IN-DEPTH: TRANSCRIPTION – UnderTheLens -11-27-24 – DECEMBER – The Trump On-Shoring Strategy

THE REALITY OF TARIFFSAbout 95% of economists polled by the Kent Clark Center for Global Markets in September agreed or strongly agreed with the statement that “imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs”.

In other words, tariffs deliver inflation to the US consumer. They are explained as a Tax on the American Consumer.

This is the accepted counter argument mantra & conditioned response that defends Globalism and Global Corporations. This argument normally squashes any form of serious thinking of using Tariffs to fight back.

In fact, Inflation has been found to be relatively low - (FT- Tariffs and taxes are not very inflationary).·         Economic theory and experience tell us tariffs are not inflationary.

·         It’s correct to claim that a tariff on a good will raise its price. However, the claim fails to consider how consumers and sellers of the goods will react to higher prices.

·         Once all the economic, price, behavioral and currency impacts net out, another round of tariffs will likely prove deflationary and harmful to economic growth.

The fact is that Tariffs are normally absorbed by the importing country through importers. Those costs result in:

1- Lower Wages

2- Lower Profits and

3- Higher Inflation.

However, it is only those with Pricing Power in the supply chain that can actually pass the higher cost levels on.

SLIDE 17

With the American worker now literally taped out we have a different scenario at work today and pricing power is in jeopardy as real sales volumes after inflation  are falling!

Dollar Tree, Dollar Store et al are now everywhere in American and even the upper middle class are now shopping at Wal-Mart (that directly from last week’s earnings announcement) – US consumers are being forced to shop downscale to survive after 21% cumulative inflation on food over the past 4 years and even higher rates than that on other goods and services!

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With the devastating damage to the American consumer already prevalent and the world dependent on that consumer - the entire supply chain will be forced to squeeze margins OR move more operations to the US.

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Trump's former economic advisor Scott Bessent, (who has now been nominated for US Treasury Secretary), has already working on this.

Bessent favors a ‘T+X’ Tariff Plan that gives global firms, say, two years to build factories in the US to avoid sanctions, reducing most of their direct inflation impact, but getting all the Capex, supply-side and trade-deficit narrowing gains.

Leading the pack, Samsung (think South Korea Electronics & Semiconductor) immediately said this is what they plan to do. That might mean new economic models are needed for US tariffs - if economists want to model the world as it is, rather than as they (or their models) want it to be.

Trump Tariffs will initially likely still elevate prices, but if successful in fostering a "reshoring" renaissance it may be the only way out of the US Economic death spiral.

It is no doubt a calculated gamble, but maybe the only one left on the table for a country clearly headed down a road towards a dismal and inevitable debt crisis?

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WHAT TRUMP JUST ANNOUNCED – 11/25/24

•      CHINA: President-elect Donald Trump plans to raise tariffs by an additional 10% on all Chinese goods coming into the U.S.

•       Trump had threatened tariffs of 60% on Chinese goods while campaigning for president.

•       CANADA & MEXICO: The post immediately followed one in which Trump said his first of “many” executive orders on Jan. 20 would impose tariffs of 25% on all products from Mexico and Canada.

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PROMISES MADE, PROMISES KEPT

 TARIFFS

•  10% TARIFFS: In multiple campaign stops Trump floated the idea of a 10 percent or more tariff on all goods imported into the United States, which he said would eliminate the country’s trade deficit.
•  He has also said he should have the authority to set higher tariffs on countries that have put tariffs on U.S. imports.
•  MEXCIO: He has threatened to impose a 200 percent tariff on some imported cars, saying he is determined in particular to keep cars from Mexico from coming into the country.
• CHINA:  Trump has targeted China in particular. 
  •  He proposes phasing out Chinese imports of goods such as electronics, steel, and pharmaceuticals over four years.
  •  He seeks to prohibit Chinese companies from owning U.S. real estate and infrastructure in the energy and tech sectors.
• “We’re going to bring the companies back. We’re going to lower taxes for companies that are going to make their products in the USA. And we’re going to protect those companies with strong tariffs,”
•  Trump said that a number of countries, including “allies” have “taken advantage of us, more so than our enemies. ”

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The Reagan Economic miracle took time and cost him his first term's mid-term elections, but it began to work and secured his second term. What was the Fiscal Investment that created the miracle? It was about investment in the people that power the economy. He built it on two cornerstones to empower Fiscal Investment:

• Reduce Strangling Regulations,
• Reduce Corporate and Personal Taxes

Trump did both of these in his first time to a large degree over an "anything but Trump" opposing congress.

