizing exposure to U.S. stocks, raising cash, buying precious metals, and also dipping my toes into emerging markets.

We’ll explore these and other themes further in the coming weeks.

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