Inauguruption: the flurry of Trump 2.0 executive orders
Michael Cembalest
Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management
Trump 2.0 is a hodgepodge of distinctly American political strains: the bare-knuckled nationalism and anti-elitism of Andrew Jackson, the tariff-loving protectionism of William McKinley, the small-government/pro-business policies of Calvin Coolidge, the unforgiving enemies lists of Richard Nixon, the deportation policies of Dwight Eisenhower, the manifest destiny of James Polk and the isolationism of 1914-era Woodrow Wilson. American First policies announced yesterday create risks for investors since its supply side benefits collide with its inflationary tendencies; there’s not a lot of room for error at a time of elevated US equity multiples.
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Good morning, everybody, and welcome to the inauguration podcast. I had a lot of fun over the last 24 hours. I stayed up all night reading executive orders, which is almost as fun as when you stay up all night with a sick child. So anyway, I am prepared this morning to share some thoughts with you on the inauguration, which is the eruption of executive orders that came out of the White House following Trump’s inauguration this week.
And so here we go. Trump 2.0 is an interesting hodgepodge of some very distinct American political strains. From a historical perspective, you’ve got the bare-knuckled nationalism and anti-elitism of Andrew Jackson. You’ve got the tariff-loving protectionism of William McKinley. You got the small government, pro-business policies of Calvin Coolidge. You have the unforgiving enemies lists and vendettas of Richard Nixon.
You’ve got the deportation policies of Dwight Eisenhower, which is something that’s not discussed, discussed quite as much as it might be, the Manifest Destiny of James Polk, and then the isolationism of Woodrow Wilson, at least when he started out in 1914. And these things together present the unique set of risks. Now, just a couple of quick comments on Manifest Destiny.
Trump has mentioned expanding America’s footprint by taking control of the Panama Canal, making Canada the 51st state, pursuing a purchase of Greenland from Denmark and things like that. The one that’s most interesting to me is the question about the Panama Canal. Panama was the first country in Latin America to sign up for China’s Belt and Road Initiative.
Chinese firms now operate ports at both ends of the canal. Chinese firms constructed a bridge across the canal. And now there’s discussions of new Chinese rail and port projects. So this does cast doubt on Panama’s ability to effectively safeguard canal neutrality as they read in the treaty. I know people are tempted to look at some of these Manifest Destiny things as just carnival working, but on Panama, there’s some real issues there.
As for the McKinley tariffs, they were politically disastrous. The Republicans were wiped out in the midterm elections, and the subsequent, subsequent presidential election after inflation went up, when McKinley raised the the average duty on imports almost 50%. Anyway, so the America First policies, when you take a look at the executive orders that came out yesterday, it does create some risk for investors because the supply-side benefits of these policies collide with other policies, inflationary tendencies.
And there’s not a lot of room for error at a time of elevated equity valuation multiples, which is a theme we discussed in the Outlook. It looks like it’s going to be a volatile year based on changes so far in the 10-year, but there’s not enough negative information that we’ve got at this point to justify any change in portfolios that are positioned for continued U.S. growth and outperformance, particularly since the tariff rollout so far has been somewhat benign.
On the 10-year Treasury yield, we, we had this chart in the Outlook, which I don’t think is the most important thing to look at, showing that unlike the past six Fed easing cycles, this time around, the 10-year has gone up and stayed there as opposed to being flat the declining and prior easing cycle. So the markets are already concerned somewhat about the inflationary consequences of Trump 2.5.
Now, I just want to tick through a couple of quick things here. As it relates to specific executive orders, the Trump deportation policies were about, which are reportedly about the chicken, might seem some extreme and costly. And entities like the Peterson Institute have written about potential drags on growth and employment that would result from these policies. But there’s this thing called the Newton’s third law of motion, where every action has an equal and opposite reaction.
I see these policies as a pendulum swing. After the Biden administration oversaw the largest uncontrolled immigration surge on record, and that with soaring, unresolved immigration cases, the courts are clogged, eroding municipal solvency due to, to asylum costs and scenes of lawlessness at the border. And so a lot of these deportation policies are a reaction to that and possibly temporary.
In 1954, there was a lot of support for deportations. Eisenhower deported, there was a peak deportation of 1.1 million people. And by the way, that included both documented and undocumented workers who got swept up in. Just two years later, after funding and support for the program declined, deportations fell by over 90%. So sometimes these things are temporary.
Now in terms of energy, I would suggest that everybody read the fine print. There’s a lot of stuff being talked about, but, you know, the details do matter. The Trump agenda calls like, well, here’s an example: The Trump agenda calls for an end to leasing to wind farms, but that refers only to wind farms on federal lands.
And only 2% of U.S. wind power is on public lands as opposed to private land. So that’s a marginal issue. Trump’s executive orders also are going to pause distribution of loans and grants from the infrastructure in energy bills if they haven’t been. In other words, if they haven’t been distributed yet, then they’re going to pause them. and that’s probably why Biden rushed through a $6.5 billion loan to Rivian and a loan guarantee for a plug power hydrogen project, of all things, to see how that goes.
