News : How Trump’s agenda would hit investors

Thursday, June 20, 2024

How Trump’s agenda would hit investors

Jun 20, 2024

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QUICK FIX

Many on Wall Street have set aside concerns that former President Donald Trump would pose a danger to democracy in a second term. The threat his platform could pose to their portfolios will be much harder to ignore.

Policies Trump has floated would weaken the Fed’s independence and the dollar while expanding fiscal policy through money printing, Larry Summers, a former top economic adviser to former President Barack Obama and Treasury secretary to former President Bill Clinton, told MM.

And Trump could deliver on a number of the nationalist elements of his economic agenda — which include resistance to foreign investment, imports and immigration — without congressional approval, he said.

“Ultimately, I think these economic policies are pretty catastrophic,” Summers said. “But they certainly could be allowed to run for some significant interval.”

The presumptive Republican nominee’s plans to impose blanket tariffs and mass deportations, coupled with his propensity to publicly harangue Federal Reserve officials over interest rate policy, could present substantial challenges to a U.S. economy that’s already beset by inflation and elevated borrowing costs.

High prices and interest rates are big reasons why voters consistently give Trump better marks on the economy than President Joe Biden. And while the financial services crowd generally has a sunnier outlook on the Biden-era economy than does the public, they also want the boost that Trump says he could provide through lower taxes and softer regulation. That combination has been central to the former president’s appeal in 2024.

“President Trump built the strongest economy in American history by cutting regulations and taxes and using the leverage of the United States to negotiate better trade deals around the world,” campaign spokesperson Karoline Leavitt said in a statement to MM. “The American people cannot afford four more years of Bidenomics.”

Market participants aren’t yet pricing for any of Trump’s most substantial policies when it comes to trade or the economy. That could change soon — possibly as soon as after the June 27 debate — once they lock in on the specifics of what Trump is putting on the table.

The most salient component of Trump’s agenda has to do with his plan to impose a blanket, 10 percent tariff on all imports.

Presidents have a lot of latitude when it comes to tariffs. But while Trump’s plan to slap a blanket, 10 percent levy on imports could face legal obstacles, “even a ‘scaled back’ version of the proposals is still material for markets,” Evercore ISI’s Sarah Bianchi — who was a deputy U.S. Trade Representative from 2021 to 2024 — and Matthew Aks wrote in a research note.

Markets reacted negatively to Trump’s trade war with China in 2018 and 2019; a period when inflation was comparatively tame and the geopolitical climate was less inflamed. What Trump is proposing now is much more expansive.

Douglas Holtz-Eakin, a former director of the nonpartisan Congressional Budget Office and former economic adviser to former President George W. Bush and Sen. John McCain (R-Ariz.), compared the possible outcomes to those of the Smoot-Hawley tariffs that exacerbated the Great Depression.

“It would have dramatically negative trade and growth consequences. There’s no way around that,” he said in an interview, adding: “The retaliation will be swift — because people know it's coming — and severe. That was the dynamic that was so dangerous back in the 1930s. And I’d worry about it again.”

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Driving The Day

Minneapolis Fed President Neel Kashkari will speak at a Michigan Bankers Association event at 8:45 a.m. … SEC Chair Gary Gensler speaks virtually at the Accelerated Settlement in the UK Conference at 9:30 a.m. … National Economic Adviser Lael Brainard will speak at an Urban Institute and Consumer Federation of America event at 10:30 a.m. … Acting Labor Secretary Julie Su will discuss economic growth in Latino communities at an event in Las Vegas at 11:45 a.m. … Consumer Financial Protection Bureau Director Rohit Chopra will participate in a Federalist Society panel focusing on the "rights, privileges, and limits on corporations” at 2 p.m. … Richmond Fed President Thomas Barkin to speak at a Risk Management Association event at 4 p.m. … San Francisco Fed President Mary Daly will speak on an AI panel at 10:15 p.m.

Movement on Goldsmith Romero — Senate Banking Chair Sherrod Brown (D-Ohio) is circling a July hearing on CFTC Commissioner Christy Goldsmith Romero’s nomination to lead the FDIC, Eleanor Mueller reports.

