Wouldn’t it be great to go into your favorite diner and order a pastrami sandwich, a Reuben, the meat-loaf special with mashed potatoes, a couple of latkes, kosher pickles, a milkshake, a cup of coffee, an iced tea, a coca-cola, and then finish up with a towering piece of cheesecake, a peach cobbler and an apple pie a la mode? That is, of course, assuming you could consume all of the above. Even being able to afford it these days is tough….
This is how I see the economic objectives set forth by President Trump. He seems to have ordered every item on the menu, and it seems far-fetched that as we move into the first course of his presidency there won’t be a lot of leftovers and terrible indigestion.
Let’s “dig in”!
Soon to be confirmed Treasury Secretary Bessent has discussed a “three-arrow” economic agenda. In large brush strokes, he aims to lower the federal budget deficit from 6% to 3%, increase economic growth from 2% to 3%, and increase oil production by three million barrels a day from 13 to 16 million.
We also know President Trump is committed to extending the 2017 Tax Cuts and Jobs Act tax reductions.
However, to pass that legislation, Trump needs to unite the deficit hawks in the House of Representatives, the Freedom Caucus, and more mainstream Maga congressmen. (Funny that… Now we have clear-cut degrees of MAGA-ness!) This political divide may jeopardize the passage of the tax cuts, or at least dilute them, and a higher effective tax burden would be a recessionary blow to economic growth.
Forget growth of 3% of GDP
Like a diner whose ultimate aim is to be satisfied, Trump’s raison d'être is to stay popular. He made several populist campaign promises - exempting tax on tips and social security payments and allowing auto loan payments to be deductible from taxes in the way home mortgage payments are.
Recently, Trump has embraced Republican interest in expanding the so-called “SALT” deduction, which, while fitting nicely with the diner analogy, would allow for residents in high-tax states to deduct ever larger portions of their state and local tax from federal taxes.
Forget about a 3% deficit.
Overeating causes inflation of the belly, and if Trump knows one thing and one thing only, it is that his legacy depends on controlling inflation for the next four years.
Ordering everything on the menu isn’t going to get that done.
What about energy policy?
Trump’s catchy campaign slogan “Drill, baby, Drill” was thought to be addressed to American oil companies, whoas a result of less rigorous environmental protections and other deregulation brought about by the new administration would be able to take already soaring domestic oil production to new highs
With the price of oil below $85 (it closed at $74 Friday), there is little economic incentive for US oil companies to add capacity and contravene both geological and capital restrictions. From 1995 to 2019, Big Oil poured 80% of its operating cash flow back into exploratory capex. Since 2020, that percentage has dropped to 40% as the oil companies have realized that shareholders prefer dividends and buybacks to their earlier attempts to disprove the law of diminishing drilling returns.
Trump’s increasingly hostile rhetoric against Canada also seems to run at counter purposes to lower energy prices. Almost 25% of US crude supply comes from Canada, and if Canada were to cut supply in retaliation against Trump tariffs, that would mean economic disaster for the US refining industry, as refiners would have to shift to other lighter blends of crude. That would spike domestic gas prices.
Has Trump bitten off more than he can chew? Or is there a way that he, and the country, can have his cake and eat it too?
Perhaps when Trump chants “Drill, baby, Drill”, he is not talking to US producers.
At his speech remotely delivered from DC to the world’s intelligentsia gathered in Davos, Switzerland last week, Trump said,
“I'm also going to ask Saudi Arabia and OPEC to bring down the cost of oil."
He has also signaled that Zellensky is willing to negotiate a truce with Putin.
He has also been relatively soft on China since Inauguration.
He has seen the first hostages released from Gaza.
He is lobbying Arab neighbors of Gaza to take in the Gazans.
He has also suspended aid to Ukraine and maintained it for Israel.
Could there be a geopolitical master deal in the works? A deal where everyone wins?
Is he setting the table for a a dinner theater along these lines?
…Trump calls on Premier Xi of China to broker a truce between Russia and Ukraine that allows Putin to annex Urkanian land his army controls in exchange for agreeing to allow Ukraine to join NATO. The US doesn’t need to arm Ukraine any longer as that job falls to Europe, which gains economically from cheaper access to sanctioned Russian oil.
In the Middle East, Saudi Arabia and Israel move together to sign their own Abraham Accord. Iran feels the strain and is forced to curtail its nuclear weapons program in exchange for reduced sanctions.
Saudi Arabia and Russia, key OPEC + nations, “drill, baby, drill”to expand their production.
Oil prices move downward, fueling cheaper energy especially needed to power the AI revolution.
Lower energy prices allow the US economy to keep growing, generating enough tax revenues to pay for Trump’s tax cuts and populist programs. Growth booms and the deficit wanted…
As far-fetched as this recipe sounds, the markets are pricing in the probability, however small, of an upside surprise with the new Administration. After all, today’s price is the net of all probabilistic outcomes.
Trump and Bessent will have trouble keeping inflation down, growth up, and popularity soaring through conflicting and clashing domestic initiatives.
Could Trump somehow serve up an unlikely international smorgasbord?
Whatever happens, what is certain is that the President will continue to order his favorite Quarter Pounder, fries and Diet Coke from McD’s.
Markets Last week
Here is an updated daily chart of the S&P index. At the beginning of the year, the market tested pre-election levels, but, as foreshadowed by last week’s (almost all green) Macro Monitor, pushed to make a new all-time high.
Markets this week
This week’s Monitor is showing a neutral reading. Not only do we have a Fed meeting this week where no rate cut is expected, and earnings from Meta, Tesla, Microsoft, and Apple, but the market will also have to deal with the new AI Chinese AI threat “Deep Seek.” For more about that, read this very informative Forbes piece here.
And one more appetizer… over the weekend, Trump slapped tariffs unceremoniously on Colombia.
Disclaimer: The content of this post reflects only the views of the author and not necessarily those of Armor Capital.