As the incoming Donald Trump administration comes together and markets respond positively to it, there are some issues about both that should concern investors.
In a column last February I discussed the probability that Trump would rely upon his business associates and similar types for cabinet positions, and compared that to what Ricardo Martinelli did in Panama in 2009. Trump does appear to be following that path and there are a few observations about that to address.
The first is that people of this type regard success as being measured principally by various financial metrics, the most important of them being how wealthy they are.
The second is that they attribute their success to themselves, how they handled all kinds of competition and obstacles throughout their lives. This has been a hallmark of Gary Cohn's, the president and COO of Goldman Sachs (GS) , and Trump's appointee as director of the National Economic Council, for many years, as evidenced by his key piece of advice on how to succeed being to "work hard." His implication obviously being that he succeeded because he "worked hard." Although I'm only referencing him here, the other choices Trump has made have similar personalities.
The third observation is that the obstacles overcome in that process are often considered to be public policy issues concerning taxation and regulation, and that they would have been able to achieve even greater things for themselves and society had there been less of both.
Assuming you've read this far and before you start sending me hate mail, I'm a member of the Libertarian Party, an entrepreneur and believe in the economic power of the individual and smaller government at all levels.
The problem with the characteristics listed above, however, is that they can lead to a cycle of confirmation bias, causing hubris or worse. Ultimately that often leaves such people with an inflated image of themselves and their capabilities and thus a blind spot to reality.
In "The Art Of The Deal" Trump outlined an 11-step formula for success, with the first step being "Think big."
Based on what Trump has said and the economic team he's assembled it appears that the "Think big" mentality will be evidenced first in the form of broad-based domestic policy proposals for corporate tax cuts and deregulation.
The idea is that capital owners unburdened by taxes and regulation will be freed to invest in the productive economy and thereby increase economic activity. That, in turn, will result in more jobs and higher wages, leading to even greater tax receipts by the federal government than those lost by the tax cuts, and a virtuous cycle of economic growth will be achieved.
He's claimed that the tax cuts will be tax revenue neutral by the inclusion of offsetting cuts in deductions, something that may be intended to cause Tea Party caucus members and those in similar caucuses to support the measures. But the fundamental problem that Trump and his team appear to be unaware of -- that "blind spot" mentioned above -- is that there is a dearth of demand in the U.S.
That means that corporate tax cuts will allow companies to increase the pass-through of earnings to their owners, which is good for stock prices, but it won't cause them to increase investment in their productive capacity, create jobs or generally cause economic activity to increase.
The only fiscal measures capable of causing an immediate increase in aggregate demand now require an increase of spending, but there is no way absent a financial or economic crisis that the fiscal conservatives in Congress will go along with such.
Worse, though, is that if tax cuts are approved (because of the expected increase in capital investment that will drive up tax receipts) they won't materialize because there is no pent-up demand to meet. That, in turn, means the fiscal debt situation will worsen and make proposals for infrastructure spending or any other increase in spending even more politically implausible than they already are.
In short, the Trump administration is facing the same legislative obstacles that hobbled the Obama administration's attempts at stimulating economic activity.
The bottom line is that the economic reality of exhausted domestic consumer demand and what is necessary to counteract it has not resonated with anyone in a position of political power. As the situation continues to worsen they are all increasingly receding into ideological constructs that preclude the possibility of solutions.
At some point market participants will awaken to this sobering reality even as elected leaders probably won't.
