Keep Your Eyes Wide Open

The postelection scene... Donald Trump's pick for Treasury secretary... What happens next isn't as clear... Easier said than done... A few big ideas to consider...

Before we head off for the long weekend...

I (Corey McLaughlin) hope you enjoyed the pair of guest essays from our founder Porter Stansberry over the past two days (here and here). And, looking ahead, we wish you a Happy Thanksgiving.

But before we get to the holiday tomorrow, we do have some business to attend to today...

Namely, postelection reality is here...

We're getting a better idea of what the next few years of federal government policy could look like under a Donald Trump administration... or at least the reality it is encountering.

As we mentioned in Monday's edition via our colleague Greg Diamond and his latest Diamond's Edge video, President-elect Donald Trump has announced his choice for Treasury secretary: Scott Bessent, who is a familiar figure on Wall Street.

Bessent is the founder of Key Square, a global macro-investment firm. And he was a partner at Soros Fund Management, where he worked for George Soros and other famed investors who included Stanley Druckenmiller, Jim Rogers, and short seller James Chanos.

Bessent interned for Rogers at Soros' firm while a student at Yale in the 1980s after he decided not to pursue a journalism career. "He even offered – which was key for me – a place to stay on the office sofa," Bessent said of Rogers.

Bessent was working at Soros' fund when it "broke" the Bank of England in September 1992 and delivered a $1 billion return to Soros by betting against the British pound on what became known as "Black Wednesday."

A fan of Alexander Hamilton, evidently...

Interestingly, Bessent had been a donor to the Democratic Party over the years before supporting Trump starting in 2016. More recently, Bessent has publicly backed tariffs and other policies that are very much in line with Trump's economic views...

Less than two weeks ago, Bessent wrote an opinion piece for Fox News arguing that "it's time to revitalize Hamilton's favorite tool." Those would be tariffs, he said. The essay began...

For months, economic commentators parroted the [Kamala] Harris campaign's misleading talking point that tariffs are a "sales tax." Like much of economists' conventional wisdom, this view is fundamentally incorrect. The reflexive opposition to tariffs represents political ideology and advocacy, not considered economic thought.

The truth is that tariffs have a long and storied history as both a revenue-raising tool and a way of protecting strategically important industries in the U.S. President-elect Trump has added a third leg to the stool: tariffs as a negotiating tool with our trading partners.

Bessent went on to describe how Hamilton was a proponent of tariffs, which are a government-imposed tax on imports or exports.

He wrote about how the U.S. moved away from them after World War II... and how this shift allowed economies such as China to take "advantage of the U.S.'s openness for far too long, because we allowed them to."

What Bessent didn't mention was the historical argument against tariffs, like the example of the Smoot-Hawley Tariff Act of 1930, supported by Republican President Herbert Hoover. It raised already-high tariff rates... led to a dramatic, two-thirds reduction of U.S. imports from Europe... and worsened the Great Depression.

Bessent has also said that extending the corporate tax cuts from the 2017 Tax Cuts and Jobs Act from Trump's first term, set to expire at the end of 2025, will be a priority.

So it's clear where the likely next Treasury secretary comes down on economic and trade policy. That's good for something, and to start the week, markets appeared to absorb the idea of Bessent as Treasury head without much trepidation.

What happens next for the economy isn't quite as clear, though...

As you might have read over the weekend in Porter's Masters Series essays, these policies and others supported by the incoming administration (which has control of the House and Senate) won't happen without consequences.

Namely, Porter wrote that Trump "is blinding his supporters into thinking that this will happen without major dislocations in the markets." I won't rehash all the reasons why. You can read Porter's take here.

Tellingly, at Grant's Annual Fall Conference last month, Bessent spoke to the audience and seemed to acknowledge the "other side" of change that could come. He said, as quoted in the Almost Daily Grant's newsletter on Monday...

Wealthy Americans like myself, and many in this room, have had a fantastic run as U.S. assets were mechanically bid up as the other side of our trade deficit... Wall Street did great. But millions of Americans were left behind because opening our economy to foreign markets exposed them to competition from lower-priced foreign labor, pushing down domestic wages.

That may all sound good to hear during a campaign. But now, sitting in a seat in Washington where he could make a difference, is the idea really to unwind this? Do we think that wealthy Americans holding the levers of power will really pull the plug on the ride that got them there?

This strikes me as something easier said than done – and more painful than they might want in practice – but we'll see.

There are a few big ideas to consider – so far...

The most straightforward is the import tariffs, which are directly paid by companies that bring goods into the U.S. Those could crimp profit margins of those companies that'll take on more costs.

Trump has described the word tariff as "the most beautiful word in the dictionary," yet others say tariffs are most likely to lead to more inflation (from higher costs of imports passed through as higher prices for consumers and, longer term, from less competition) than any benefits.

In any case, though, Trump is already using the threat of new tariffs as a bargaining chip...

Yesterday, he threatened to impose new tariffs on Mexican and Canadian imports (of 25%) and on Chinese goods (of 10%) on day one of his second term in the White House if the countries didn't do more to help curb illegal immigration and illicit drugs from crossing U.S. borders.