I’m dubious. And Trump also talks about terminating the electrical, the electric vehicle mandate. Now, there, there is no such direct mandate. From what I can tell, he’s referring to the Biden rules announced last year that reduce allowable fleet level emissions for review for auto companies by around 50% by 2032. So you know, I, it’s not an electric vehicle mandate per se, but indirectly it is one because of the GHG limits.
A change to that rule could slow the auto industry’s development of models. But the larger issue is what happens to the $7,500 subsidy that was included in the energy bill, unless Trump can figure out a way to get rid of that. And I don’t think he can without legislation to replace the energy bill. I don’t think that subsidy is going anywhere, in which case, that would continue to drive some EV adoption.
Although, to be clear, the U.S. is on a slower pace than a lot of other countries.
The, the more interesting parts of the energy policy to me are the goals of increasing output and the goals of increased infrastructure, specifically pipelines and electricity transmission. And as you can see from some charts that we have in the piece, the construction of liquids pipelines has ground to a halt. The construction of new natural gas pipeline capacity, both interstate and interstate, has slowed dramatically over the last few years.
And the saddest one, if you, if you’re interested in sustainability, is the complete collapse and transmission line growth over the last few years, in spite of the fact that there’s all sorts of efforts to resuscitate this. So executive orders to accelerate project development sound interesting. But without eminent domain legislation passed at the federal level, which explicitly overrides the states’ rights.
Eminent domain issues. I don’t really see some that huge. Changes here, you know, there are projects, there’s a project or a family that we know that owns some Wyoming wind farms, has been trying to bring that wind power to the California Nevada border for 18 years. It was fast tracked by the Obama administration, and they just put a shovel in the ground this year after 17 or 18 years, and all of that has to do with states’ rights issues and individual landowner issues.
And so I’m not, it’s not clear to me that executive orders at the federal level can override that. Where I think the administration will have some luck is Scott Bassett has a target for more fossil fuel production. And when you do the energy math, it amounts to around a 7% increase, 7% increase in production, which I think is eminently achievable.
The question about the impact on inflation is different. If a lot of that new production is exported, the inflation benefits are more modest. And when I look at the supply chains for residential and industrial electricity, inflation seems to be really well entrenched. We have a chart in here on residential electricity prices by state, and for goods within the core goods PPI category of all of the different categories, transformers and power regulators have seen the largest increase in inflation since 2018.
So the electricity supply chain inflation is pretty entrenched at this point. Not clear to me that more oil and gas production is going to immediately affect that. Now in terms of drain the swamp and the Doge effort, we had a long section in the Outlook on that, about seven pages. I’m not going to go through it here.
I’m just going to reiterate two or three main points, which is for all of the talk about a flow to a bloated federal agency workforce. Federal workers now represent the lowest share of overall employees in 85 years, so I’m not sure where a lot of the commentary is coming from. With respect to the benefits of cutting that when you, and when you actually look at that federal workforce, it’s mostly Defense, postal workers and Veterans Affairs.
So if those, who’s going to take a run at that, which seem to be some core GOP constituencies? You know, good luck, the pickings are pretty slim. If you start going after the Department of Education, the EPA, the SEC, the Department of Labor, in aggregate, they represent less than 1% or so of federal workers. So I don’t I don't really see some huge benefits there.
The, there are definitely some savings to be had from reversing some Biden executive actions. And we had a table on the Outlook showing that, you know, if you repeal a whole bunch of them having to do with healthcare, student debt and some other programs, you could save about $100 billion a year. But that’s a far cry from what the Doge team have set out for themselves in terms of spending reduction goals.
At least once they get through the easy stuff, they’re going to have to look at defense spending, and they’re going to have to look at entitlements. And I just don’t know what they’re going to be able to accomplish on that front. There are certainly some interesting things to look at in the Defense Department. Weapons procurements are only 20% of the overall budget.
The rest is people and maintenance. But within that 20% for weapons procurements, a lot of it is no-risk, cost-plus contracts for a shrinking number of defense contractors. And so certainly there’s, there’s something to, to look at when you’ve got such a, a prevalence of cost-plus contracts with a shrinking number of contractors.
So we’ll see what they get out on that front. The biggest surprise to me in the executive orders so far has been very little mention of tariffs. Now we knew that the tariffs were likely to be something that got rolled out over time, but there was even less in the executive orders than we thought there’d be. Trump stated last night that he was inclined to put a 25% tariff on Mexico and Canada starting in February, since they’re allowing the vast number of people over the border.
I wasn’t aware that was the case with Canada, but you know that, that we’ll see. but there weren’t any mentions yet for the tariffs on China or a universal tariff. And remember, Trump also threatened 25% tariffs on Mexico and Canada in his first term, but they never got implemented. So I think the market’s maybe a little too sanguine here.
I still expect Trump to increase tariffs on China somewhat, and to increase tariffs on auto imports. But if there is a universal tariff, it would probably only be applied to critical imports, which are 10 to 15% of all U.S. imports, and not to the entire stack of U.S. imports. So it does feel like the rollout of, of tariffs is, it’s going to be a little bit more benign than we were initially expecting.
What we do know is to the extent the tariffs get implemented, most economists, not all, but most economists think that the impact is going to be negative rather than positive on manufacturing, employment and growth. And one of the interesting things is that when you look at the states that import the highest share of state GDP, most of those are red states and not blue ones.
