Trump Economic Agenda

Now that we are two months into the Trump administration we wanted to share some thoughts on the economic agenda, and what affects that may have on the market. We don’t like making predictions, but if the Trump administration is successful in implementing its plans, there will be an economic impact, and we can try reason what that will be. Exactly how the market will price it in is anybody’s guess.

Demise of the IRS, extinction of income tax, 50% tariffs…what is really likely to occur? Fun fact: did you know that there was no income tax until 1913 (the year the Fed was created, actually) and the government was mainly funded by taxes on….alcohol. Unfortunately, American alcohol consumption per capita and government spending have radically changed in the last hundred years, so its likely impossible to go back to those idyllic (though bibulous) days.

President Trump appointed Scott Bessent as his Secretary of the Treasury, responsible for advising the President on economic policy and managing the governments finances. Scott Bessent is a Wall Street veteran, a former hedge fund manager with Soros Fund Management as well as his own firm. Bessent had notable wins during his career around currency bets and often used geopolitics to make macro investments.

Mr. Bessent has proposed a three part economic plan and summarized his trio of goals as 3-3-3[1]:

1.)      Sustained 3% GDP growth rate – growth is good. Good growth (via healthy investments and production, not inflation) is better.

GDP growth requires more workforce participation and/or productivity. Can AI come to the rescue? Given Trump’s stance on immigration, workforce participation may be a headwind. Note that Bessent has specified that he wants “non-inflationary” growth, growth that is tied to real factors as opposed to monkeying with the money supply to goose numbers.

2.)      Federal fiscal deficit of 3% of GDP or less – certainly laudable for a government that is deficit spending like we are in a hot war.

Reduced spending could come from: less interest expense on US debt (lower rates), less defense spending (although that could negatively affect GDP), and DOGE cuts. Stronger GDP growth will naturally help here. The current federal deficit is around 6.5% of GDP, so there is a lot of work to be done, maybe an $850B reduction in the budget deficit assuming GDP stays the same (or 14% reduction in the overall budget)[2].

3.)      3M barrels a day increase of US domestic oil production – the oil and gas industry is key to the US, and a low cost of energy should aid overall economic growth.

An additional 3 million barrels would result in a roughly 20% increase in US production. Not impossible, but if the global economy contracts in a meaningful way, oil prices would crash, and drillers would need to stop drilling to remain profitable. With where we are now in the $60-$70 barrel range, there isn’t a ton of incentive for oil and gas companies to increase production.

Lower rates would significantly help matters. Scott Bessent has even stated that as a key objective. Lower rates will help the mortgage market thaw, and lending activity could lead to more productivity. It would also mean that the government can roll over the $7-10T coming due this year at lower rates, which is crucial since interest expense on the US debt is now over $1T annually, or almost 14% of all 2025 US outlays. Lower rates are also arguably good for US oil production, allowing for more lending.

How could this be accomplished? So far, Trump has suggested that there will be a rough patch and that investors shouldn’t look at the stock market. Which is surprising, because in his first term, Trump tweeted about the stock market constantly (per CNBC, Trump tweeted 63 times between election in November 2016 and February 2018). While focusing on treasuries may smack of moving the goalposts, it also suggest that Trump and Co. understand the severity of the fiscal situation. Now the S&P is down 8% on the year, and the 10-year treasury yield has moved from around 4.80% in January to 4.3%.

Higher Inflation might help with addressing the federal debt, but would ultimately mean higher rates, not lower, as the Fed would be pressed to hike rates. Hence the need to be sensitive to bringing down inflation. 

What could go wrong? Around 29% of the federal debt is foreign owned. If foreign countries and investors were to dump treasuries due to a perceived lack of stability, fear of inability to repay or even the threat of seizing the bonds (Russia had over $500B in foreign government bonds that will likely not be repaid after it invaded Ukraine), or even geopolitical competitive reasons, rates would move higher. Additionally, if inflation increases, the Fed would need to raise rates in order to bring inflation down. Higher rates would likely make all three of Bessent’s goals harder to achieve.

All this to say: expect volatility, especially in the short term. A focus on reducing the size of government and government spending are ultimately pro-growth, and should be viewed favorably. If the administration is successful in its aims, rates will moderate and continue to come gown, as will inflation. This is a better time to wait and see rather then make big moves even with the deafening roar of the media.