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What Reagan got (with a supporting congress) was the realization that the US government had grown to the point that it was now the problem!  Government control, regulations, restrictions and taxation was strangling the US economic engine.

Reagan's understanding of the unorthodox Laffer Curve guided his thinking and Trump's.

An investment is different than simply the spending of tax money. Fiscal Spending is the allocation of tax money in the form of redistribution of wealth. Today tax money and deficit spending is allocated in a fashion that it goes to toward consumer consumption in the form of transfer payments. There is no investment, but rather the consumption of

money.

Fiscal Investment is not about redistribution, but rather allowing those who have the money to keep it and use it to produce personal wealth. Their success, (let's call it personal greed, ambition or even vision), is the only proven sustainable factor to creating investment and wealth. That wealth grows taxation and increases jobs and wages. This in turn propels independence, positive sentiment, risk taking and consumer confidence. We go to a virtuous upward cycle from a downward economic spiral.

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PROMISES MADE, PROMISES KEPT

 TAXES

•  Throughout the 2024 campaign, Trump promised to curb federal regulations that he said would limit the creation of new U.S. jobs. He also has pledged to keep intact a 2017 tax cut that he supported and signed while in office.
•  His team has also proposed a further round of individual and corporate tax cuts beyond those initiated in his first term.
•  Trump has pledged to reduce the corporate tax rate from 21 percent to 15 percent for companies that make their products in the United States.
•  In a bid to win Nevada, Trump earlier this year pledged to end the taxation of tips and overtime wages to aid some service workers and waiters.
•  He has pledged not to tax or cut Social Security benefits.
•  Trump also has said that as president, he would pressure the Federal Reserve to lower interest rates but wouldn’t make any demands on the central bank.

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WHAT WE CAN EXPECT

 TAX CUTS: 

• •  A full extension of the 2017 tax cuts that expire at the end of 2025,
  •  Likely including reinstatement of some expired business investment incentives.
  •  Likely some modest additional tax cuts to accommodate Trump’s campaign proposals,
  •  Expect these proposals to be scaled down (would only cut taxes by a few tenths of a percent of GDP, primarily focused on individual income taxes  and not corporate.

SLIDE 26

To fix the competitive costs that forced companies offshore to China and to reduce the growing size of the US debt the exploding nature of government regulations must be addressed in a serious and thorough fashion.

This includes reinstating all the Trump 1.0 deregulation executive orders as well a whole new effort and government department called DOGE (Department of Government Efficiency).

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REGULATIONS

•  Throughout the 2024 campaign, Trump promised to curb federal regulations that he said would limit the creation of new U.S. jobs. He also has pledged to keep intact a 2017 tax cut that he supported and signed while in office.

•       Likely a lighter-touch approach, particularly with regard to energy, financial, and labor policies.

•       While some aspects of antitrust policy might ease slightly, expect scrutiny of the tech sector to continue.

I have written about this and dedicated a UnderTheLens video in August called “The Exploding Cost of Regulations” to the seriousness of this problem.

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DEPARTMENT OF GOVERNMENT EFFICIENCY (DOGE)

•  The Manhattan Project of our time!
•  The ultimate goal of DOGE is to make its own existence obsolete by July 4, 2026 - the 250th anniversary of the founding of the United States.
•  By then, it is hoped that a leaner, more efficient government will be in place, one that is more responsive to the needs of the people and more in line with the vision of the Founders.
•  If successful, this reform effort will be a gift to the nation, ensuring that future generations inherit a government that is both effective and accountable.

