Trump’s Sovereign Wealth Fund Is A Game Changer (Uncut) 02-07-2025

Stocks, Gold To Soar? Trump’s Sovereign Wealth Fund Is A Game Changer | Axel Merk

One of the things I’ve paid attention to, which you did not mention, is this announcement of a sovereign wealth fund. When you throw around your weight and say, I’m going to impose tariffs, you have things happening in five minutes. Problem is with China, this stuff doesn’t really seem to be working.

Ultimately, a lot of this is noise. China is not going to change. Canada is not going to change.

Mexico is not going to change. I think I’ll just sit back and eat my popcorn because I haven’t seen much of a change. Huge market volatility this week on the back of tariff use.

We’ll dissect what this means for investors, short-term and long-term. The dollar moved up significantly first when Trump announced tariffs and then dropped significantly after tariffs were postponed. Gold is reaching new all-time highs and the stock markets are rebounding from their big drop earlier this week.

Axel Merck is here to break down market action and what’s next for investors. He is a president of Merck Investments. Welcome back to the show.

Axel, good to see you. Great to be with you again. Offline, we talked about how the best investment for this year might be popcorn.

You figured maybe we should give your listeners a little bit more than that. Let me maybe dive into that. Popcorn, for those of us who are observing, for those of us who have skin in the game, what do we do to prepare for volatility? The key here is that nobody knows exactly what will happen next with policy initiatives from the White House.

It’s difficult to predict, even on a short-term or medium-term basis, the direction of any one particular asset class. One of the mantras I’ve always had is to look at investing more in terms of risk than anything else. Can you afford to be invested in whatever that may be? As you point out, reasonable people might have no clue about what’s going to happen next.

That said, I actually think Trump is far more predictable than many people think. That said, market volatility might suggest otherwise. One of the things to just add to that I’ve argued is that the US and Trump specifically might actually be the anchor of stability in an increasing unstable world.

What I mean with that is that institutionally, the US can handle a populist. Karl Rove, the Republican strategist, he once said that in the US, politics is much more rough and tumble than the rest of the world. I would agree with that.

The US can adapt to a changing world, whereas in particular, when you look at Europe, we have a very rigid system in Europe. That means when the public wants change and populists on the rise, we might break things. That’s why I happen to think that in the US, with all the volatility there is, it’s actually the better of the things that we might see.

What happens once Fed breaks some of his promises or rescinds some of his tariff threats, for example? Are we going to see less volatility or more perhaps? Well, we’ve obviously seen that this is a rapid fire and series of announcements. They always have to be seen in the context of what the short-term gain is. You impose tariffs on your best buddies of Canada and Mexico, then you rescind them before they’re put in place.

The signaling, I suppose, is supposed to mean that, hey, I’m tough with my friends, so you better watch out what I’m going to do with you guys. Notably, China and the European Union, they don’t understand this language. Actually, there are some exceptions.

Alex Stubb, he’s the president of Finland, and there the president is in charge of the foreign policy. I think he has an excellent understanding of Trump and says, hey, he might have a point for something. His style may not be the one we’re used to, but let’s listen to the substance rather than the rhetoric of it.

I think foreign leaders would be well-served to try to figure out what is it that he wants. Obviously, he is going to spin it that it’s going to be a great deal for him. Then again, these guys are politicians and they can sell their stuff to their own audience.

As far as investment is concerned, the tough stuff, so to speak, tends to be out early in an administration. Then we’ll see how this plays along. Also, keep in mind that obviously the opposition to whatever Trump wants to do is going to ramp up.

I’ve long argued that Trump doesn’t have a big majority, so he has to do things with executive orders. We’ll see pan out, I think, in the coming weeks, what of these things will stick and which ones the courts will push back on. I say the courts because Congress seems to be incapable of pushing back much.

Let’s take a look at market reaction to what happened this week. First, we had gold moving new all-time highs. We’ll talk about that in just a minute.

The US 10-year yield jumped up earlier in the year, but has since fallen from its highs of 4.8% down to 4.5%. A huge drop on the 4th of February after it was announced that tariffs on Canada and Mexico will be put on hold for 30 days. DXY, again, initially jumped up on the expectation of tariffs and then went back down once tariffs were rescinded. This is what I mean by what I said earlier in the introduction when things are jumping around up and down and very volatile, very unpredictable.

