LARRY KUDLOW: On the economy also, Mr. Trump is trying to save Europe from itself

The piece argues that US supply-side policies — tax cuts, deregulation, increased domestic energy production and modest tariffs — have produced a strong growth and disinflation backdrop, citing a 4.4% GDP run rate over three quarters of the current presidential term and forecasts of 5–7% growth as energy and other incentives kick in. It points to core PCE running 0.2% month/month (≈2.3% annualized over the past three months) and durable goods inflation near 2%, and claims 15% tariffs have helped reduce the trade deficit. The author urges a Fed personnel change to sustain the pro-growth regime and suggests European economies should emulate US policies; the view implies continued upside for US growth-sensitive assets but carries geopolitical and policy risks from tariffs and shifts in central-bank leadership.

Analysis

Market structure: A Trump-driven supply-side agenda (tax cuts, deregulation, energy push, modest tariffs ~15%) biases return-on-equity toward US cyclicals: energy, industrials, financials and small caps. If GDP does approach the 4–6% run-rate cited over the next 4 quarters, pricing power and capex should lift EBITDA margins by 200–500bp for industrials and energy services over 12–24 months, while European exporters and ESG-heavy renewable developers face margin compression.

Risk assessment: Key tail risks are a retaliatory EU trade response or tariff escalation that spikes input inflation (>+200bp in CPI) within 3–6 months, Fed policy mis-steps if inflation re-accelerates, and a geopolitical shock from Ukraine that disrupts energy markets. Near-term (days–weeks) volatility will be headline-driven around policy appointments and tariff notices; medium-term (3–12 months) depends on fiscal enactments and 4Q/1Q GDP prints; long-term (1–3 years) depends on capex realization and energy investment cycles.

Trade implications: Expect higher real yields if growth outpaces inflation expectations; that steepens yield curve and benefits banks/short-duration instruments while pressuring long-duration growth/tech. FX should favor USD appreciation vs EUR if Europe lags, supporting long USD/short EUR and pressuring European equities (FEZ) relative to US (IWM/XLF). Options volatility will spike near tariff/Fed headlines—use directional spreads to limit premium spend.

contrarian angles: Consensus assumes immediate winners; but onshoring increases unit costs short-term and could compress margins for manufacturers for 6–12 months before capex pays off. Historical parallel: 1980s supply-side effects were multi-year and deficit-funded—expect volatility around fiscal math and bond market repricing. Unintended consequence: stronger USD erodes export competitiveness and could offset domestic gains for multi-nationals in <12 months.

Key Decisions for Investors

• Establish a 2.5% portfolio long in XLE (Energy Select Sector SPDR) with a 6–12 month horizon; target entry on pullback to 50-day MA, take profits at +25–30%, stop-loss -12%.
• Add a 2% tactical long in XLF (Financials SPDR) funded by a 1.5% short in FEZ (STOXX Europe 50) to capture US cyclical outperformance; rebalance after 6 months or if US 2yr yield falls >50bp from current levels.
• Implement a 1% long USD position (UUP) vs 1% short EUR (FXE) with 3–9 month horizon; widen if EUR/USD >1.10 or tighten if US PCE >3.0% for two consecutive months.
• Buy a 6-month XLE call spread (buy ATM, sell +15% OTM) sized at 0.5% notional to express upside with limited premium; roll or exit ahead of major tariff/Fed announcements.
• Reduce core long-duration growth exposure (e.g., reduce tech ETF holdings like QQQ by 3–5%) and redeploy to industrials (XLI) and select energy MLPs (EPD) if 3-month GDP prints remain >3.5% and core PCE stays ≤2.5%.