NOVEMBER 29, 2024 – Perhaps the soundest investment advice I’ve ever encountered was in an article in the Business Section of a Saturday edition of The Times—years ago when a paper copy was tossed somewhere in our yard, bushes or front basement window wells (the delivery system deteriorated to the point where we were forced to cancel our “home delivery” subscription and go exclusively to the online version). The advice was simple: “Don’t let your politics affect your investment decisions.” It was purveyed during Trump’s first term as president, and I took it seriously. I didn’t sell out, and the economy didn’t tank. Equity markets rewarded those who’d stayed invested.
This time around, given the increased stridency of my politics—and not in a direction aligned with the president-elect—following the “soundest advice I’ve ever encountered” will be a far greater challenge.
In the first place, I can’t believe . . . strike that; I don’t want to believe that the market, that is, the collective “brain” of individual and (mainly) institutional investors, will ignore all the threats of Trump and his cohorts to undermine the fundamental principles on which our society is based (e.g. rule of law; respect for information that is true, not false; peaceful transfer of power[1]); and because of which our economy thrives. I refuse to concede, for example, that the market won’t look unkindly upon Trump’s attempt to round up undocumented immigrants and forcibly toss them into holding areas that in the cool light of day will be concentration camps. I can’t believe that given unrestricted license, when Trump’s extreme loyalists push into effect the worst elements of Project 2025, the market won’t choke and the economy won’t plunge into acute sickness.
At the same time, however, I must regretfully acknowledge that 10s of millions of people actively and even contemptuously ignored our fundamental principles. Among those millions are lots of investors and money managers connected to the collective “market brain.” I now harbor the fear that as it turns out, despite all our lip-service to the Declaration of Independence and Constitution, lucre trumps—absolutely no pun intended—liberty, civility and morality. In other words, as long as business concerns are raking in revenue and generating profits, the market doesn’t assign much value to “life, liberty, and the pursuit of happiness.” Nor does it worry much about who “We the People” are or what our best interests might be—and for that matter, what sort of social and political revolt might ensue if the gaping chasm between the haves and the have-nots of this country lasts and widens much further.
In other words, maybe The Times article is still right: Don’t let your visceral dislike of Trump cause you to enter or call in a pile of “sell” orders.
And yet . . . from a purely economic perspective, I worry about what’s to come under the second Trump regime.
In keeping with his stunning non-aptitude for policy, the geezer is all over the place when it comes to the economy. On the one hand, Trump espouses business-friendly positions such as reduced regulation and extension of the 2017 tax cuts; he’s enthusiastic about domestic oil production (“Drill, baby, drill!”); and to key economic positions such as Treasury secretary, Commerce secretary, and Chair of the White House Council of Economic Advisors, Trump has announced appointments of serious adults—however much people might disagree with their policy perspectives. The appointees in waiting are not juvenile delinquents with zero applicable experience, such as Matt Gaetz and Pete Hegseth, named mostly for their shock value; or an apparent agent of Putin and other autocrats and with zero experience in national intelligence, Tulsi Gabbard. Trumps economic appointees seem to have been chosen as more than a mere nod to Wall Street.
On the other hand, Trump talks about “day-one” tariffs on our top three trading partners (Canada, Mexico and China), which nearly every economist, left, right or center, agrees will operate as a hefty tax on the American consumer[2]. His bromance with Musk will lead to lots of noise and disruptions when it comes to cutting the federal bureaucracies, but without proposing cuts in Medicare and Social Security, which cuts would trigger a firestorm of political protest, DOGE won’t have the focus or legal authority to make substantial cuts in federal expenditures. Growing outlays for Medicare and Social Security, when combined with an extension of the 2017 tax cuts will widen the federal deficit further, increasing interest rates, and spurring renewed inflation—and increased pressure on Treasury to raise interest further to attract buyers of U.S.-issued debt, sparking an inflationary cycle that could eclipse the inflation Trump voters complained about long after it had subsided. Moreover, Trump made himself president largely based on his rough rhetoric targeting undocumented immigrants and threatening draconian (and prohibitively expensive) measures to round them up. If Trump carries through on his “day-one” orders in this regard, the effect will be a destructive wave, not a ripple, through the U.S. economy, given how many sectors depend on undocumented labor. The net effect will be a labor shortage—and inevitable inflationary increase in wages.