What do you think markets are interpreting right now, generally speaking? One of the things I paid attention to, which you did not mention, is this announcement of a sovereign wealth fund. That might sound like another buzzword. Obviously, historically, sovereign wealth funds are used to invest budget surpluses.

Of course, we don’t have that. What that reminded me of is, and I mentioned that because I look at the bond market, the curve flattening, the long-term yield coming down, is that, if I’m not mistaken, the purpose of Trump’s version of a sovereign wealth fund is to have more active industrial policy. We’ve seen that off and on in the US.

Silicon Valley, where I talk from, was obviously built on an industrial policy. China has long had a strong industrial policy. In Europe, Mario Draghi has proposed that 5% of the EU budget is going to be used in infrastructure spending.

If the US has a similar plan, and if Trump can direct funding towards this project, what that means, what industrial policy in general means, it means a lot of spending. It means the government is more involved in the allocation of resources. That’s a very friendly way of saying resources are going to be allocated less efficiently.

It also means, in many ways, that the cost of doing business is going to go up, and tariffs are going to be elevated. All of that warrants a lower long-term yield, and in many ways, also a higher price of gold. That’s why I mentioned that that happened to coincide with giving up, at least in the short term, the tariffs on Canada and Mexico.

That in itself, of course, who knows what’s going to happen next year, right? It’s not like lots of drugs and illegal immigrants came in from the North. All of that is used for political purposes. Whether that’s really going to change the outlook so much, especially with Canada, that it should affect the yield curve that much is another question.

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So this is the news you’re referencing, I believe. Trump orders creation of U.S. sovereign wealth fund, says it could buy TikTok, I guess, with this fund. What else could be in this fund besides 50 percent of TikTok? Well, it’s going to get everybody guessing, and I guess that’s part of the point of it.

I don’t think that the government is going to buy TikTok. And indeed, of course, the other part that some people in the audience might be excited about, that Bitcoin could be purchased with that. I don’t think there’s any government use for cryptocurrency.

But what it could be, I think, is to do strategic investments, whatever that might mean. That could be basic infrastructure or anything that Trump deems interesting, deems in the national interest, to get an industry to be stronger at home. And we’ve seen that not so much in the last decades, but in the 70s, it was very popular.

Before that, it was very popular. And so we’re going back to the government having a heavier hand in industry. And at some point, there’s going to be a wave against that.

And for the time being, we talk all about government efficiency, DOGE. This is going to work against that. And for what it’s worth, tariffs, by the way, are also the antidote to government efficiency.

When you have tariffs in place, you need a bureaucracy to manage those tariffs. You’re going to create a bureaucracy, and you’ve got to create also a lobbying industry that’s going to call for exemptions. And so there’s always, on the one hand, the folks that, like Trump, say we’re going to have great efficiencies.

On the other hand, we’re going to create new inefficiencies. The one thing, by the way, we’re also not tackling with any of this is entitlements. And I mentioned all of that in the context that we often talk about gold.

And it’s, I think, one of the reasons why gold is doing just fine, despite all this, what is ultimately noise. Last week, a week ago, we didn’t know yet that these tariffs would come in and get out again. And at the time, I said, I have no idea whether these tariffs will be in for four minutes or for four years.

It turns out they were in for zero minutes. So I was wrong with my assessment there. They could come back.

The next 30 days, we don’t know what’s going to happen the next 30 days. There are certain conditions. Let’s take Canada, for example.

There’s certain conditions that the Canadian government has to meet. They have to appoint a fentanyl czar. They have to tighten border security.

I think 10,000 border patrol guards. They have to create a joint task force with the U.S. to fight organized crime in Mexico, a lot of things, all that. And by the way, the reason all this, normally when these things are negotiated through the official channels, these things can take years and nothing might ever happen.

And so when you throw around your weight and say, I’m going to impose tariffs, things happening in five minutes. The problem really is, and by the way, Mexico, the current president is most willing to work with the U.S. on crime and other things. The problem is with China, this stuff doesn’t really seem to be working.

I mean, the latest was that the phone call that was supposed to happen is put off because Trump is upset that China retaliated already. I mean, it’s all a lot of bluster. And the reason I mentioned this popcorn as an investment and take a seat back is because ultimately a lot of this is noise.

China is not going to change. Canada is not going to change. Mexico is not going to change.

