The Trump economy

Episode Summary

Executive Summary: The episode examines what a Trump presidency could mean for markets and the U.S. economy. Guests argue the immediate market moves were partly relief, but the bigger effects depend on trade, taxes, regulation, immigration, and debt policy. They stress that Trump could trigger supply shocks and global spillovers, while structural issues like weak growth, China’s slowdown, and loss of pricing power may matter more than election-night volatility.

Main Topics: Initial market reaction to Trump’s victory (Priority: 5/5): The conversation opens on the surprising rise in equities and jump in Treasury yields after Trump’s win, with guests debating whether markets overreacted to the election and whether the move reflected relief rather than clear policy pricing. Trade policy as the biggest macro risk (Priority: 5/5): A major concern is Trump’s hostility to trade agreements and tariffs. Speakers argue trade restrictions could become a slow-moving supply shock, reduce productivity, raise inflationary pressure, and harm multinationals globally. Corporate taxes, infrastructure, and deregulation (Priority: 5/5): The discussion focuses on Trump’s proposed corporate tax cuts, possible repatriation of overseas cash, infrastructure spending, and deregulation. Guests doubt the headline numbers are fiscally coherent but note sectors like construction, energy, and some financials could benefit. Banks, yields, and financial regulation (Priority: 4/5): Alex Skaggs and Aswath Damodaran debate whether the banking rally was driven by steeper yield curves or expectations of deregulation. Damodaran argues banks remain structurally weakened by lost trust and post-2008 constraints. Country risk in developed markets (Priority: 5/5): The episode argues political risk has migrated from emerging markets to advanced economies. Trump is presented as evidence that the U.S. can now exhibit behaviors once associated with emerging markets, such as policy unpredictability and institutional strain. Earnings, China, and global growth (Priority: 4/5): The hosts and guests suggest U.S. earnings face pressure from weak global growth, disinflation, competition, and China’s slowdown. Damodaran is especially skeptical that corporate earnings can return to prior growth rates. Debt management and safe-asset demand (Priority: 4/5): The discussion closes on Treasury issuance, deficits, and debt-ceiling politics. Speakers note that higher deficits may be manageable if demand for safe assets remains strong, but trade tensions could undermine foreign appetite for U.S. debt.

Key Arguments: Markets reacted to Trump’s win as if receiving relief from a feared Clinton outcome, but short-term moves may not reflect durable fundamentals. Trump’s impact on interest rates is likely limited because low rates are driven more by low growth and low inflation than by central-bank power. Trade is the clearest channel through which Trump could materially affect growth, because tariffs and renegotiated deals could spark retaliation and hurt global commerce. The market may be pricing in a softer version of Trump than what he promised; if he follows through on trade, markets could still be wrong. Healthcare stocks may reprice because repeal of Obamacare could restore pricing power to pharmaceuticals while creating uncertainty for insurers. Infrastructure spending combined with tax cuts creates a fiscal contradiction unless deficits widen or new revenues appear. Corporate tax reform is broadly needed, but the 15% rate Trump floated seems unrealistic; a rate closer to 25% is more plausible. Banks may get a relief rally from lighter regulation and steeper curves, but their long-term credibility and profitability problems remain unresolved. Political risk is no longer confined to emerging markets; developed markets now show similar instability and policy unpredictability. China is identified as the key variable for global earnings growth; without China, global growth and corporate earnings remain structurally weak. Deficit spending can be stabilizing when it supplies safe assets, but if it mostly goes to high-saving households, it may not boost investment or growth much. Immigration and trade are both supply-side constraints; reducing them would likely act as an inflationary supply shock and lower potential growth.

Data Points: Treasury yield move: Long-end Treasury yields started climbing after the election - Market reaction discussed by Damodaran and Skaggs Dow Jones intraday expectation: News stories said the Dow was down 800 points - Expected market calamity on election night Dow opening move: Opened 200 points up - Contrary to the feared crash after Trump’s win Trump corporate tax target: 15% - Campaign proposal discussed by speakers Likely corporate tax outcome: 20% to 25% - Damodaran’s estimate of a more realistic rate Trapped overseas cash: $2.5 trillion - Estimated cash held abroad by U.S. multinationals Obama deportation rate: Hundreds of thousands per year - Matt Klein cited Obama-era deportations as precedent Time to remove all undocumented immigrants at that rate: About 55 years - Illustrating scale limits of deportation policy Trump income tax effect: 23% after-tax income increase for top earners - Mentioned as a possible supply-side experiment U.S. debt-to-GDP ratio in the 2000s: About 35% and roughly flat - Matt Klein on deficits in the 2000s Obama/Trump election comparison: Clinton got millions fewer votes than Obama; Trump got many millions fewer than Mitt Romney - Used to illustrate turnout gaps and election surprises Post-2008 pivot date: September 12, 2008 - Damodaran called it the "last day of innocence" before Lehman’s collapse Corporate earnings recovery period: 2009 to 2014 - Damodaran said earnings climbed back to pre-2007 levels by 2014 Recent earnings change: Freezing or decline of about 4% to 5% - Damodaran on the last two years of earnings performance China growth skepticism: Real growth possibly below 3%, maybe zero - Damodaran’s estimate of China’s current growth

Pivotal Quotes: "If you think about what set them apart, in developed markets, central banks did not play a huge role... Since September 12th of 2008, I've viewed the world as a much more grayer place." — Azwath Damodaran: Explaining how the financial crisis blurred the line between developed and emerging-market risk "Trade is the one box where the Trump effect could be significant... you could potentially set off a trade war. And that is not good news for anybody involved." — Azwath Damodaran: Describing the biggest macroeconomic downside risk from Trump’s agenda "The debt ceiling is just an arbitrary, archaic, misguided sort of idea." — Alex Skaggs: Critiquing the recurring U.S. debt-ceiling standoffs and hoping a Republican Congress will avoid them

Implications: Listeners should expect policy uncertainty to matter more than election-night market swings. Trade, taxes, immigration, and deficits could reshape sector returns, inflation, and global growth, but implementation and congressional constraints will determine how much of Trump’s agenda becomes reality.