The last topic for the day is, is deregulation, and it’s an important one. It’s hard to quantify sometimes. We know that it’s a powerful issue, right. It’s a powerful supply-side benefit. One of the primary factors that led to the Eisenhower growth boom, which reduced the national debt after World War Two, were some pro-growth policies that resulted in high growth, low inflation and a productivity expansion.
And the pace of government regulation is certainly a big part of that. So Trump mentioned their requirement that going forward, 10 rules would have to be eliminated for any new rule to be enacted. This follows on the 2-to-1 standard that he applied in his first term. Now here comes that fine print again. It’s hard to dismantle the regulatory state.
There’s something called the notice and comment rulemaking process that could take six to 12 months for some of these things. And sometimes when they’re challenged, the courts side with those challenging the new rules, particularly after the end of Chevron deference. Right, because now that the Trump majority on the Supreme Court has gotten rid of Chevron deference, it gives the courts even more power to challenge agency rulings and agency interpretations of government regulation.
During Trump’s first term, he only won when his rules were challenged about a third of the time. But even if this new 10-to-1 standard doesn’t work as planned, it will probably still dampen the regulatory juggernaut as it did in his first term. And a lot of people talk about this, so just I’ll just mention it. Some of the Trump political appointees in his first term were unfamiliar with the technicalities of the Administrative Procedures Act, which is what you have to go through to repeal or change government regulations or agency regulations. And his political appointees complained that there were some career civil service employees that opposed, junked Trump’s agenda and deliberately didn’t prepare when asked to do so.
The type of administrative records that would, that Trump would need to survive judicial review.
And the history of that is a big impetus. Why Trump has been trying to adopt the Schedule F, which would turn more positions from career civil servants to political appointments, which means they could then be fired at will and replaced with somebody that would do a better job on, on helping the administration justify its regulatory stances.
So that’s some of the background on that schedule messed up. And then the Eye on the Market, we have these charts we’ve shown on many times before on the number of economically significant rules by month, 40 of each presidency. Trump obviously much lower than either Obama or Biden. And, and I love this chart from Doug Holtz Eakin, who I know at the American Action Forum, showing that Trump sandwiched in between Obama and Biden regarding the hours of paperwork from new regulatory activity and the total loss of final rules, and you basically had a regulatory holiday during the Trump era when compared to what was sandwiched around it.
They’re really going to need because of the other aspects of, of, of the Trump policies, they’re going to need some big wins on the regulatory front in order to offset some of the issues about a shrinking labor supply and things like that. So this is, this is the part of the Trump agenda that’s really going to have to kick in in order for the markets over the course of the year to give the administration the benefit of the doubt at a time of high starting valuation multiples in the first place.
Again, there’s nothing here that we’ve seen in executive orders that were a massive surprise. And there’s nothing that prompts us to, to recommend any changes to portfolios that are positioned for U.S. growth and outperformance at this time. So thank you very much for listening. Good to talk to you again. And stay tuned in early March, we’ll be releasing our 50th, 15th, not that old, 15th annual energy paper.
Thanks a lot, bye
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Text: J.P. Morgan. Eye on the Market. J.P. Morgan. January 2025. Inauguruption. An image of the U.S. Capitol Building as a large cloud of papers floats behind it.
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[AUDIO LOGO]
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A man sits in an office. On a shelf, the J.P. Morgan logo.
(SPEECH)
Good morning, everybody. And welcome to the Inauguruption podcast. I had a lot of fun over the last 24 hours. I stayed up all night reading executive orders, which is almost as fun as when you stay up all night with a sick child.
So anyway, I am prepared this morning to share some thoughts with you on the Inauguruption, which is the eruption of executive orders that came out of the White House following Trump's Inauguruption this week. And so here we go.
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New slide. Text: Trump 2.0. Trump 2.0 is a hodgepodge of distinctly American political strains. He reads the seven bullet points that follow.
(SPEECH)
Trump 2.0 is an interesting hodgepodge of some very distinct American political strains, from a historical perspective. You've got the bare-knuckled nationalism and anti-elitism of Andrew Jackson. You've got the tariff-loving protectionism of William McKinley. You've got the small government, pro-business policies in Calvin Coolidge.
You have the unforgiving enemies lists and vendettas of Richard Nixon. You've got the deportation policies of Dwight Eisenhower, which is something that's not discussed quite as much as it might be, the manifest destiny of James Polk, and then the isolationism of Woodrow Wilson, at least when he started out in 1914.
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New slide. Text: Trump 2.0. Bullet point. Text: Trump's manifest destiny. Trump mentioned expanding America's footprint by retaking control of the Panama Canal, making Canada the 51st state, pursuing a purchase of Greenland from Denmark and planting an American flag on Mars. On the Panama canal: Panama was the first Latin American country to sign up for China's Belt & Road Initiative. Chinese slash HK firms now operate ports at both ends of the canal, a Chinese firm constructed a bridge across the canal and there's discussion of adjacent Chinese rail and port projects. This casts some doubt on Panama's ability to effectively safeguard canal neutrality as agreed in the treaty. Bullet point. Text: Nixon's enemies list compiled by Presidential Counselor Charles Colson included a total of 220 politicians, celebrities, businessmen, reporters, labor leaders and academics. Many people on the list stated that they considered being hated by Nixon as their greatest accomplishment. Bullet point. Text: McKinley tariffs. The Republican McKinley increased the average duty on imports to almost 50%, and to 70% on imported tin plates. The subsequent increases in inflation were politically disastrous: in the 1890 midterms, Republicans lost their majority in the House with seats falling from 171 to 88, and after the 1982 election, all branches of government were under Democratic control.