And some efficiencies will be gained when you, there is nothing more popular than highlighting government abuse. And I’m sure that they’re always just going to point out how much money is wasted in this department or that department. The question is, does it matter sufficiently to impact the price of gold, the price of treasuries, the price of equities? Equities will obviously react to tariffs.

And the bond market, yes, they may well react as well. The way I look at it as a gold investor is what does it mean for the long-term fiscal sustainability? And there, I think I’ll just sit back and eat my popcorn because I haven’t seen much of a change. What does that mean for inflation then if fiscal responsibility or sustainability hasn’t changed? Well, inflation is created by deficit spending ultimately.

The central banks have a role to play. I do think that the FOMC meeting last December showed what disarray the Federal Reserve is in. These economic projections were trumped up, no pun intended on that.

And then guess what? They’re human beings on the FOMC and they all got spooked. Trump got elected. So maybe we have to raise rates.

Maybe we have to do this. Maybe we have to do that. When the Federal Reserve should, in my view anyway, project a quote-unquote reaction function, should say what will happen based on known factors.

And the reason why that is so important is because ultimately the U.S. dollar with the Federal Reserve, they set the anchor of the risk-free rate, both by regulation but also in practice. And so knowing what will happen to the risk-free rate is tremendously important for asset prices. And when you have what I would call the debating club set policy, that again creates inefficiency, increases the cost of doing business, raises the cost of borrowing.

And in my view, we should replace the FOMC with a rules-based system where we get rid of this stuff. They now said they have their five-year review. I’m not sure how many of your listeners are aware that we still have this asinine, I think that’s a technical term, backward-looking inflation averaging as the official Fed policy, which of course they don’t adhere to.

And now in a few months, they want to come up with a new policy. Well, they’ve never digested everything that went wrong with the high inflation environment. And you asked me what’s going to happen to inflation.

Nobody knows because once inflation is high, it’s not linear anymore. And when you have a debating club decide on rates and they’ve taken away many of the gauges going forward, they don’t know. So they’re going to look in the rear view mirror to set policy going forward.

None of that makes any sense. And so that means rates will be a little bit higher than they would otherwise be. But the markets appear to be doing just fine with that.

In many ways, I think we have parallels to the late 90s where the Federal Reserve was just sitting on a little higher rates. The key difference is that the fiscal situation is much worse. And I think you see that expressed in the price of gold because the options that are available when something goes wrong are just far, far fewer.

I’m getting the sense you have very little faith in the Department of Government Efficiency. No, no, no, I have been buying a lot of popcorn. I love it.

I love it. So just today they’ve announced that they’re considering axing the Department of Education. So Elon’s not just talk, they’re actually taking action to cut entire government agencies.

The reason why I’m cynical is because whatever they do, good for them, but it doesn’t fix the bigger issues, entitlement reform. Getting rid of government waste is always a good idea. And reasonable people might disagree on the little detail.

People might disagree on the specifics that they go about certain things. But getting rid of inefficiency is certainly great and it needs to be done periodically. There is nothing wrong with that.

But as an investor, and not just somebody sitting on the couch eating popcorn, I do need to know, well, what does it mean for me, for my investments? And I don’t see the big issues. And quite the contrary, what I see is that there’s a narrow majority in Congress. In order to get these tax cuts extended, which seems to be a very high priority, they need to dole out gifts left and right.

And of course, you can get some more revenue with tariffs, maybe or maybe not. I don’t think that makes too much of a dent. So I have nothing against the efforts that are undertaken.

I think they’re necessary. I just don’t think they impact the markets as much as people want. One exception, sorry, I keep ranting here.

The one thing that is relevant is, even though I say on substance, they might not change all that much. The perception does matter. So Republicans in particular are completely miserable when Democrats are in power.

You see that on consumer confidence numbers. So you have Trump coming to power, consumer confidence goes up. There is a new mood out there.

There is mourning in America, right? And even when you cut regulations, it’s not like suddenly there’s not going to be regulations anymore. The perception matters. And so more people might engage in projects, might invest.

And so the sales pitch, the narrative does matter. And so, yes, all equal, right? These efforts might induce more growth, especially since some former liberal folks are apparently trying to make friends with Trump as well. So that can all have a positive impact.

