The Trump/Powell No-Love Fest

Maybe it’s like the movies, where bickering parents stick it out for the kids. Or maybe both of them are simply comfortable in their positions of power, free to do what they want in their respective worlds.

Whatever the reason, the fact that President Trump still sits in the Oval Office and Jay Powell remains at the helm of the Federal Reserve is great news for investors. Long-term they might be driving us over a financial cliff, but for the moment they’re unwilling co-conspirators pushing us higher.

On the day of Trump’s inauguration, I wrote “Welcome to the Revolution,” and laid out why I, and many people I know, voted for him. It wasn’t out of love for everything he says, or even support for some of his social programs. We wanted fewer regulations, a modified tax code, and more power pushed down to the states instead of centralized in Washington. Some of that has happened, and it’s been fabulous for American business.

Cutting corporate taxes from 35% to 21% gave American firms a sudden windfall. This wasn’t the tax change I had in mind, and I wrote in the days after it passed that the change would put cash into a lot of pockets, but wouldn’t boost growth very much.

Unfortunately, by cutting taxes without also cutting revenue, the move put us on the path to trillion-dollar deficits starting this year and stretching as far as the eye can see. There’s no way we’ll actually allow the tax cuts for individuals to phase out in the mid-2020s. It will take an act of Congress to increase the corporate tax at least halfway back to where it was to bring things back to a semblance of balance.

On the regulation front, Trump has given most businesses an ongoing Christmas present. Trump now holds the single-year record for the fewest regulations added by any president since we began keeping records in 1975. He also holds the second and third spots. Trump rolled into office promising to cut two regulations for everyone he implemented. He didn’t.

Instead, he’s cut 8.5 regulations for everyone he’s put in place. He’s also redirected the EPA and other regulatory agencies and now wants to limit the time allowed for an environmental study to two years. Such studies have been used as a weapon to stop everything from pipelines to roads.

And then there are the judges. Trump has appointed a full 25% of all U.S. Circuit Court judges and appointed 187 judges overall, plus two Supreme Court Judges, all of whom will presumably, but not guaranteed, take a softer stance on business. Because these judges are appointed for life, this legacy will live on for decades.

You don’t have to love, or even approve of, the man to recognize the benefits for Corporate America and investors.

As for Chair Powell, he hasn’t pushed interest rates below zero, earning the ire of President Trump. But he’s still been a friend to business and the markets. By turning about-face in early 2019 from a rate cut in December 2018, Powell put the world on notice that he was willing to turn dovish at the drop of a hat. The three rate cuts during the year gave the markets a little boost, and then Powell went even further.

In September, the Fed intervened in the repo markets where borrowers had to pay a steep price, around 10% when lenders decided to turn off the taps. Repo borrowers use the money to invest, so a breakdown in this area would have sent jolts through the equity and bond markets. Powell was having none of it. He lent more than $100 billion.

In early October, Powell and his fellow Fed Governors pledged to offer $65 billion per month in repo money to quiet the markets. Unless it’s not enough, in which case they’ll lend whatever people want to borrow.

In the last four months, the Fed has lent more than $400 billion in repo money. It’s not QE in their eyes because they aren’t buying bonds all along the yield curve to lower interest rates to boost the economy, but it adds more firepower to hedge funds and other large investors who then chase stocks and bonds. The economy might not benefit directly, but our investment accounts certainly do!

The deficit-inducing Trump tax cuts, along with the bubble-blowing money printing from the Fed, can’t be good for the economy or the financial market’s long-term.

Eventually, we’ll have to get the budget deficit under control, which means cutting spending or raising taxes, and stop giving nearly-free money to hedge funds.  Eventually… but not today.

Jay Powell is relatively untouchable on his perch. And, for all of his foibles, Trump looks like he’ll hang on at least through the end of his first term. If his re-election starts to look questionable, expect the business community and markets to take it hard, which will be bad news for your investments.

I don’t think Jay Powell, as a single parent of the markets, would be able to keep it going.

P.S. On January 22nd at 1 PM ET, my Charles Street Research colleague, Michael Coolbaugh is hosting a live event called, The Delta Profit Summit. This is where he’ll use his expertise as a Certified Market Technician and experience trading on Wall Street to walk you through how you could use one of Wall Street’s own algorithms to grow your wealth and build a seven-figure retirement. Click here to reserve your seat.