Financial IED

“What is the meaning of life? That was all—a simple question; one that tended to close in on one with years, the great revelation had never come. The great revelation perhaps never did come. Instead, there were little daily miracles, illuminations, matches struck unexpectedly in the dark; here was one.”

To the Lighthouse, Virginia Woolf, 1927

THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.

The first set of appointments came fast and one of them has already been rejected but there is a pause around the Treasury Secretary. The Treasury Secretary is a critical choice for a) debt management and b) financial crises. My hunch is the pick is at the epicenter of the tension between Trump and something he does his best to ignore: unpleasant realities.

The criteria for every appointment so far seems to be rigid loyalty to Trump, including being an election denier. When it comes to Treasury, however, Trump reportedly wants to hire someone who has “Wall Street credentials”. That typically means someone who understands on a practical level how financial markets work. The archetype is Bob Rubin, who was Treasury Secretary under President Clinton and before that a chief of Goldman Sachs.

I don’t know who Trump will pick. But I do know if he picks anyone who actually does have Wall Street credentials, they will know that cutting taxes and raising tariffs when the budget deficit is 6% of GDP is courting disaster. Ever since Trump pulled ahead in the polls, US interest rates have been rising. The plausible scenario is that under a tax cut/tariff policy long term interest rates crest well above 5%, an area they last were pre-2008 financial crisis. They are currently below 4.5%.

Moreover, anyone with Wall Street credentials will also know Trump companies have declared bankruptcy half a dozen times, according to Chat GPT (1991, three companies in 1992, 2004 and 2009). Said differently, it’s hardly a secret that Trump is not a guy who focuses on prudent debt management. Anyone on Wall Street also knows about the 20% equity market decline that happened the last time Trump initiated tariffs.

So let’s imagine the interview process. On the one hand, Trump’s agenda is crystal clear—big tariffs, America First. On the other hand, the reality of the budget situation and debt is also clear, as are the knock on effects of higher rates on the economy.

Imagine what it is like if he picks you. Your job is to make sure interest rates don’t rise amid tax cuts, tariffs and the deportation of 20 million people. This isn’t a TV show, it’s supply and demand. Just like I didn’t bet on the election (we created a portfolio that would work whoever won), I position based on the outcomes and go from there. So I am waiting and will adjust accordingly.

The funny thing about meeting people in positions of power is how normal they are. Yes they run a central bank or the Treasury or whatever, but they know pretty much the same stuff you know. As the Wizard of Oz showed, the guy behind the curtain is just a guy. So get a fancy person on Wall Street and sit him down with Trump and their belief systems will almost certainly clash. The Wall Street guy will think in terms of limits. Trump will think in terms of what plays well with his base.

To be sure, for many on Wall Street, ascending to a job in Treasury or the Fed is the crowning achievement. There is also a financial incentive. Many people on Wall Street are paid in stock that, if exercised, creates a huge tax burden. But if you are called to service my understanding is all the stock needs to be exercised at…zero tax. Nice.

The reality is that Trump’s campaign slogans are toxic for the US bond market. That’s particularly true given that the bond market is pricing in a sharp decline in short term interest rates. Technically, this means the futures market is pricing in 100 basis points of Fed easing. If reality shifts and it is clear interest rates not only won’t fall but need to rise, the shift can be abrupt and painful. Picture a sharp up in yields and downs in other asset values.

If that does happen, Trump will likely be forced to reverse course. Policy making mostly happens in a crisis and perhaps we will get one. Yes, Trump is unpredictable. So there are certain odds he picks someone that does understand the debt markets and can say to Trump what Rubin reportedly said to Clinton — “the bond market won’t let you do it.” If you go by the logic of his other picks. there’s not much reason to be hopeful. But this has gone on for more than a week now. Reality may not be winning but it does seem to have the president-elect’s ear.