There can be little doubt that the recent election of Donald Trump as the 47th President of the United States has unleashed a fair degree of animal spirits in the financial markets and in corporate America. Some of this could simply be a function of the fact that a chaotic and sometimes frightening election is now over.
Two assassination attempts and having the primary candidate for one of our two parties drop out of the race a little more than 100 days before the election is a chain of events that would be considered implausible even by the standards of Hollywood. Still, higher stock prices, lower bond yields, and a stronger dollar since the election all suggest that the newly-elected President’s policies are being greeted warmly by investors at home and abroad. For the most part, President Trump’s economic agenda for his second term is not all that different than what was sought in his first term – deregulating the financial and energy industries, keeping or even further lowering corporate tax rates, and pursuing reciprocity when it comes to trade.
There are new and added features of course – no tax on tips, a safe harbor for cryptocurrencies, etc. – but my interactions with institutional investors around the world since the election suggest to me that the markets are most excited about the establishment of the Department of Government Efficiency (DOGE) and the potential to make substantive changes in the ways the federal government spends our money as taxpayers. As of now, investors are far more excited about the potential for fiscal reform than they are worried about tariffs. Time will tell whether such feelings are justified, but it is undeniable that the incoming Trump Administration is off to strong start with the global investment community.
As luck would have it, I was about to embark on a flight to Asia without WiFi after midnight on the day of the election, potentially leaving me in the dark about the outcome of a consequential election for what might have been an interminable 15-hour jaunt. Luckily enough, Pennsylvania was called just before the wheels of the plane left the ground at JFK and everyone seemed reasonably certain that the race was over without much potential for litigation. I landed on what was to be a 10-day trip to Korea, Italy, Switzerland, and the United Kingdom on Thursday morning. By that afternoon, November 7th, a local financial YouTube program in Seoul was asking me whether a new Trump administration might consider a new Plaza Accord to weaken the dollar. By the next morning, half the questions I received at a conference at which I was speaking concerned the establishment of DOGE and the likelihood of its success. By Monday evening, European investors who were not disgusted that President Trump had won another term were wondering aloud whether American fiscal sobriety might finally force the Continent to deal with its own bloated public spending regimes. In all my years in the business, I cannot remember a time when a relatively simple idea filled institutional investors with as much hope as has the discussion about the creation of DOGE.
This is undoubtedly being driven by the fact that the new department will be headed by two hyper-competent people, Elon Musk and Vivek Ramaswamy, one of whom is the richest man in the world who also happens to own his own social media platform that can shine light on the waste and abuse so undoubtedly present in a $6.75 trillion budget (~23% of GDP.) It is also a subtle recognition, by both Republicans and Democrats alike, that only the power of the Presidency might give politicians the cover they need to make spending reforms. In the last few years, I have been lucky enough to become friendly with Senator Rick Scott, Republican of Florida. He has asked me to address the Republican caucus on two separate occasions about the dangers of deficit spending given the fact that we are increasingly funding long-term liabilities with short-term debt. Sadly, it was not difficult to get the impression after those meetings that 14 years of quantitative easing had worn away any fear among most members of Congress that the bond market might veto its prodigal ways. In short, the Fed has reinforced the idea among most elected officials that “deficits don’t matter” since 2008.
This is not to say that the goals of DOGE will be easily achieved or warmly greeted. Politicians are put on Earth, after all, to give other people’s money away. This is also not to say that the initial savings from efforts to stop wasteful spending will add up to all that much money in the context of the 80% of the federal budget that is made up of Social Security, Health Care, Veterans Benefits, Defense Spending, and Interest Expense. Still, it might represent more than a subtle change in attitudes in a town that not so often sees a taxpayer’s take-home pay as some sort of dispensation from government rather than just compensation for their labor.
For an Administration that so desperately wants to make permanent the tax cuts encompassed in its landmark 2017 Tax Cut and Jobs Act, a good faith effort to cut spending in absolute terms rather than merely the pace of the increase in government spending might provide some warning to would-be bond market vigilantes. Restoring some faith in government to do the right thing most of the time (a time series from Pew that has been in freefall since the late 1950s) might allow a new generation of leadership to attempt to make politically difficult decisions on large budget items like entitlements. If we look after the pennies, the pounds may wind up looking after themselves.
Finally, there may be a sense in which a certain seriousness of purpose on the part of government workers may start to influence the culture at large. Does it seem right that we have become so cynical about government that the current Administration and Congress accepts the fact that, according to a 2023 Government Accountability Office Report, 17 agencies had less than a quarter utilization of their headquarter buildings? What kind of example does that send to the taxpayer? To the young? To the striving entrepreneur?
It is true that people who work for the federal government often make less than their peers in the private sector. By the same token, their peers in the private sector run the risk of being fired and probably have benefits that are far less generous than their counterparts in government. The wondrous achievements of this country were not crafted by the bureaucratic class that grew out of the establishment of the federal income tax in 1914, they were largely achieved by poor and middle-class sons and daughters of immigrants who sought largely to be left alone by the long arm of the government. Perhaps DOGE may remind everyone that, in the words of Calvin Coolidge, “the business of America is business.” Red, blue, Republican, or Democrat, let’s root for this new experiment in governance. Long may the market’s approval of these efforts continue.