(SPEECH)
And these things together present a unique set of risks. Now, just a couple of quick comments on manifest destiny, Trump has mentioned expanding America's footprint by taking control of the Panama Canal, making Canada the 51st state, pursuing a purchase of Greenland from Denmark, and things like that.
The one most interesting to me is the question about the Panama Canal. Panama was the first country in Latin America to sign up for China's Belt and Road Initiative. Chinese firms now operate ports at both ends of the Canal. A Chinese firm constructed a bridge across the canal. And now there's discussions of new Chinese rail and port projects.
So this does cast doubt on Panama's ability to effectively safeguard canal neutrality as they agreed in the treaty. I know people are tempted to look at some of these manifest destiny things as just carnival barking. But on Panama, there's some real issues there.
As for the McKinley tariffs, they were politically disastrous. The Republicans were wiped out in the midterm elections in the subsequent presidential election, after inflation went up, when McKinley raised the average duty on imports, to almost 50%.
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New slide. Text: Trump 2.0. American First policies create risks for investors since its supply side benefits collide with its inflationary tendencies; there's not a lot of room for error at a time of elevated US equity multiples. It looks like it will be a volatile year based on changes so far in the 10-year Treasury, but there's not enough negative information at this time to change strategy in portfolios positioned for continued US growth and outperformance, particularly given a more benign tariff rollout.
(SPEECH)
Anyway, so the America First policies, when you take a look at the executive orders that came out yesterday, it does create some risks for investors. Because the supply-side benefits of these policies collide with other policies, inflationary tendencies. And there's not a lot of room for error at a time of elevated equity valuation multiples, which is a theme we discussed in the out.
It looks like it's going to be a volatile year, based on changes so far in the 10-year. But there's not enough negative information that we've got at this point to justify any change in portfolios that are positioned for continued US growth and outperformance, particularly since the tariff rollout so far has been somewhat benign.
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New slide. Text: 10 year Treasury. Chart. Title: 10 year Treasury yield change after the first Fed cut. Numbers on the y axis begin at negative 1.0 percent and increase in intervals of 0.2 percent, with positive 1.2 percent at the top. The x axis is labeled Business days since first Fed rate cut. Numbers on the x axis begin at 0 and increase in intervals of 5, with 90 as the rightmost number. The chart has several colored, fluctuating lines, labeled Sep '24, Sep '98, Jul '19, Sep '07, Jan '01, Jul '95, Jun '89. The line for Sep '24 ends higher than the other lines, close to positive 1.0 percent. Text: Source: Bloomberg, J.P.M.A.M., January 20, 2025.
(SPEECH)
On the 10-year Treasury yield, we had this chart in the outlook, which I still think's the most important thing to look at, showing that, unlike the past six Fed easing cycles, this time around, the 10-year has gone up and stayed there, as opposed to being flat to declining in prior easing cycles. So the markets are already concerned, somewhat, about the inflationary consequences of Trump 2.0.
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New slide. Text: Immigration. Trump deportation policies might seem extreme and costly, causing think tanks like the Peterson Institute to write about potential drags on growth and employment. But like Newton's Third Law of Motion, sometimes every political action has an equal and opposite reaction. The Biden administration oversaw the largest uncontrolled immigration surge on record, resulting in soaring unresolved immigration cases, an erosion in municipal solvency and scenes of lawlessness at the border. The Trump deportation policies are a reaction to that, and possibly temporary. According to Vice President Vance, the Trump Administration plans to deport roughly 1 million undocumented workers per year. In 1954 under Eisenhower, annual deportations peaked at 1.1 million according to DHS data, a figure which included both documented and undocumented workers. Just two years later, deportations fell by over 90% to just 80,000 as funding and support for the deportation program evaporated.
(SPEECH)
Yeah, I just want to tick through a couple of quick things here, as it relates to specific executive orders. The Trump deportation policies, which are reportedly about to kick in, might seem some both extreme and costly. And entities, like the Peterson Institute, have written about potential drags on growth and employment that would result from these policies.
But there's this thing called the Newton's third law of motion, where every action has an equal and opposite reaction. I see these policies as a pendulum swing, after the Biden Administration oversaw the largest uncontrolled immigration surge on record And with soaring unresolved immigration cases, the courts are clogged, eroding municipal solvency due to asylum costs and scenes of lawlessness at the border.
And so a lot of these deportation policies are a reaction to that and possibly temporary. In 1954, there was a lot of support for deportations. Eisenhower deported-- there was a peak deportation of 1.1 million people. And, by the way, that included both documented and undocumented workers who got swept up in it. Just two years later, after funding and support for the program declined, deportations fell by over 90%. So sometimes these things are temporary.