So I don’t want to be completely negative on this. I’m just not thinking that it’s going to have as profound an impact on something like the gold market as some people might argue. Well, let’s take a look at how the markets are responding to the developments that we’ve talked about here.

So over the past one month, the S&P 500 has been trading more or less range bound. It’s a little bit down since Christmas. Gold is just continuing to go up.

It had a bit of a trough around Christmastime and went from $2,600 now to new all-time highs. I wonder what’s been driving the gold price. We talked about that a little bit in the beginning, but let’s drill deeper.

The U.S. 10-year has been falling. I wonder if the 10-year yield dropping or the long end of the curve dropping in general has been a major contributor to the rise in the gold price since the beginning of 2025. What do you think? I would like to say yes, except it didn’t work the other way around, right? When the yields were rising, gold held up just fine.

There’s a metric called the 10-year real yield where net of inflation, what the 10-year yield will do, that has come down a little bit. Now, I know a lot of people don’t look at that because how on earth do we know what inflation will be in 10 years? Well, the point is that there are measures that you can extract from the market and changes in these metrics historically do matter. Now, the gold has somewhat decoupled from the 10-year.

First of all, inflation of gold has, versus just about anything else, morphs over time. It’s not steady. The correlation to real yields is higher than that to many other things.

The reason why I think we have seen a reduced correlation is ever since the dollar has been weaponized, that correlation has been breaking down. When you use the dollar as a weapon and discourage foreigners that are hostile to the U.S. from owning U.S. dollars, it’s not surprising that some of these correlations break down. The one thing to add maybe, we have the Chinese New Year’s where everybody in China is off work for several days.

Gold continued to appreciate during those days. It’s not just foreign central banks buying. Part of why I think people are buying gold is simply you talk about the S&P being range-bound.

The S&P is obviously a bit top-heavy with the MAC-7. How do you diversify from that when those securities are just omnipresent? Cash is, of course, one way to do it. There are things other than gold you can do, but I think gold is a key beneficiary as people just don’t know what’s going to happen.

They’re scrambling to find out, well, if these tariffs hurt the economy, where do I go? When people do their screens, gold just keeps coming up. We see also in the work we do, we see more people allocate to gold. When you say that gold has more room to climb, what are the main drivers behind that assumption? Historically, when people pile in on gold, really, you talk about market volatility.

We haven’t seen that much upward volatility. It has been very, very orderly. Part of the reason I think we haven’t seen it is because on the one constituent of the gold buyer, the speculators, they have been somewhat absent.

It’s because there are plenty of other speculative venues these days on meme stocks, on crypto and whatnot. If those guys come back in, then we can see anything. I’m not trying to put a price target on anything here, but these dynamics in the precious metals side, they’re somewhat contained.

The price of gold historically is actually about as volatile as equities are, but it can zoom up quite a bit. We haven’t really seen that. The 10-year yield falling that I mentioned earlier, what is that pricing in? Some people say that the 10-year has tracked inflation.

If that’s the case, do you think markets are expecting lower inflation, which is maybe contrary to what we’ve discussed so far? The reason I’m not looking at the camera, I’m looking at my fancy Bloomberg terminal. Five-year inflation expectations are at 2.6%. That’s about where it has been, maybe picked up a little bit. Overall, Trump policies are a bit inflationary, but real growth is also up.

Real growth expectations have been rising. The challenges, the further you go up the yield curve, the more factors play into what the 10-year is reflecting, or the 30-year, of course, even more. We can all give a narrative to it.

Ultimately, we’re price takers. We have to take it as it is. A lot, I think, ultimately depends on what of the Trump initiatives will stick.

To go back to Doge, one of the things, yes, I’m a cynic at heart, maybe, but one of the things that has been said is that a lot of what Doge wants to do is they want to build on the Chevron doctrine being turned over by the Supreme Court, which is basically the Supreme Court saying that these government agencies aren’t allowed to create their own laws, that that is in the purview of Congress. I think there may well be a lot of dismantling through executive orders. To the extent that that stuff can stick, that can lead to real growth.

Then the 10-year can be higher. Now, obviously, those who are the recipients of these cuts, they’re not going to sit idle. They’re trying to fight these things in court.

Just anecdotally, there was this funding freeze, and even though that was stopped by the courts, I know at some universities, people that were dependent on National Science Foundation grants, they didn’t get the paycheck because there was just so much uncertainty in the system. It’s quite easy to break programs to the extent that they can’t come back on their feet. By using this wrecking ball approach, some costs may be saved.

