Hedge Fund Picton Says Markets Will Punish a Fed That Bows to Trump

The head of Picton Investments said bond markets will swiftly discipline the US if President Donald Trump appoints a Federal Reserve chair who’s seen as too malleable — and precious metals remain a good hedge against political volatility.

“There is a relationship between the amount of Truth Social that gets posted and what’s happening in the debasement trade — that is, gold, silver and these commodity-based hedges,” said David Picton, referring to Trump’s preferred social media network.

Gold and silver jumped and “Sell America” sentiment rippled through markets early last week after the administration escalated its attacks on current Fed Chair Jerome Powell. Precious metals rose again Monday after Trump escalated his threats against European nations over Greenland, reiterating his view that the US must control the Arctic island that has long been part of Denmark.

Precious Metals Soar Under Trump

Silver, gold and the US dollar since inauguration day

The Justice Department has subpoenaed the Fed about Powell’s testimony on a renovation project at the central bank’s headquarters. But the Fed chair said the criminal investigation is a pretext, intended to punish him for not cutting interest rates faster.

The Powell probe has exacerbated concerns about how far the White House might go in eroding the Fed’s autonomy. Key policymakers such as Thom Tillis, a Republican senator from North Carolina, have promised Trump’s Fed picks will get more scrutiny now.

Picton, whose firm manages about C$16.6 billion ($11.9 billion), said he doesn’t expect the Fed to lose its independence in the end. But Trump’s repeated verbal assaults on Powell are “extremely not helpful.”

“If a new Fed chair was imposed that became like the Arthur Burns of the 1970s and sort of bowed to the will of the president, the market would punish that extremely quickly,” Picton said.

As for Picton’s investment outlook this year, the CEO sees a significant chance the global economy will pick up speed, fueled by stimulus. Major economies including the US, Europe and China are rolling out economic support through monetary and fiscal policy, including major infrastructure programs and higher defense spending.

“As that occurs, there should be a broadening of the markets and stocks that participate in a potential rally,” Picton said.

In technology, capital discipline is starting to become a theme in the artificial intelligence sector, so the market may sort out winners and losers in that group, he said.

This paves the way for money to move out of the tech trade into other areas of the market, such as autos, restaurants, consumer discretionary and transportation, according to Picton.

While all these elements are generally positive for equities, Picton said a stock pullback is always possible — and one trigger would be a jump in bond yields if fixed-income investors begin to rebel against too much government borrowing.

“The bond vigilantes out there may have something to say about this,” Picton said. His firm has increased its hedging positions to cushion the blow if there’s a correction.

Metals Flying

Picton is bullish on commodities. “The lack of investment in the space, combined with rising demand, was going to lead at some point to a pinch — and we’re probably there.”

Silver touched $94 an ounce in early trading, building on last year’s stunning 148% rally — the metal’s biggest annual gain since the late 1970s.

Picton said he’s hoping the price of silver dips because “I’d like to get a little bit more, but I think I’m part of a large legion that says that.” The supply-and-demand scenario for silver points to a lot more upside because of a shortage of inventory, he said.

“The silver story is very compelling because you need silver. You need silver in the electricity trade, you need it in solar. You just need it in the economy.”