What the long-term investor must also consider is how Trumponomics will affect GDP and debt and credit markets over the long-haul. The question revolves around a central criticism of an unfettered (laissez-faire) market economy—“capitalism,” if you will.
From certain perspectives, capitalism is the most efficient system devised for the generation of goods and services, extraction of natural resources and development of real property; in other words, for the creation of “wealth.” To the extent more and better “stuff” is beneficial to human beings, one could say capitalism is good, and more of it is better; lots of it is best. But much of the “stuff” includes harmful products and by-products that are harmful to human beings and the planet as a whole. In many cases, “stuff” is wonderful but excess “stuff” is awful. One thing is certain, however: no other economic system has produced as much “stuff,” good and bad, as has capitalism.
The fundamental problem with capitalism, however, is that it doesn’t price effectively for indirect long-term costs. For example, in the case of any goods or services related to the fossil fuel industry, the market price doesn’t factor in the cost of climate change caused by the release of carbon from gas, oil, et cetera into the atmosphere. More immediately, the spot price of Texas crude oil doesn’t reflect the long-term environmental cost of an oil spill. The price of pharmaceuticals doesn’t account for the cost of adverse side effects, and neither the price of advertising on social media nor the market cap of Google, Meta or Amazon takes full stock (so to speak) of rate hikes by public utilities to cover ever burgeoning costs of operating vast energy thirsty data centers.
The absence of market mechanisms to price for social, environmental and infrastructural costs is why a significant degree of governmental regulation and fees, taxes, and penalties becomes necessary. It’s often a case of a manufacturing firm paying $X today, (for example, to fund installation of pollution controls on an industrial plant) or society will have to pay $X times a multiple to cover tomorrow’s costs—medical care, for example, for people who develop illnesses caused by the pollution.
In effect, long-term, indirect costs not taken into account in pricing become a future tax. Worse, the tax must be paid to cover costs that for the most part are associated with goods and services already consumed. Accordingly, the tax covering such unpaid costs becomes a drag on the future economy.[3]
Many of Trump’s stated economic proposals, from decreased regulation to greater dependence on fossil fuels will accentuate capitalism’s primary shortcoming. Those proposals might well gain support from Wall Street and investors generally and extend the current bull market into 2026. I worry, however, that the retributive moves such as tariffs and hidden, deferred and unaccounted-for costs of our market economy will eventually create major headwinds in the form of trade wars, inflation and concomitantly, unsustainably high asset values (value “bubbles”). When the bubbles burst, the next recession will begin, and that’s when you’ll wish you’d sold out earlier before everyone rushes for the exit.
Irrespective of the foregoing analysis, however, whether taking a short-term or long-term view, markets thrive on stability and are spooked by impulsivity. I worry that based on Trump’s record and rhetoric plus the conflicting views among his economic appointees, we’re about to enter a period of uncertainty. Irrespective of your politics or investment choices—“buy,” “sell,” or “hold—you might want to tighten your seatbelt.
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© 2024 by Eric Nilsson
[1] Advancing aggressive falsehoods without evidence to create a whole cult around election denialism—culminating with the January 6 assault on the Capitol—was antithetical to a “peaceful transfer of power.”
[2] Trump’s affinity for tariffs, embraced by Howard Lutnick, Trump’s pick for Secretary of Commerce. This invites an internal fight among Trump’s economic appointees.
[3] In addition to imposing a de facto tax on the future economy, costs that are not reflected in the sticker prices of harmful goods and services wind up creating inequities between (a) producers who profit from not having covered the costs up front, and (b) members of the future economy who must pay the “tax.” But the market is amoral. It doesn’t much care about inequities.