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New slide. Text: Energy: read the fine print. The Trump agenda also calls for an quote end to leasing to wind farms unquote, but only 2% of US wind power takes place on public lands as opposed to private lands, so that's a marginal issue at best. Trump's executive orders also paused distribution of undisbursed loan and grant monies from the infrastructure and energy bills, specifically mentioning EV charging stations as area for pausing disbursements. That explains why in mid-January, Biden rushed through a 6.5 billion dollar loan to Rivian and a dollar sign 1.7 loan guarantee to Plug Power for a hydrogen project. Trump also refers to terminating the quote electric vehicle mandate, unquote. From what I can tell, he is referring to Biden rules announced in March 2024 that reduce allowable fleet-level GHG emissions by cars and trucks by tilde 50% by 2032. Such rule changes could slow auto industry development of EV models, but the larger driver of EV adoption is probably the 7,500 dollar EV subsidy included in Biden's energy bill. As far as I can tell, Trump cannot unilaterally rescind the EV subsidy as it was part of prior legislation.
(SPEECH)
The-- now, in terms of energy, I would suggest that everybody read the fine print. There's a lot of stuff being talked about, but the details do matter. The Trump agenda call-- well, here's an example. The Trump agenda calls for an end to leasing to wind farms. But that refers only to wind farms on federal lands. And only 2% of US wind power's on public lands, as opposed to private land. So that's a marginal issue.
Trump's executive orders also are going to pause distribution of loans and grants from the infrastructure and energy bills. If they haven't been-- in other words, if they haven't been distributed yet, then they're going to pause them. And that's probably why Biden rushed through a $6.5 billion loan to Rivian and a loan guarantee for a plug power hydrogen project, of all things, to see how that goes. I'm dubious.
And Trump also talks about terminating the electric vehicle mandate. Now, there is no such direct mandate. From what I could tell, he's referring to the Biden rules announced last year that reduce allowable fleet level emissions for auto companies by around 50% by 2032. So it's not an electric vehicle mandate per se, but indirectly it is one because of the GHG limits.
A change to that rule could slow the auto industry's development of EV models. But the larger issue is what happens to the $7,500 subsidy that was included in the energy bill? Unless Trump can figure out a way to get rid of that-- and I don't think he can without legislation to replace the energy bill-- I don't think that subsidy's going anywhere, in which case, that would continue to drive some EV adoption. Although, to be clear, the US is on a slower pace than a lot of other countries.
The more interesting parts of the energy policy, to me, are the goals of increasing output and the goals of increasing infrastructure, specifically pipelines and electricity transmission.
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New slide. Text: Energy policy. Chart. Title: Annual US liquids pipeline project completions. Text: Number of projects. Numbers on the y axis begin at 0 and increase in increments of 5, with 35 being the highest number at the top. The x axis has a progression of years, starting at '10 and ending at '24. A legend indicates red denotes Petroleum products, gold denotes Hydrocarbon gas liquids, and blue denotes Crude oil and condensate. Each year has a bar with different proportions of the categories. Only the years '16, '17, '19 and '20 have an amount of red denoting a proportion of Petroleum products, in addition to amounts of gold and blue. The bars for years '10 and '23 are blue only, denoting Crude oil and condensate. The bar for year '24 is gold only, denoting Hydrocarbon gas liquids. The bars for the remaining years have differing proportions of blue and gold. Text: Source: E.I.A., October 2024.
(SPEECH)
And, as you can see from some charts that we have in the piece, the construction of liquids pipelines has ground to a halt.
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New slide. Text: Energy policy. Chart. Title: Annual US natural gas pipeline capacity additions. Text: Billion cubic feet per day. Numbers on the y axis begin at 0 and increase in increments of 5, with 25 being the highest number at the top. The x axis has a progression of years from 2017 to 2023. A legend indicates gold denotes Interstate and blue denotes Intrastate. The bars for different years have differing proportions of blue and gold. Text: Source: E.I.A., March 2024.
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The construction of new natural gas pipeline capacity, both intrastate and interstate, has slowed dramatically over the last few years.
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New Slide. Text: Energy policy. Chart. Title: US transmission line growth. Text: Miles added per year. Numbers on the y axis begin at 0 and increase in increments of 1,000, with 10,000 being the highest number at the top. The x axis is a progression of years: 2013, 2015, 2017, 2019, 2021, 2023, 2025, 2027, 2029, 2031, 2033, 2035. A blue line decreases from left to right, with its final plotted point at year 2023, in the range between 0 and 1,000. On the graph, a red dotted line labeled D.O.E. 2030 target is in the range between 5,000 and 6,000. A red dotted line labeled D.O.E. 2035 target is close to 10,000. Text: Source: S&P Global, J.P.M.A.M., 2024. Note: Transmission lines greater than symbol 100 kV.
(SPEECH)
And the saddest one, if you're interested in sustainability, is the complete collapse in transmission line growth over the last few years, in spite of the fact that there's all sorts of efforts to resuscitate this.
So executive orders to accelerate product development sound interesting. But without eminent domain legislation passed at the federal level which explicitly overrides the states' rights eminent domain issues, I don't really see some-- that huge changes here.