“Unelected bureaucrats in the administrative state that was created through executive action are running the government which needs to be fixed by the executive branch”.

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1. Regulatory Rescissions: Rolling Back Illegitimate Regulations

The most immediate and significant action DOGE will take is targeting the tens of thousands of regulations imposed by federal agencies, many of which exceed the constitutional authority granted to these agencies.

• Using Supreme Court Rulings as a Guide: Following the rulings in West Virginia v. Environmental Protection Agency (2022) and Loper Bright v. Raimondo (2024), DOGE will work to identify regulations that overstep the bounds of the authority Congress has granted. These rulings clarify that agencies cannot enact major economic or policy decisions without explicit congressional approval. DOGE will compile a list of regulations that should be nullified and present them to President Trump for executive action.
• Immediate Suspension and Review of Regulations: Through executive orders, the president will pause enforcement of these overreaching regulations and initiate a full review process for rescission. This action will prevent regulations that were never approved by Congress from continuing to harm businesses and individuals.
• Creating a System to Prevent Reviving Illegitimate Regulations: Once regulations are rescinded, DOGE will ensure that future administrations cannot simply reinstate them. Any reactivation of these regulations would require a new act of Congress, ensuring that regulatory power is returned to the people’s elected representatives.

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2. Administrative Reductions: Streamlining Federal Agencies

Alongside regulatory rescissions, a drastic reduction in the size of the federal bureaucracy will be necessary. DOGE will target specific reforms to reduce the number of federal employees, streamline agency operations, and focus government efforts on its core constitutional responsibilities.

• Identifying Minimum Staffing Needs: DOGE will collaborate with agency leaders to identify the minimum number of employees required to carry out essential functions. With fewer regulations to enforce, many agencies will require significantly fewer staff. As regulations are rescinded, the corresponding workforce reductions will follow.
• Cost-effective Employee Transitions: For those whose positions are eliminated, DOGE will support their transition into the private sector, providing incentives for early retirement or voluntary severance. Programs designed to make these exits as seamless as possible will be implemented, ensuring a smooth process for both employees and taxpayers.
• Leveraging Executive Authority to Limit Bureaucratic Growth: President Trump will use his authority to amend civil-service rules to curtail administrative overgrowth. This could include actions like large-scale firings or moving federal agencies out of Washington, D.C., to reduce costs and decentralize power.
• Restoring Accountability in Federal Agencies: Agencies will be required to return to in-person work, ending the COVID-era trend of remote work. This will incentivize employees who are unwilling to meet this expectation to voluntarily exit, reducing the overall headcount.

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3. Cost Savings: Tackling Waste, Fraud, and Abuse

Beyond reducing the size of government and eliminating unnecessary regulations, DOGE will focus on eliminating wasteful spending and ensuring that taxpayer dollars are used efficiently.

• Ending Unauthorized Expenditures: A significant portion of federal spending, over $500 billion annually, is either unauthorized by Congress or used for purposes Congress never intended. DOGE will work with the administration to end these wasteful programs, including unnecessary funding to international organizations and progressive groups, while scrutinizing expenditures like the Corporation for Public Broadcasting.
• Overhauling Federal Procurement: The government’s procurement system is notorious for waste and inefficiency. DOGE will conduct large-scale audits of federal contracts, suspending payments where necessary to identify and eliminate inefficiencies. This will be especially critical for agencies like the Department of Defense, which has failed repeated audits, indicating a lack of oversight over how taxpayer money is spent.
• Targeting the Deficit and Overspending: While entitlement programs like Medicare and Medicaid are often the focus of budgetary discussions, DOGE will tackle the more immediate waste, fraud, and abuse that plagues most federal agencies. Through targeted executive actions, DOGE will curb these excesses without the need for new legislation.

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TRUMP 2.0 IS LOOKING FOR A RENAISSANCE TO REPAIR, REPRIVATIZE & REJUVINATE THE ECONOMY - Allowing the private sector rather than the government to allocate capital is crucial to growth.

The U.S. must reform the Inflation Reduction Act’s distortionary incentives that encourage unproductive investment, which has to be sustained by a lifetime of subsidies. Overhauling the regulatory and supervisory environment will encourage more lending and reinvigorate banks.

