Reality vs. Rhetoric: What Will President Trump Really Do?

Photo by Gage Skidmore

Make sure you read all of this month’s special feature coverage leading up to President Trump’s First 100 Days here.

As we mentioned in our earlier piece outlining the plans the incoming Trump administration has for the first 100 days of its time in power, examining the specific proposals of any political candidate on the campaign trail doesn’t usually produce a clear understanding of what’s to come. An incoming administration needs the approval of Congress for any major legislation, a process that can frequently see even the simplest of directives muddied and complicated. For that matter, the actual construction of a cabinet, the staffing for the White House, and the harsh realities of turning the hypothetical into the practical all stand to seriously change any proposal.

And for investors trying to forecast how the new administration may affect the markets, that’s hardly a welcome uncertainty. Actually, for investors or entrepreneurs, the term “welcome uncertainty” is something of an oxymoron. Anyone trying to understand how this major shift might impact their portfolio or their ability to raise capital isn’t interested in hearing about vagaries or chaos. Point being, knowing what a Trump presidency might mean for the economy is vitally important, but at this point, there’s a frustrating lack of detail.

As such, it may be significantly more valuable not to think of things in terms of specifics as much as themes. The specific iterations that the new administration’s agenda will take are anyone’s guess, but if we’re familiar with the driving principles that are shaping them, it’s easier to see where compromises might be made, and what they might look like. As a result, investors can temper their expectations accordingly, anticipating the broad strokes, even if the minutiae won’t be completely clear for at least a few weeks.

So, here’s a look at what Trump’s campaign and cabinet selections seem to indicate are the themes that stand to guide things as they transition from a proposed candidate and president-elect into a functioning executive branch.

Deregulation of Wall Street and Beyond

At the heart of the incoming administration’s approach to the economy is a firm pro-business attitude, most specifically with regards to reducing regulation. In what’s been a pretty common refrain for Republicans since, well, ever, Trump has championed the idea that we’re being held back from a roaring economy and tremendous prosperity by an ocean of red tape and onerous regulation that’s handcuffing our great and noble businessmen and women.

That’s almost certainly true to some degree, even if not to anywhere near the extent that Trump and other Republicans seem to assume. However, precisely what regulations Trump plans on specifically targeting is what’s intriguing. There’s certainly going to be a lot of restrictions removed from energy companies (more on that later), and small businesses may also see some major changes. However, there’s one sector in particular that appears to be in line for the most removal of regulation: finance.

It does seem a bit odd that Donald Trump, newly minted populist champion, is so committed to helping out the biggest Wall Street banks by rolling back Dodd Frank, but that does seem to be a central tenet nonetheless. In an interview with CNBC, incoming Treasury Secretary and former Goldman Sachs (GS) partner Steven Mnuchin stated that he very much intends to oversee stripping out most of the key pieces of legislation, citing the Volcker Rule (which bans proprietary trading with government-insured deposits) as being too complex and confusing.

The basic mindset is that, if the big banks are allowed to open up some and improve profits, it will in turn boost lending and support the entire industry from the top down, which, in turn, would mean more capital available for business formation. It’s a lovely thought if it works, but plenty of people are probably not going to like the idea of letting big banks make risky bets with people’s deposits again. Whether Trump realizes it or not, the wounds of the 2007-2008 economic collapse are still very raw in the minds of most Americans.

Then again, plenty of investors are no doubt excited at the potential for expanded access to capital and better profits in the financial sector. Whether or not the financial sector can open things up again without driving into a ditch likely won’t be apparent for a long time, but the Trump administration appears committed to raising the speed limit.

Repealing Obamacare

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Speaking of removing government controls on a huge, essential industry, Trump is coming in with big plans to kill President Obama’s signature accomplishment. The plans remain foggy at this point, but the anti-Obamacare sentiment is especially strong in the Republican base, and it would likely be political suicide for Trump or the Republicans in Congress not to make a sincere effort.

That said, it’s already clear that unwinding the Affordable Care Act may be a lot trickier than Republicans have made it out to be. For starters, there’s the fact that a simple repeal is going to mean throwing 30 million people or so off of their insurance plans and back into an individual market where there would now be no rules against refusing customers based on pre-existing conditions or to prevent insurance companies from placing prohibitive limits on how much they have to pay out. You know, the essentially untenable state of the health care sector prior to Obamacare. Trump has suggested that he might support a “partial repeal,” but even that is ignoring the reality that the exchanges and the individual mandate were concessions to insurers that would make the limitations of screening for pre-existing conditions and lifetime and annual limits financially feasible.