There are projects-- there's a project where a family that we know that owns some Wyoming wind farms has been trying to bring that wind power to the California-Nevada border for 18 years. It was fast tracked by the Obama Administration. And they just put a shovel in the ground this year after 17 or 18 years. And all of that has to do with states' rights issues and individual landowner issues. And so I'm not-- it's not clear to me that executive orders at the federal level can override that.
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New slide. Text: Energy policy. Chart. Title: Production of crude oil, natural gas and natural gas liquids. Text: Trillions of BTUs per month. Numbers on the y axis begin at 0 and increase in increments of 1,000, with 8,000 the highest number at the top. The x axis has a series of years: '00, '02, '04, '06, '08, '10, '12, '14, '16, '18, '20, '22, '24. A legend indicates red denotes Natural gas liquids, gold denotes Natural gas, and blue denotes Crude oil. Amounts of red, gold and blue fluctuate on the graph, with the total amount's general trend increasing from left to right. Near the graphic's upper right corner, text: Bessent 3 dash 3 dash 3 target. A black line, near 8,000, above '24. Text: Source: E.I.A., J.P.M.A.M., September 2024.
(SPEECH)
Where I think the Administration will have some luck is Scott Bessent has a target for fossil fuel production. And when you do the energy math, it amounts to around a 7% increase-- 7% increase in production, which I think is eminently achievable. The question about the impact on inflation is different. If a lot of that new production is exported, the inflation benefits are more modest.
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New slide. Text: Energy policy: exports and the pace of the renewable transition. Chart. Title: Residential electricity prices by state. Text: US dollar sign, cents per kWh. Numbers on the y axis begin at 10, increase in intervals of 5, and the highest number is 35 at the top. The x axis has a progression of years from 2016 to 2024. The chart has four lines, labeled California, New York, Pennsylvania and Texas. California's line ends the highest, New York's the second-highest, Pennsylvania the third-highest, and Texas the lowest. The lines extend slightly past 2024 on the chart. Text: Source: E.I.A., J.P.M.A.M., Q3 2024.
(SPEECH)
And when I look at the supply chains for residential and industrial electricity, inflation seems to be really well entrenched. We have a chart in here on residential electricity prices by state and core goods.
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New slide. Text: Energy policy: exports and the pace of the renewable transition. Chart. Title: Core goods PPI component inflation. Text: percent increase versus 2018 for each of the 47 core goods categories. Numbers on the y axis begin at negative 10 percent and increase in intervals of 10, with 80% at the top. The x axis has no label. A series of many blue circles are on the chart. A red circle labeled Transformers & Power Regulators is slightly above the 70% line. Text: Source: Bloomberg, J.P.M.A.M., December 31, 2024.
(SPEECH)
And within the core goods PPI category, of all of the different categories, transformers and power regulators have seen the largest increase in inflation since 2018. So the electricity supply chain inflation is pretty entrenched, at this point. It's not clear to me that more oil and gas production is going to immediately affect that.
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New slide. Text: Drain the Swamp slash DOGE. Chart. Title: Government employees as share of all employees. Text: percent of all employees. The y axis begins at 0 percent and increases in intervals of 2, with 20 percent being the highest. The x axis is a progression of years: 1955, 1960, 1966, 1972, 1978, 1984, 1990, 1995, 2001, 2007, 2013, 2019. A red area on the chart is labeled Local. A gold area is labeled State. A blue area is labeled Federal. Text: Source: F.R.E.D., J.P.M.A.M., October 2024.
(SPEECH)
Now, in terms of drain the swamp and the DOGE effort, we had a long section in the outlook on that, about seven pages. I'm not going to go through it here. I'm just going to reiterate two or three main points, which is, for all of the talk about a bloated federal agency workforce, federal workers now represent the lowest share of overall employees in 85 years.
So I'm not sure where a lot of the commentary's coming from with respect to the benefits of cutting that. And when you actually look at that federal workforce, it's mostly defense, postal workers, and Veterans Affairs.
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New slide. Text: Drain the Swamp slash DOGE. Chart. Title: Breakdown of Federal workers, 2023. Rectangles of different sizes and colors. They are labeled: Defense, 26%. Postal, 20%. Veterans Affairs, 15%. Other, 13%. DoJ, 4%. Trs, 3%. Agri, 3%. Inter. , 2%. DHS, 7%. HHS, 3%. SS, 2%. EPA plus SEC plus D.o.L., 1%. Text: Source: Bloomberg, J.P.M.A.M., November, 2024.
(SPEECH)
So if DOGE is going to take a run at that, which seemed to be some core GOP constituencies, good luck. The pickings are pretty slim, if you start going after the Department of Education, the EPA, the SEC, Department of Labor. In aggregate, they represent less than 1% or so of federal workers. So I don't really see some huge benefits there.