Then there's the proposed extension of corporate tax cuts, which could keep the current status quo for companies' tax costs in place – though won't help the state of the federal deficit.

Uncle Sam's debt totals roughly $36 trillion, including nearly $2 trillion for 2024 alone. And of that, interest on our debt was more than $1 trillion for the last fiscal year that just ended in September. That's a 30% jump in interest payments from the 2023 fiscal year.

During Trump's first term as president, the national debt grew by about $8 trillion with only about half coming from COVID-19 relief measures. The 2017 tax cuts, straight-up regular spending, and interest on the debt made up the rest.
Now, it's not a question of if the tax cuts will be extended, but for how long.

Debate is already starting about that, as The Hill reported yesterday...

Sources familiar with the early discussions between Senate and House Republicans say the House GOP is floating the idea of a four-year extension of the law so its impact on the federal deficit, as determined by the Joint Committee on Taxation, won't give House conservatives sticker shock.

"We're having conversations with them and with our colleagues about that and so those are continuing," incoming Senate Majority Leader John Thune (R-S.D.) said of the discussions over how long to extend the Trump tax cuts.

Speaker Mike Johnson (R-La.), House Ways and Means Committee Chair Jason Smith (R-Mo.) and House Budget Committee Chair Jodey Arrington (R-Texas) know they'll be operating with a very small majority next year and won't be able to afford more than a few defections from fiscal conservatives in the GOP conference.

That's why they're mindful about how much a package could add to the deficit.

A 10-year extension of Trump's tax cuts would add more than $4 trillion, which might not sit well with fiscal hawks in the House who are alarmed over the size of the nation's $36 trillion debt. Of that staggering sum, $28.5 trillion is held by the public and $7.4 trillion is held by the government.

And maybe most importantly, there are Trump's reported plans to slash government spending (through the newly proposed Elon Musk and Vivek Ramaswamy-led Department of Government Efficiency).

This is the bigger kahuna, given the reach Uncle Sam has on the economy in general.

In the third quarter of this year, U.S. federal government spending rose by nearly 10%, which made for 0.6 of a percentage point in the headline estimated GDP growth of around 2.8% annualized.

Any meaningful level of cuts would assuredly lead to a decrease in U.S. GDP, and at least a form of the "shock therapy" Argentine President Javier Milei has prescribed over the past year or so.

Keep your eyes wide open...

So, as Dan Ferris wrote two weeks ago, "it's time to hope"... But keep your eyes open for the unexpected – or what's not priced into the market right now...

Simply put, a large reduction in the entity that accounts for 25% of U.S. GDP could tip us into recession, perhaps even if it's handled adroitly (though mass firings and spending cuts don't seem inherently compatible with adroitness).

Given the exorbitant overvaluation of the stock market, the recent appearance of 40-year-high inflation, massive growth in federal debt, and the growing burden of the welfare ("entitlement") state... massive downside is looming for everybody who depends on the U.S. economy.

The unfortunate irony of Trump proposing to reduce the burden of government by creating a brand-new government department run with not one but two people in charge has not been lost on anyone. Let's hope the irony fades as the reality lives up to the promises.

We're just starting to see what that reality might look like. After all, what's said and what ultimately happens can be two very different things.

In the meantime, we'll keep our eyes on how any of these potentially major policy shifts (and others we didn't discuss today, notably including deregulation of oil and gas exploration) could affect the broader markets and individual names, for better or worse.

New 52-week highs (as of 11/26/24): Automatic Data Processing (ADP), Air Products and Chemicals (APD), American Express (AXP), Brown & Brown (BRO), CBOE Global Markets (CBOE), CME Group (CME), Compass (COMP), Costco Wholesale (COST), Copart (CPRT), Salesforce (CRM), Cisco Systems (CSCO), Cintas (CTAS), Commvault Systems (CVLT), Enterprise Products Partners (EPD), Expedia (EXPE), Fair Isaac (FICO), Comfort Systems USA (FIX), Home Depot (HD), Markel (MKL), Altria (MO), Procter & Gamble (PG), Packaging Corporation of America (PKG), Planet Fitness (PLNT), Ryder System (R), Roivant Sciences (ROIV), Sprouts Farmers Market (SFM), Snap-on (SNA), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 (SSO), Toast (TOST), T. Rowe Price (TROW), Trane Technologies (TT), Tyler Technologies (TYL), ProShares Ultra Financials (UYG), Vanguard S&P 500 Fund (VOO), W.R. Berkley (WRB), Industrial Select Sector SPDR Fund (XLI), and Utilities Select Sector SPDR Fund (XLU).

We've got a quiet mailbag today, but a scheduling note to share: Our offices are closed tomorrow and Friday for the Thanksgiving holiday. After this weekend's Masters Series, we'll pick things up with more of our regular Digest fare on Monday. Have a great holiday weekend.

All the best,

Corey McLaughlin
Baltimore, Maryland
November 27, 2024

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