It’s also not evident that there’s a clear philosophical theme backing Trump’s opposition here. Again, this may be a circumstance of political necessity rather than firmly held ideological belief. In that sense, a “repeal” in name only that keeps much of the bill in place may be possible. Or, what’s more, Republicans may simply try to make a big show, but ultimately let Democrats in the senate filibuster rather than be forced to actually try to construct an alternative.

Growing Energy Production

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Among the most popular sectors for the new administration is undoubtedly energy. Boosting domestic production appears to be among the staunchest held beliefs of Trump and his administration. Rick Perry’s selection as Secretary of Energy and Rex Tillerson as Secretary of State would seem to point toward an extremely cozy relationship between the oil industry and the Trump administration. While Obama may have tried to make last-minute changes to block exploration in the Arctic and offshore Atlantic drilling, the Trump administration stands to roll back a lot of regulations and open up as many areas for drilling as they can.

There’s also the issue of the administration’s stance on climate change. New EPA head Scott Pruitt has always taken a pretty dim (and obstinately contrarian) view of global warming, and it should be of some benefit to the energy industry. Where the Obama administration was clearly committed to finding ways to reduce the use of fossil fuels where possible, Trump is entering office looking to expand it aggressively.

That said, some of Trump’s promises, particularly with regards to the coal industry, are just talk, and at odds with other proposals. Trump may insist that he’s going to revitalize coal, but the major villain for coal production in America has not been, as leaders in the coal industry are fond of insisting, Obama-era EPA restrictions on carbon emissions. Rather, it’s been cheap natural gas flooding the market with the advent of fracking, a practice that Trump’s planning on expanding.

Changing Trade Policies

Trump’s biggest target for vitriol, though, has long been globalization and trade deals that he’s insisted were the source of America’s fall from manufacturing dominance. Trump has talked big about killing the TPP before it exists, “renegotiating” NAFTA to secure more favorable terms for American factories, and passing big new taxes on companies that offshore jobs. On top of that, he’s pushed the idea of a trade war with China, slapping massive tariffs on goods produced there.

Now, as I have previously outlined, many (if not most) economists feel strongly that free trade pacts are beneficial to Americans on the whole and bear a disproportionate share of the blame for globalization, but there’s certainly plenty of economists and politicans on the right and left who have taken the opposite position. Who’s right? Well, the Trump administration may very well give the economics community a chance to see which side’s theory will prove relevant in practice.

Of course, this become that much more apparent if Trump ultimately gets a chance to engage in the sort of aggressive trade war with China that he’s been proposing. In the event that he begins levying massive tariffs on Chinese goods, it could result in some pretty significant consequences.

Certainly, the potential for dramatically increased prices on Chinese-made goods could result in a serious mark-up for consumer prices across the board, hurting retailers and companies with significant exports to Chinese markets (which would likely retaliate with its own draconian tariffs on American goods) specifically and the broader economy more generally. Given that we’re already in a period of economic growth that’s already reaching historic lengths, some would even argue that this heavy a jostling might spark a recession.

That said, there’s clearly some specific industries that would benefit greatly from a more aggressive posture on limiting Chinese imports. Everything from steel to solar panels have seen prices pulled down significantly by Chinese competition, and those industries would likely see major benefits from a potential trade war. If the ultimate effect on consumer prices is more limited, it could result in a very significant boost for myriad domestic industries.

Trump’s rhetoric has been pretty fiery, though, and it would be a clear reversal for him not to keep up his aggressive stance moving forward. Of all the themes that drove the Trump campaign, this may be the most interesting one to keep an eye on. Trump is likely tilting at windmills in his efforts to reverse the trend towards globalization, but just how far is he willing to go in this Quixotic quest?