Does that make a difference as far as the long-term sustainability of the country? I don’t know, but it may well have an impact if that does change the tone in the medium term. Axel, how do you feel about the mining equities, gold equities that is? I know that’s something you look at. Volatility in the equity space, the large caps, S&P 500 overall, will that translate to some of the gold projects you’re looking at? For full disclosure, we manage about $1.8 billion in gold and gold mining.

Yes, we do look at that space quite closely. We focus mostly these days on the development companies in the mining space. The large miners, they underinvested over the years.

They’re scrambling to catch up. They’re tackling these huge projects that are difficult to do on time and on budget. We think that the sweet spot is more in the smaller miners where the projects are much more manageable.

Clearly, the higher gold prices help. The market is paying less for these ounces than they used to, in part because investors have gotten burned so much. But clearly, this environment has been quite favorable.

We happen to think that many of these prices continue to be pressed. I’ve been on record of being an insider buyer in that space. Maybe I’m biased, but I do like that space.

It is very volatile. I’d like to caution anybody to only do these things if they can afford the risk. I can’t give specific advice to invest in that space.

But there are some tremendous opportunities, we think. Anecdotally, by the way, just if I can abuse you for that, tariffs might actually be a positive for some of these miners. When these Canadian tariffs were announced, obviously they haven’t been implemented yet, the Canadian dollar fell.

So what does it mean? That means the price of gold in Canadian dollar is rising. And the labor force is paid in Canadian dollar, which means the margins for the Canadian miners are actually increasing. So the miners, in an odd way, can actually be beneficiaries of these tariffs through margin expansion.

Now, I wouldn’t put a thesis of investing in gold miners simply based on the threat of tariffs. But I’d just like to point out that these tariffs are not a negative for everybody. Wait, how is it a positive for mining companies in particular? Because it might increase the margins, because they will get a higher gold price in Canadian dollars if the currency weakens.

And assuming their fixed costs are about the same, obviously that’s always easier said than done. For the producers, would they not face difficulties selling their ores across borders? Yes, but the price of gold is set internationally, right? Assuming now that there’s not going to be trade barriers on prices of metals. So the price of gold is what it is.

And in Canadian dollars, that’s going up when the currency goes down. Any significant policy changes in regards to developmental companies in terms of zoning or permitting times that may change under Trump or more government support or subsidies for critical minerals, so on and so forth? Sure. Well, net, of course, less red tape, a streamlining of red tape is a benefit.

And same, by the way, we’re expecting a change in Canada, right? A change in government in Canada will quite likely make permitting easier in Canada. The First Nations have gotten very, very involved in the permitting process. And there are many things one can do to ease that.

A broader point there to make is there’s geopolitical risk in any jurisdiction, be that the US, be that Canada, be that Latin America, be that West Africa, Australia. And so these are nuances. It’s not like there’s going to be no red tape anymore for mining development in the US.

That said, Idaho and the US has been trying very hard to cut regulations, for example. And so these things are relevant. Ultimately, what we think the scarcest resource in the mining sector is talent, good management teams that can execute these things.

Obviously, got to know the local bureaucracy and whatnot. That hasn’t changed too much. There’s always going to be gold in the ground.

The question is, can you get this out on time and on budget? Can you get the permitting done in a timely manner? In some of these bureaucratic countries, including the US for that matter, the time to develop a mine tends to be very long. In some countries that have more geopolitical risk, if you deal with a centralized government, including a military dictatorship, maybe it is quite fast that you get something permitted. And also the price might be much lower.

So when you’re an investor, you’ve got to take all these factors into account. And quote, unquote, just because regulation eases a tad doesn’t mean you suddenly pile all your money into that country. Excellent.

Well, let’s bring out the popcorn. I’ll go buy some later tonight and see what happens later this week. Thank you very much for your insights.

Where can we learn more from you? Merckinvestments.com is our website. From there, we can’t talk about our products here, but from there you can see what we do. We have a newsletter you can sign up for.

I’m on Twitter or at x at Axel Merck. There I can comment on the news of the day. And yeah, follow me, get engaged.

Excellent. Thank you very much, Axel. Appreciate it.

My pleasure. Thank you for watching. Don’t forget to like and subscribe.