President-Elect Trump must also address government borrowing. U.S. interest expense exceeds the defense budget. Treasury Secretary Janet Yellen has distorted Treasury markets by borrowing more than $1 trillion in more-expensive shorter-term debt compared with historical norms. Terming out that debt in favor of a more orthodox borrowing profile may increase longer-term interest rates and will need to be deftly handled. The only way to return to a prudent borrowing strategy without upsetting financial markets is restoring investors’ faith in the economy and preserving the dollar’s global role.

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If Trump is even mildly correct he could unleash and tap into the animal spirits of corporate deal making!

Trump and his economic advisors are well aware that M&A activity relative to GDP is well below-trend levels, leaving room for some serious acceleration before it becomes credit negative.

Further, given the level of rates, debt-funded M&A initially might see a more gradual uptick versus strategic activity, accelerating appreciably as we get closer to the end of the cutting cycle.

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Trump is also acutely aware that the dramatic growth in private credit has been a major theme in credit markets.

The growth has been massive and has not yet been fully tapped.

This could propel an unlimited amount of investment!

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Currently it has prompting talk about greater regulatory oversight and scrutiny.

This is exactly where Trump’s team can make some strategic moves.

The expected focus on deregulation in Trump’s second term dampens this prospect, which bodes well for the continued growth of private credit.

SLIDE 36

There may be no better time to take on China than now as foreign investment is plunging and has went negative for the first time – ever – or at least it came onto the global export scene!

There may be just a chance that Trump 2.0 may pull this off!

SLIDE 37 – CONCLUSIONS

So what can we conclude?

SLIDE 38

THE REMOVAL OF THE BURDEN OF SUPPORTING THE WORLD

The US can no longer financially support the world as its foreign policy has effectively done since WWII.

·         The US has become the Global Piggy Bank.

·         UN

·         NATO

·         Involved in all crisis

·         600 Military Posts

·         Arms and Support to Ukraine, Israel etc

This must end to protect the US Standard of Living and maintain the American Dream.

SLIDE 39

 RE-PRIVATIZATION OF THE US ECONOMY

•       STOP FALSE & UNPRODUCTIVE ECONOMIC GROWTH

•       STOP THE DISTORTION OF CAPITAL ALLOCATION

•       RESTORE FAITH IN THE US ECONOMY & DOLLAR (* CRITICAL)

SLIDE 40

1. Though Tariffs are paid by importers studies show that doesn't necessarily translate into direct consumer price inflation.
2. Trump believes that the US Consumer is the winning Trump Card. Without it China and other export lead mercantilist nations are seriously jeopardized.
3. The Trump Card is the strategic play to start a manufacturing reshoring shift back to the US.
4. This shift will result in jobs, tax revenues and potentially ignite a revitalized US Investment and Re-Privatization paradigm.
5. This is a big gamble by the new Trump Administration, but they view the current mercantilist driven debt path as being an existential threat to the US' survival.

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However, there are major hurdles ahead:

1. INFLATION RISKS will mount further from here, given likely tariffs and fiscal stimulus. Moreover, the backdrop is already one where central banks are easing policy, whilst growth data is surprising on the upside. So this is a prominent concern that could prompt a more hawkish reaction from the Fed. DB has warned about inflation risks in recent months, and since the bank's most recent piece in September the 2yr US inflation swap has risen nearly 50bps.
2. FISCAL CONSTRAINTS: The financial context is very different to Trump’s first victory in 2016. Fiscal constraints are tighter given higher Treasury yields and a higher federal debt, whilst asset valuations are much higher as well.
3. DEBT CEILING: Assuming we get unified government (which Polymarket places at 99%), the risk of a debt ceiling crisis has just collapsed for the next two years.
4. POLITICAL WINDOW:  US politics is very volatile: In 9 of the last 10 presidential/ midterm elections, at least one of the White House/Senate/House of Representatives has changed control. So it’s entirely plausible the political landscape changes quicker than many expect today.