The election of Donald Trump as President of the United States on November 9th, 2016 was a shock wave for the political landscape as well as financial markets. Stock prices, bond yields, and inflation expectations soared. Even if you believed as I do, that these market moves were already underway on the back of Chinese reflationary efforts, the acceleration of the moves was striking. A businessman president and a Republican congress looked set to pass massive tax cuts, slash burdensome regulations, and deliver badly needed infrastructure spending. These collective actions would release "animal spirits" and a CapEx revival. Financials, Industrials, and small-caps outperformed and the 10 year US treasury was on it's way back to 3%. US Small Business Optimism exploded, and for a few short months it appeared that reflation, CapEx, and tax cuts could return the American economy to its former glory. Maybe after a few years, 3 - 4% growth would again be possible. Whatever you think of Mr. Trump filling his cabinet with billionaires, many of the appointees were heavy hitters with impressive careers in the military and private sector. Not squishy academics, two-faced politicians or grey suited technocrats. Surely these deal makers could forge new alliances both domestically and abroad? Hedge fund titans like Ray Dalio, released desk notes that portrayed an optimism that this Trump super team could very well accomplish its goals. Bill Ackman said he woke up the day after the election and felt "bullish" and contended that at their core the American people are very "wise." Suddenly, Larry Summer's "secular stagnation" thesis seemed a lot less compelling. But alas, as the administration became bogged down in scandals of its own making, and 100 days passed without major legislative accomplishment the equity sectors reversed themselves. The 10 year treasury sank back down below 2.25. The administration is young, and still has time to accomplish reforms in infrastructure and tax, but as the days go by, the reforms appear ever more modest and decreasing in likelihood. But why did we all believe in the first place? Wasn't there enough frightening elements of the Trump agenda (Border Tax, Protectionism, Immigration, politicization of the Fed) to outweigh the "tastier" tax cuts and infrastructure spending?
Smart investors know the world we live in doesn't make sense right now. Capitalism is supposed to lift all boats, and provide routes to prosperity, whether you grew up in Lansing or Long Island. Yet economic growth has been anemic, causing a greater amount of people to fight over the same pie. Income inequality has reached dangerous levels, pension plans are barely funded, and social spending is on an unsustainable trajectory. They know change is needed before our society rips itself apart fighting over the scraps.
Investors also like learning about history. They know history can operate in cycles, as the world changes there comes a time to tear down old institutions and build stronger ones to meet the challenges of the present and future. Revolutions often happen fast, with little foresight from those living through them. Might Donald Trump have been this change agent? No matter what his legacy, his victory will always be an incredible accomplishment. Russian intrigue aside, he was an insurgent candidate who won power with the support of no political parties, no outside money machine, while shattering the formalities and standards American presidential candidates are usually limited to. Sure, a lot of Mr. Trump's policies appeared economically incoherent. Even supporters admitted he seemed narcissistic and prone to shooting himself in the foot. But wasn't Thomas Cromwell able to use his position of power under the petulant King Henry VIII to push England through the Reformation; shaking the foundations of the West? All change agents don't need to be shining knights on white horses, perhaps the All-Star team of Rex Tillerson, James "Mad Dog" Mattis, and Steve Mnunchin could navigate their president's flaws. These accomplished men could provide the blue print for remodeling the American economy while Mr. Trump could flex his rhetorical muscles to go around the country selling their vision of America 2.0 to his heartland supporters. It didn't seem so crazy at all.
I believe the Trump trade was psychological. Buying into all of this is a lot easier, when you have a Trump surrogate like Anthony Scaramucci, the former hedge fund manager and founder of SkyBridge Capital. A clean, polished coastal elite himself, he is the perfect man to assuage the concerns of Wall Streeters and give them a story for why this all makes sense. He speaks eloquently about the need to right size the economy so it works for all Americans. He even invokes historical figures to project on to the current administration. I know that this pitch works, because it worked on me! Scaramucci recommends reading the Bully Pulpit by Doris Kearns Goodwin - Donald Trump isn't that different a figure than Teddy Roosevelt. Or check out Hamilton by Ron Chernow, "wonder kid" Jared Kushner reminds him of a young Alexander Hamilton. These are books portfolio managers and investment bankers want to read on their Hampton beachfront anyways! Maybe this election was a sloppy way of democracy working - the people sending a message to establishment elites demanding change.
The problem is under closer scrutiny the picture does not add up. Trump may remind some people of Roosevelt for leading a crusade of working people against "elites," his temper, or his brow beating of corrupt businesses. But Roosevelt was an accomplished man with experience in public office and deep seeded beliefs. Jared Kushner's family connections do not equate with Hamilton's incredible rise from orphan immigrant to US Treasury secretary.