— Sen. Bill Hagerty told Eleanor he was a “no” on Biden’s nomination of Goldsmith Romero to lead the FDIC. Given the challenges that will face the new chair to repair the agency’s toxic workplace, “I would expect this administration to put forward somebody with real substantive banking experience, someone with managerial experience,” the Tennessee Republican said. “Commissioner Romero has none.”

— Pete Schroeder and Michelle Price of Reuters reported on Wednesday that Goldsmith Romero probably has enough votes for confirmation but that “Republicans are likely to slow walk the process.”

Budget

A widening deficit — The Congressional Budget Office on Tuesday increased its estimate for this year’s federal deficit by $400 billion to $2 trillion, Jennifer Scholtes reports. The biggest contributor to the widening estimate was Biden’s student loan relief program, according to the CBO. An additional $70 billion of the increased deficit projection for this year stemmed from recent bank failures, as the FDIC hasn’t recovered payments as quickly as expected.

— One factor that will boost revenue? Surging immigration. Immigrants are expected to pay $1.175 trillion in individual and payroll taxes over the next 11 years while receiving just $278 billion in benefits during that period, Brian Faler reports.

— Your MM host is very interested in this story, particularly as it relates to medical care inflation. The CBO also estimated that the percentage of Americans without health insurance could rise to 8.9 percent by 2034, up from 7.2 percent in 2023, Kelly Hooper reports. One cause? The end of a Covid-19-era law that stopped states from reviewing whether people had low enough incomes to qualify for Medicaid.

Fed File

So, what could Trump actually do? — Trump doesn’t have many legal maneuvers at his disposal to directly influence the Fed, Bloomberg’s Amara Omeokwe reports.

— But, but, but: “But whether a president can remove the chair is more ambiguous, because the law doesn’t explicitly provide the ‘for cause’ protection for the role,” said Peter Conti-Brown, a professor and Fed historian at the Wharton School of the University of Pennsylvania”

Still “wait and see” as more signs point to cooling inflation — Key Fed officials said they’ll need to see more signs of falling inflation before moving ahead with a rate cut — or rate cuts — later this year, Bloomberg’s Reade Pickert reports.

— Retail sales “barely rose” in May, per Reuters, which suggests the economy has slowed.

Mortgage rates fall — Mortgage rates dipped below 7 percent for the first time since March, Bloomberg’s Vince Golle reports. Mortgage applications continued to climb this week as well.

Crypto

Stabenow eyes summer markup — Senate Agriculture Chair Debbie Stabenow hopes to hold a committee vote on her crypto bill before the August recess, the Michigan Democrat told Eleanor. “We’re still working on the substance of it — but I’d like to get something marked up as soon as we could.”

Bond resurfaces — Former Association for Digital Asset Markets CEO Michelle Bond, whose failed 2022 congressional campaign was financed by her partner and recently convicted FTX executive Ryan Salame, is launching a new nonprofit focused on the fintech, digital asset, and artificial intelligence industries. Bond, who left ADAM shortly after FTX collapsed, said the purpose of the new venture was to “promote regulation that strikes the right balance between protecting consumers while also allowing these new industries to flourish.”

Regulatory Corner

Warren pressures the Fed — Sen. Elizabeth Warren (D-Mass.) urged Fed Chair Jerome Powell to move ahead with finalizing rules to require tougher capital requirements for banks, Michael Stratford reports.

Back in Texas — A challenge by banks to the CFPB rule capping credit card late fees will proceed in federal court in the Northern District of Texas, rather than the District of Columbia, Katy O’Donnell reports. It’s a blow to the CFPB, which was earlier blocked from implementing the rule by a preliminary injunction.

Wall Street

Regional banks turn to hedge funds — Regional banks are striking deals with hedge funds to lay off the risk of certain loans, The Wall Street Journal’s Matt Wirz reports.

Private equity’s exit problem — Private equity firms are having a hard time selling their portfolio companies and delivering cash to investors. Instead, they’re borrowing more, Bloomberg’s Sonali Basak and John Sage report.

AIC messages on private credit — As more regulators turn their attention to the opaque world of private credit, the PE industry’s top lobbying organization in Washington, the American Investment Council, will start releasing quarterly data on how direct lending vehicles and other debt funds finance American businesses. Private debt funds issued 133 loans to businesses in the U.S. during the first quarter, with a median loan size of $70 million, according to a copy of the report shared with MM.

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