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New slide. Text: Drain the Swamp slash DOGE. Table. Title: Savings from Reversing President Biden's Executive Actions, billions of US dollar sign. Amounts in the table are denoted as being in billions of dollars. Category: Healthcare executive action repeals. Medicaid financing. 140 billion dollars. Medicaid eligibility. 75 billion dollars. Medicare Part D rebates. 65 billion dollars. A.C.A. self-only coverage parentheses quote family glitch fix unquote close parentheses. 40 billion dollars. Medicaid nursing home staffing. 25 billion dollars. Category: Student debt executive action repeals. S.A.V.E. program. 275 billion dollars. Closed school rules. 15 billion dollars. Category: Other executive action repeals. SNAP Thrifty Food Plan. 180 billion dollars. Vehicle carbon emissions slash EV credits. 150 billion dollars. S.S.D.I. past work period. 20 billion dollars. S.S.I. expansion. 20 billion dollars. I.R.S. enforcement restrictions on less than 400 thousand dollars. 20 billion dollars. Total 10 year savings, 1,025 billion dollars. Annual savings, 103 billion dollars. Text: Source: Committee for a Responsible Federal Budget, November 26, 2024. A.C.A. Affordable Care Act; S.S.D.I. Social Security Disability Insurance; S.S.I. Supplemental Security Income.
(SPEECH)
There are definitely some savings to be had in reversing some Biden executive actions. And we had a table in the outlook showing that if you repeal a whole bunch of them, having to do with health care, student debt, and some other programs, you could save about $100 billion a year. But that's a far cry from what the DOGE team have set out for themselves, in terms of spending reduction goals.
Once they get through the easy stuff, they're going to have to look at defense spending, and they're going to have to look at entitlements. And I just don't what they're going to be able to accomplish on that front.
There are certainly some interesting things to look at in the Defense Department. Weapons procurements are only 20% of the overall budget. The rest is people and maintenance. But within that 20% for weapons procurements, a lot of it is no-risk, cost-plus contracts for a shrinking number of defense contractors. And so certainly, there's something to look at when you've got such a prevalence of cost-plus contracts with a shrinking number of contractors. So we'll see what they get done on that front.
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New slide. Text: The Tariff surprise: little mention in the executive orders. Trump stated last night that 25% tariffs could be imposed on Mexico and Canada beginning on February 1 since they're quote allowing a vast number of people over the border unquote, but there were no mentions parentheses yet close parentheses of further tariffs on China or a universal tariff. Trump also threatened 25% tariffs on Mexico and Canada in his first term but they were never implemented. Trump did sign an executive order directing federal agencies to examine unfair trade and currency practices and to assess whether foreign governments have complied with terms of existing trade deals. I still expect Trump to increase tariffs on China and on E.U. auto imports as well. If there is a universal tariff, I expect it would only apply to critical imports which are 10% dash 20% of all U.S. imports.
(SPEECH)
Biggest surprise to me in the executive orders so far has been very little mention of tariffs. Now, we knew that tariffs were likely to be something that got rolled out over time. But there was even less in the executive orders than we thought there'd be.
Trump stated last night that he was inclined to put a 25% tariff on Mexico and Canada starting in February, since they're allowing a vast number of people over the border. I wasn't aware that was the case with Canada. But we'll see. But there weren't any mentions yet of further tariffs on China or universal tariffs. And remember, Trump also threatened 25% tariffs on Mexico and Canada in his first term, but they never got implemented.
So I think the markets may be a little too sanguine here. I still expect Trump to increase tariffs on China somewhat and to increase tariffs on auto imports. But if there is a universal tariff, it would probably only be applied to critical imports, which are 10% to 15% of all US imports, and not to the entire stack of US imports. So it does feel like the rollout of tariffs i going to be a little bit more benign than we were initially expecting.
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New slide. Text: Tariffs. Chart. Title: Survey of economists on the effect of Trump tariffs on manufacturing employment, 44 economists surveyed. The y axis begins at 0% and increases in increments of 10%, with 100% at the top. The x axis has no label. A legend indicates red denotes Increase, gold denotes Remain level, and blue denotes Decrease. A bar has the three colors in proportions: 16% red, 25% gold, 59% blue. Text: Source: W.S.J., J.P.M.A.M., October 2024.
(SPEECH)
What we do know is, to the extent that tariffs get implemented, most economists, not all, but most economists think that the impact is going to be negative rather than positive on manufacturing employment and growth.
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New slide. Text: Tariffs. Chart. Title: Import share of G.D.P.: top 10 U.S. states. Text: 2023 goods imports as a share of 2023 state G.D.P., percent. The y axis begins at 0% and increases in increments of 5 percent, with 30 percent at the top. The x axis has no label. In red text, Won by Trump in 2024. In blue text, Won by Harris in 2024. Bars are labeled with the names of states. Kentucky, Michigan, Tennessee, Indiana, South Carolina, Georgia, Texas and Mississippi are in red bars. Illinois and New Jersey are in blue bars. Bars are of different sizes. Text: Source: Census Bureau, B.E.A., J.P.M.A.M., 2024.
(SPEECH)
And one of the interesting things is that when you look at the states that import the highest share of state GDP, most of those are red states and not blue ones.