Cutting Taxes and Boosting Infrastructure Spending

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In terms of the federal budget, Trump has big plans there, as well. His plans for slashing taxes are big, broad, and largely in line with congressional Republicans. In particular, the long called-for cut to the business tax rate has been a target for conservatives for ages. Of course, cutting the base rate while eliminating loopholes has been a goal that even Democrats can agree with, but cutting tax loopholes is especially difficult. That said, Trump can likely expect plenty of support in his plans to slash taxes. For that matter, his plan to use public-private partnerships to boost infrastructure spending is precisely the sort of industry-friendly measure that Republicans can get behind after spending eight years opposing Obama’s calls for infrastructure spending.

But Trump may find his fair share of opposition for his tax plans, as well. Democrats, for starters, are going to be none-too-happy about tax cuts that are clearly going to primarily benefit the wealthiest Americans and big corporations. It’s an issue they can feel comfortable standing strong on, and a lengthy filibuster and/or government shutdown is well within the realm of possibilities rather than stepping aside. What’s more, Democrats clearly haven’t forgotten the massive hole Bush-era tax cuts tore in the budget, making a firm stand feel even more of a likely outcome.

Combine Trump’s plans for big tax cuts with his big plans for infrastructure spending and it does appear that the Republican Party may also be headed for a day of reckoning. The party has a certain history of standing firm on all matters regarding budget deficits when a Democrat is in the White House only to find they’re more flexible during Republican administrations. That was a sticking point for some conservatives during the Bush administration, and it will be interesting to see if the Freedom Caucus and Tea Party Republicans are willing to show a similar willingness to compromise the next time the debt ceiling needs to be raised.

This is especially interesting when you consider Trump’s business career. Trump has long believed in borrowing and spending big, driving up budgets to feed his sense of largesse. After pitching a fit over every proposal from the Obama administration no matter how modest, how will Republicans react to exploding deficits as they slash taxes and, most likely, don’t match the lost revenues with spending cuts. Trump may be accustomed to borrowing his way out of any problem and sparing no expense on making his programs the biggest and best possible, but will that fly with a Republican Congress?

The consequences of slashing taxes and running up big deficits likely won’t hit until we’re years into a Trump administration, and the short-term gains for the economy could be felt prior to that. That said, the economic benefits of the massive Bush tax cut never materialized in the fashion predicted by conservative economists, so it’s difficult to say just how much consumer spending and capital formation would be juiced by this new effort to slash taxes.

From Populist Outsider Candidate to Traditional Conservative President?

Photo by Gage Skidmore

Trump is, ultimately, offering a vision of the American economy that is largely in line with traditional conservatives: friendly to big business, deregulation, and fossil fuels. In that sense, success in passing his slate of legislation will give conservatives a chance to see if their ideological premise has the same footing in reality as they’ve been saying for the last eight years. Removing limitations to earnings for big banks and opening them up could very well have the desired effect in boosting small-business lending, and while the environmental impact of expanding oil and gas production seems dire, it’s most likely a policy that would boost growth.

That said, it seems entirely unlikely that Trump is going to get anywhere near the 4.0% annual GDP growth he’s promised, particularly with him entering office in the midst of a 90-month period of economic growth, the second-longest such economic expansion in history. What’s more, a trade war with one of our biggest trading partners could seriously restrict consumer spending, making the likelihood of a recession that much greater.

For investors, some things appear to be pretty clear. The prospects for big banks, domestic energy producers, and companies competing with cheap Chinese imports should be substantially improved. Other inferences are less clear, but still seem potentially possible, like the new freedom of the largest banks loosening up lending and expanding available capital across the economy and juicing growth. Likewise if potential tax savings result in companies reinvesting additional profits and repatriating overseas earnings. While 4.0% annual GDP growth is clearly a pipe dream, improved growth certainly isn’t out of the question.

That said, there’s also plenty of reason for caution. The very real chance that an overzealous effort to reverse decades of trends in trade policy could swing the economy into a recession and do significant harm to domestic exporters and American consumers should give any investor pause before buying into the potential for real gains in the economy. Especially when you consider that the administration, which is inheriting an economy that’s been growing for 90-straight months, facing an environment of rising interest rates, and has stock markets already hitting record highs, a pullback would seem likely regardless of government policy.

As such, the temptation to view the coming four years as a referendum on conservative economic policies is likely a mistake, regardless of outcome. But, with a chance to reverse so many Obama-era reforms, it does bear keeping a close watch on how things play out in the markets.