Pricing Trump
The convincing victory by Donald Trump and the clean sweep of Congress by the Republicans took away the ultimate election uncertainty, a contested election result. Markets are now free to focus in on what the second coming of Trump might mean. Everyone knows that transposing Trump’s campaign rhetoric directly into actual policies is foolish. However, when trying to piece together which strain of Trump we are going to get, his picks in the key economic roles of government give us the first real insight.
Starting with the most important we have hedge fund manager Scott Bessent recently appointed as Secretary of the Treasury. Broadly speaking, markets have been reassured by this appointment. Bessent is viewed as a safe pair of hands by Wall Street. He understands the global trading system well and will be focused on addressing a system that he feels has evolved in recent decades to be disadvantageous to large parts of the US electorate. He has voiced his support of tariffs as one component of an overall interventionist stance to reset the US terms of trade with the rest of the world. In a recent interview, Bessent outlined his “3-3-3” policy: slashing the budget deficit to just 3% of GDP by 2028, ramping up real GDP growth to a brisk 3% via sweeping deregulation, and boosting oil production by 3 million barrels per day. Speaking recently to the Wall Street Journal, Bessent said, “It might seem counterintuitive from a free market perspective, but in order to actually create a freer and more extensive trading system over the long term, we need a more activist approach internationally.” Bessent is clearly focused on changing the system of global trade, but the market is confident his approach to tackling this task will be measured.
The second notable appointment is Howard Lutnick as Secretary of Commerce. Lutnick also hails from Wall Street as former boss of Cantor Fitzgerald. Lutnick is also on board with tariffs but again the markets are, so far at least, comfortable with this selection. This just leaves the trade representative, a slightly lower position that will now report into Lutnick (formerly there was a direct line to the President), for which Trump has now selected Jamieson Greer, a protégé of Robert Lighthizer, the architect of Trump’s previous trade policy. The final notable appointments in terms of economic policy are in the newly created Department of Government Efficiency (DOGE) which will be headed jointly by Elon Musk and Vivek Ramaswamy with the task of slashing wasteful government spending, presumably to help achieve Bessent’s 3% deficit target (currently the deficit is 6% of GDP).
In summary, the markets are viewing this collection of appointments as a sign of “sensible Trump” rather than anything more revolutionary.
However, while it appears the first hurdle has been cleared, it is still very unclear what the implications of the new approach will be for economies and markets. While a detailed analysis is beyond the scope of this note, it is worth highlighting a couple of contradictions that exist within the broad outline of the new policy framework.
The first contradiction is in relation to tariffs. All else equal, they are inflationary for the importing nation. However, not all else is equal. If, which is theoretically the case, tariffs result in a stronger US dollar versus the exporting nation, the inflation is offset to the extent of the currency move and the cost is borne by the exporting nation via a lower exchange rate. Trade flows are broadly unaffected, and the US government has an incremental source of revenue. However, part of the problem is that the international value of the US dollar is too high for US industry to produce competitively, hurting the manufacturing industry and creating a national security issue as the US becomes dependent on adversaries for critical imports. Affecting trade flows (i.e. reducing the trade deficit) is the whole point of the policy. However, a weaker US dollar is, all else equal inflationary for the US, which as the Democrats have just discovered, is political kryptonite.
The second contradiction is in relation to the budget deficit. Government spending is an important component of GDP. By reducing the budget deficit from 6% to 3% will, in isolation, act as a significant drag on GDP. One could argue the only reason the US economy has been as strong as it has is because of the deficit. Increasing growth, while slashing the deficit, is going to be very hard indeed.
There is a general ebullience from pro-growth, pro-Trump constituents that while not totally unfounded perhaps under-estimates the scale of the task at hand. A small sigh of relief at the conclusive result of the US election is absolutely warranted. Correctly pricing the myriad of implications has only just begun.