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New Slide. Text: Deregulation. Trump mentioned a requirement that 10 existing rules be eliminated for any new rule to be enacted. This follows on the 2-to-1 standard that Trump applied in his first term. But here comes the fine print again: it's hard to dismantle the regulatory state. The notice-and-comment rulemaking process could take 6 to 12 months, and sometimes the Courts side with those challenging new rules parentheses or the rescinding of existing rules close parentheses. During Trump's first term, out of 77 major rules that were challenged, Trump won just 31% of the time, experienced a mixed outcome in 12% of cases and lost the rest of the time. But even if the 10-to-1 standard doesn't work as planned, it will still probably dampen the regulatory juggernaut, as similar policies did during Trump's first term. Some Trump political appointees in his first term were unfamiliar with the technicalities of the Administrative Procedures Act, and complained that career civil service employees generally opposed the Trump agenda and did not prepare the type of administrative record necessary for Trump's desired regulations to survive judicial review. This history is a major impetus underlying Trump's drive to adopt quote Schedule F unquote which would turn more positions into political appointments parentheses i.e., they can be fired at will close parentheses.
(SPEECH)
The last topic for the day is deregulation. And it's an important one. It's hard to quantify sometimes. We know that it's a powerful issue, right? It's a powerful supply-side benefit. One of the primary factors that led to the Eisenhower growth boom, which reduced the national debt after World War II, were some pro-growth policies that resulted in high growth, low inflation, and productivity expansion. And the pace of government regulation is certainly a big part of that.
So Trump mentioned their requirement, that going forward, 10 rules would have to be eliminated for any new rule to be enacted. This follows on the two to one standard that he applied in his first term.
Now, here comes that fine print again. It's hard to dismantle the regulatory state. There's something called the notice and comment rulemaking process, that could take six to 12 months for some of these things. And sometimes, when they're challenged, the courts side with those challenging the new rule, particularly after the end of Chevron deference, right?
Because now that the Trump majority on the Supreme Court's got rid of Chevron deference, it gives the courts even more power to challenge agency rulings and agency interpretations of government regulation.
During Trump first term, he only won when his rules were challenged about a third of the time. But even if this new 10-to-1 standard doesn't work as planned, it will probably still [INAUDIBLE] the regulatory juggernaut, as it did in his first term.
And a lot of people talk about this. So I'll just mention it. Some of the Trump political appointees in his first term were unfamiliar with the technicalities of the Administrative Procedures Act, which is what you have to go through to repeal or change government regulations or agency regulations.
And his political appointees complained that there were some career civil service employees that opposed Trump's agenda and deliberately didn't pair when asked to do so the type of administrative records that Trump would need to survive judicial review.
And the history of that is a big impetus why Trump has been trying to adopt this thing called Schedule F, which would turn more positions from career civil servants to political appointments, which means they could then be fired at will and replaced with somebody that would do a better job on helping the Administration justify its regulatory stances. So that's some of the background on that Schedule F stuff.
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New slide. Text: Deregulation. Chart. Title: Cumulative number of economically significant rules by month 40 of each presidency. The y axis begins at 0 and increases in increments of 50, with 300 being the highest at the top. The x axis begins at 0 and increases in increments of 5, with 45 being the largest on the right. Lines of different colors are labeled: Biden, Obama, Trump, Clinton, G.W. Bush, G.H.W. Bush, Reagan. Text: Source: G.W.U. Regulatory Studies Center, May 2024.
(SPEECH)
And then the Eye on the Market, we have these charts we've shown many times before on the number of economically significant rules by month 40 of each presidency, Trump obviously much lower than either Obama or Biden.
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New slide. Text: Deregulation. Chart. Title: Regulatory activity by administration. Text: From Inauguration Day to April 19th of Year 4. On the left of the chart, the y axis starts at 0 dollars and increases in increments of 200, with 1,400 dollars the highest on the top. On the right of the chart, the y axis starts at 0 and increases in increments of 50, with 300 the highest on the top. The x axis has labels: Obama, Trump, Biden. A legend indicates blue denotes Total costs of final rules, parentheses, US dollars, billions. A blue arrow pointing to the left is beneath this text. Gold denotes Paperwork hours, parentheses, millions. A gold arrow pointing right is beneath this text. Text: Source: Doug Holtz Eakin, American Action Forum, April 2024.
(SPEECH)
And I love this chart from Doug Holtz Eakin, who I know at the American Action Forum, showing Trump sandwiched in between Obama and Biden regarding the hours of paperwork from new regulatory activity and the total cost of final rules. And you basically had a regulatory holiday during the Trump era, when compared to what was sandwiched around it.
They're really going to need-- because of the other aspects of all the Trump policies, they're going to need some big wins on the regulatory front, in order to offset some of the issues about a shrinking labor supply and things like that.
So this is the part of the Trump agenda that's really going to have to kick in, in order for the markets over the course of the year to give the Administration the benefit of the doubt at a time of high starting valuation multiples in the first place.
Again, there's nothing here that we've seen in the executive orders that were a massive surprise. And there's nothing that prompts us to recommend any changes to portfolios that are positioned for US growth and outperformance, at this time.
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New slide. Text: January 2025. Inauguruption. An image of the U.S. Capitol Building as a large cloud of papers floats behind it.
(SPEECH)
So thank you very much for listening. Good to talk to you again. And stay tuned. In early March, we'll be releasing our 50th-- 15th-- not that old-- 15th annual energy paper. Thanks a lot. Bye.
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About Eye on the Market
Since 2005, Michael has been the author of Eye on the Market, covering a wide range of topics across the markets, investments, economics, politics, energy, municipal finance and more.
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Jan 1, 2025
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Eye on the Market Outlook 2025: The Alchemists
