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