When investors explained their renewed optimism after the election, they may have cited an infrastructure bill, or tax reform. But deep down they had to believe this shocking election result meant something more than just an earnings boost for the S&P 500. Western capitalism isn't working. The time for great institutional change may indeed be near. The machine of how the economy and government work both separately and together needs to be re-engineered, and investors are not wrong to contemplate and plan for that time. The problem is in a moment of wonder, we miscalculated the incompetence of Trump himself. Accomplishing institutional change of historic magnitude will take men of talent and conviction. Right now, Trump is simply too incompetent and incoherent to rally public opinion. His electoral college victory was too narrow to convince establishment GOP to adopt his populist platform. His attacks on the media have deprived him of a third-party apparatus to spread his message to a broader base. His popularity now hovers around 40%, hardly the public mandate to create meaningful change. Trump still has another three and half years in office, perhaps he can right the ship, but it is becoming harder to envision.
Smart investors know the world we live in doesn't make sense right now. Capitalism is supposed to lift all boats, and provide routes to prosperity, whether you grew up in Lansing or Long Island. Yet economic growth has been anemic, causing a greater amount of people to fight over the same pie. Income inequality has reached dangerous levels, pension plans are barely funded, and social spending is on an unsustainable trajectory. They know change is needed before our society rips itself apart fighting over the scraps.
Investors also like learning about history. They know history can operate in cycles, as the world changes there comes a time to tear down old institutions and build stronger ones to meet the challenges of the present and future. Revolutions often happen fast, with little foresight from those living through them. Might Donald Trump have been this change agent? No matter what his legacy, his victory will always be an incredible accomplishment. Russian intrigue aside, he was an insurgent candidate who won power with the support of no political parties, no outside money machine, while shattering the formalities and standards American presidential candidates are usually limited to. Sure, a lot of Mr. Trump's policies appeared economically incoherent. Even supporters admitted he seemed narcissistic and prone to shooting himself in the foot. But wasn't Thomas Cromwell able to use his position of power under the petulant King Henry VIII to push England through the Reformation; shaking the foundations of the West? All change agents don't need to be shining knights on white horses, perhaps the All-Star team of Rex Tillerson, James "Mad Dog" Mattis, and Steve Mnunchin could navigate their president's flaws. These accomplished men could provide the blue print for remodeling the American economy while Mr. Trump could flex his rhetorical muscles to go around the country selling their vision of America 2.0 to his heartland supporters. It didn't seem so crazy at all.
I believe the Trump trade was psychological. Buying into all of this is a lot easier, when you have a Trump surrogate like Anthony Scaramucci, the former hedge fund manager and founder of SkyBridge Capital. A clean, polished coastal elite himself, he is the perfect man to assuage the concerns of Wall Streeters and give them a story for why this all makes sense. He speaks eloquently about the need to right size the economy so it works for all Americans. He even invokes historical figures to project on to the current administration. I know that this pitch works, because it worked on me! Scaramucci recommends reading the Bully Pulpit by Doris Kearns Goodwin - Donald Trump isn't that different a figure than Teddy Roosevelt. Or check out Hamilton by Ron Chernow, "wonder kid" Jared Kushner reminds him of a young Alexander Hamilton. These are books portfolio managers and investment bankers want to read on their Hampton beachfront anyways! Maybe this election was a sloppy way of democracy working - the people sending a message to establishment elites demanding change.
The problem is under closer scrutiny the picture does not add up. Trump may remind some people of Roosevelt for leading a crusade of working people against "elites," his temper, or his brow beating of corrupt businesses. But Roosevelt was an accomplished man with experience in public office and deep seeded beliefs. Jared Kushner's family connections do not equate with Hamilton's incredible rise from orphan immigrant to US Treasury secretary.
When investors explained their renewed optimism after the election, they may have cited an infrastructure bill, or tax reform. But deep down they had to believe this shocking election result meant something more than just an earnings boost for the S&P 500. Western capitalism isn't working. The time for great institutional change may indeed be near. The machine of how the economy and government work both separately and together needs to be re-engineered, and investors are not wrong to contemplate and plan for that time. The problem is in a moment of wonder, we miscalculated the incompetence of Trump himself. Accomplishing institutional change of historic magnitude will take men of talent and conviction. Right now, Trump is simply too incompetent and incoherent to rally public opinion. His electoral college victory was too narrow to convince establishment GOP to adopt his populist platform. His attacks on the media have deprived him of a third-party apparatus to spread his message to a broader base. His popularity now hovers around 40%, hardly the public mandate to create meaningful change. Trump still has another three and half years in office, perhaps he can right the ship, but it is becoming harder to envision.
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