Locking in the Trump Trade
What every investor (at least for the traders among us) wants to know is whether the Trump trade will be long or short, robust growth or more stagnation.
Ignore the current Trump rally. That’s all about mood, and just as shifty.
Whether it’s better to short Trump or bet on him depends on how many new, bad Trump ideas become reality vs. how many excellent ones. Leading the bad are wacky protectionist schemes of 50% to 100% tariffs on “enemy” imports. We may assume, or at least hope, that the titular “artist of the deal” is merely bluffing to build up his negotiating stance, but who knows?
Leading the excellent is his idea for further cuts in the corporate income tax rates on top of the dramatic 2017 reduction from 35% to 21%. President-elect Trump says he wants to get the rate down to 15%, which would be the lowest of any of the world’s 15 largest economies.
That reform would trump (sorry) nearly every bad Trump idea.
The great lesson of Reaganomics was how thoroughly tax policy dominates all other economic policies. The Reagan era tax cuts—including the deep cuts in capital gains taxes that preceded his presidency—are the principal reason we have seen 40 years of good-to-excellent economic growth and robust employment combined with declining inflation and interest rates.
Trump’s big add—the corporate tax rate cut—put the whole thing in hyperdrive, cutting unemployment to 50-year lows while “inflation” continued flat to down.
From 1983 (when the tax cuts were fully in place) through today, good tax policy was the only constant. We’ve seen more regulatory overload (and occasionally less), more drilling for energy and less egregious levels of green foolishness and somewhat less egregious levels, and through it all the essential picture has remained: relatively strong economic growth and declining prices.
(Taxes aside, the most positive prospective Trump move is reversal of the $6 trillion in putative subsidies for climate socialism in the oxymoronic Inflation Reduction Act. This vandalistic assault on economic sanity has debauched the decision-making process in almost every major corporation and jeopardized our entire power grid with CO₂ net-zero hokum.)
Over the four decades from Reagan onward, we saw modest variations in the personal income tax rate. These seemed to matter much less than the large and persistent reductions in capital gains tax rates—from 35% in 1979, to 28% in 1980, then to 20% where it remains today. These bolster innovation and investment and boost asset values to support business expansion.
The 2017 act added evidence that taxes on business and investment have a bigger impact on the overall economy than personal rates. The personal rates affect small business creation and maintenance over the long term, and thus jobs for recent generations of young men.
The 20% deduction on pass-through income, which will expire if not renewed, also rewarded small business investment. The corporate rates most affect the goliaths at the top who have led our economy in recent years amid a dearth of initial public offerings (IPOs).
That our economy would be led by the goliaths amid an IPO drought was not what most supply-siders, ourselves included, predicted. But it’s hard to argue with a 40-year record amid mazes of emergency socialist regulations from the Securities and Exchange Commission (SEC) and the Environmental Protection Agency (EPA) among dozens of other agencies.
Crucial to the future of the economy and the GOP will be getting the party populists, many of whom style themselves rebels from the Reagan tradition, to realize how much their goals, especially retaining American jobs, depend on tax policy—Reagan’s turf.
The 2017 reduction to 21% had a massively beneficial impact specifically on minority employment, likely a powerful factor in the rising support for Trump and the GOP from minority voters. The competitive power of slashing the rate to 15% would be easily measured by the piercing cries of pain from Europe.
Trump’s proposed tariffs would erode American employment; we’re not likely to build more trains, planes and automobiles by raising the cost of steel. Cutting the corporate tax rate would compensate for much, perhaps all, of the damage done to U.S. employment by a tariff binge. For the populists, tax cuts would be a political gift, letting them cater to their tariff-loving constituents without marching quite so many of them to the unemployment line.
A wrinkle for the neo-populists is that slashing corporate taxes would complicate their immigration stance. The disaster of Biden’s open borders radically changed the political consensus on immigration. In just four years, Americans shifted from being 36% for more immigration versus 28% for less, to only 16% for more—less than half the previous number—and 55%, almost twice as many, for less.
Stopping the flood of illegals and the associated horror stories should move opinion back the other way. That would be fortunate because with a 15% corporate tax rate, demand for workers would soar to levels impossible to meet without even more immigrants.
In the current political atmosphere, not even defenders of Biden’s open borders wanted to talk about how indispensable recent immigrants, including millions of illegals, were to what economic growth we did see over the past four years. But amid a collapse of birth rates everywhere, the economy would have been even weaker without immigration.
From 2019 through late 2024, native-born Americans contributed only 480,000 net adds to the U.S. labor force; immigrants contributed 3.6 million. Of the four million or so workers added to the workforce over that time, immigrants added 90%. What would we have done without them?
The “Trump Trade” is not yet in place. For an investor win, we need to put aside the invidious glower, liberate the economy from the green socialism, and adopt even more positive populism–of the Ronald Reagan inspiration and insight.
P.S. George will be holding a subscribers-only teleconference on Nov. 20 at 2 p.m. EST entitled “The Power of Investing in Private Companies… and an Easy Way to Do It.” The event is free, but you have to register here in order to be able to attend. Don’t miss out!