LARRY KUDLOW: Trumponomics is working, as a midterm victory comes into sight

The piece argues strong macro data and policy moves are driving a ‘Trump economy’ rebound: a January wage‑income proxy (hourly earnings × hours worked) rose to a 5.6% annualized pace over the past three months while CPI rose 2.4% over the same period, implying a roughly 3.2% real wage gain; unit labor costs were up only 1.1%. The author credits deregulation (EPA rollbacks), energy policy, tariff-driven trade measures, and 100% immediate depreciation for boosting factory construction, business investment and corporate profitability, and cites improved consumer/economic confidence and a rising stock market as bolstering Republican midterm prospects.

Analysis

Market structure: Policy mix described (tariffs, immediate 100% expensing, EPA dereg) is a clear near-term tailwind for US energy producers (integrated oil & gas, coal) and heavy industrial capital goods (construction, machinery, industrials) while depressing relative returns for renewables and import-dependent consumer goods. Expect domestic oil/gas supply to increase and exert downward pressure on Brent/WTI by $3–$12/barrel over 3–9 months absent geopolitical shocks, tightening input prices for steel and equipment as capex demand rises. Cross-asset: soft CPI prints + strong payrolls create two-way pressure — bonds likely to rally on repeat low inflation prints (10–30bp lower 2–5yr yields), but equity multiples for cyclicals can rerate higher; FX: USD mixed (stronger on growth, weaker on disinflation surprises). Options vol should fall for rates-sensitive names but rise for energy on geopolitical tail risk.

Risk assessment: Tail risks include tariff escalation and global retaliation that could shave 100–300bp off specific exporters' revenues, a Middle East shock spiking oil >$20/barrel in days, or legal reversals of deregulation. Timeline: immediate (0–14 days) market moves around CPI/Fed speak; short-term (1–6 months) capex and order-book upside for CAT/DE; long-term (12+ months) structural policy, trade, and technology shifts may revalue stranded assets in coal/renewables. Hidden dependencies: reported productivity gains can reverse if capex is front-loaded or supply-chain bottlenecks re-emerge, turning unit labor cost advantage into wage inflation. Key catalysts: next 2 CPI prints, next FOMC meeting, and midterm election outcomes.

Trade implications: Establish tactical overweight 2–4% portfolio positions in XLE and select majors XOM/CVX (long XOM 2% position, CVX 1.5%) with 3–9 month horizon; buy industrial exposure via CAT (1.5–2%) and XLI ETF (2%) to capture capex. Pair trade: long CAT (1.5%) vs short NEE (1.5%) to express baseload fossil/industrial vs utility/renewable underperformance; expected mean reversion window 3–9 months. Options: buy 3–6 month call spreads on XOM/CAT (limit cost to 0.8–1.5% portfolio risk) and hedge macro tail with a 2% portfolio SPY 3–6 month put spread (5–7% OTM). Entry: layer in positions over next 2–6 weeks, take profits after 15–25% move or if CPI/Fed guidance materially changes.

Contrarian angles: Consensus may overstate durability of “real wage” gains — if CPI re-accelerates or productivity cools, equities cyclicals will reprice quickly; capex boom might be more backloaded into 2–4 quarters and already partially priced in, compressing near-term upside. Renewable/utility shorts (NEE, TAN) assume policy persistence; if geopolitical oil spike occurs, these could rally — size shorts conservatively (max 1–1.5% portfolio) and use option structures to cap losses. Historical parallel: 2017 tax-driven capex surge produced sharp 12–18 month benefits but limited secular GDP improvement; plan exits at 9–12 months or on policy reversal triggers.

Key Decisions for Investors

• Establish a 2% long position in XOM and 1.5% long in CVX within 2 weeks to capture deregulation and domestic production tailwinds; hedge with a 3–6 month 5–7% OTM put on XOM limited to 0.25% portfolio cost; take profit or trim 50% after +20% move.
• Allocate 2% to XLE ETF and 2% to XLI ETF (or 1.5% long CAT + 0.5% DE) over the next 4 weeks to play capex/industrial cycle; set stop-loss at 12% adverse move and reassess after next CPI and FOMC (within 6–8 weeks).
• Implement pair trade: long CAT (1.5%) vs short NEE (1.5%) with target spread capture of 15–25% over 3–9 months; cap maximum loss at 10% via hard stops or 6–9 month option collars on both legs.
• Buy 3–6 month call spreads on XOM and CAT sized to 0.8–1.5% total portfolio risk to leverage upside while limiting capital; simultaneously buy a 3–6 month SPY put spread (2% portfolio risk) as macro tail hedge triggered by CPI/Fed surprises or midterm election volatility.
• Reduce exposure to pure-play renewable/utility growth names (e.g., trim NEE, TAN exposure by 25–40%) within 30 days and redeploy into energy/industrials; if Brent spikes >+$15 in 7 days, pause further shorts and rotate 50% of proceeds to tactical energy longs.