Siebert Financial Corporation
11/25/2024 | Press release | Distributed by Public on 11/25/2024 07:43
Tariffs, Taxes, and Treasuries: Scott Bessent’s Role in Trump’s Economic Playbook
Stocks rallied to close off the week on a positive note carried by upbeat retail earnings. Flash manufacturing PMIs missed targets while inflation-causing services PMI surged as consumer sentiment was revised lower, making for a ball of messy economic signals.
The man of the minute. Expect to hear the name Scott Bessent a lot over the next few days. What, you have no idea who he is? It's OK, I will fill you in. First, as most hedge fund managers (hedgies as we like to call them on the street), he maintains a very low profile. Side note: you have probably noticed that the only hedgies you have heard of are either on their way to jail or uber-wealthy and mostly retired. Bessent is neither. On Friday, President-elect Trump announced that he will nominate Bessent for the role of Secretary of Treasury (TS). Not a total surprise, he was on a short list with two other Wall Street types. One is a former Fed governor and the other a captain of leveraged finance. So, what does this all mean to you and me?
Well, let's start with why everyone has been buzzing about the Treasury Secretary. This cabinet member is a key figure in assisting the President with his economic agenda. The TS is quite possibly the second most powerful non-politician in the world behind only the Federal Reserve Chair. That's right. We all know how much bliss or pain Chairman Powell can cause not for just US citizens, but for central bankers the world over. Powell is at the levers of monetary policy which includes interest rates policy. The Treasury Secretary is a key figure in fiscal policy. The TS doesn't have a dial with "interest rates" labeled on it, no, but he does have a dial that says "austerity ◀️ - expansionary ▶️," and we know which one the incoming President is pushing for. That's right, expansionary fiscal policy. That can include income tax cuts, increased Government spending, or tax cuts and incentives for businesses, among other things. All three of those are part of Trump's plans, as he laid out his strategy during the campaign. So, you can bet that the TS will be turning that knob to the right.
To be clear, the TS cannot change tax laws, that is the job of legislators in Congress, but tax policy is typically driven by the President with support of the Treasury Secretary. Let's take a BIG step back and understand what TS is responsible for. At the highest level, the Treasury Department collects revenues and spends them. It is like the checkbook of the nation. The IRS, under the oversight of the TS collects revenues and then uses them to pay the bills. If the Treasury is short on funds, it simply borrows them by selling bonds. Though that description grossly oversimplifies things, you should see clearly how important those three major points are.
Taxation is on the minds of everyone, everywhere. Based on the campaign promises made by both campaigns, many folks are already queuing up for their promised tax cuts. Tax cuts are designed to put more money in the pockets of consumers where they are expected to spend it and stimulate the economy - "expansionary." Corporations too are lining up for tax cuts which will help them be more profitable. Those increased profits can be used to hire more workers, invest in new technologies, or in pure animal-capitalism style, use it to buy back shares and boost EPS. All of them are… "expansionary." That is just the IRS's job. Spending. Well, the Treasury pays salaries of Government workers, pays entitlements like Social Security, and pays debt service. Wait, what was that last one? Debt service, as in paying coupons for holders of Treasury Notes and Bonds. That brings us to that third function, borrowing. Yes, it is the Treasury that is responsible for making up budgetary shortfalls by borrowing money to plug the gaps. In fact, the Treasury may even borrow money to make payments on bonds it sold in the past! Don't get stressed, that is - sadly, quite normal. But how exactly the Treasury does it is highly influenced by the Treasury Secretary. More or less of one bond or another, as we have learned, can greatly impact bond yields and, more importantly, interest rates that affect your bottom line. So, you can see that the Treasury Secretary is the person with the nation's checkbook in their back pocket.
Well, that covers economic policy advice, management of federal finances, and debt management. There is more! The TS also regulates financial institutions. The Treasury works very closely with the Fed's OCC and FDIC. The TS chairs the Financial Stability Oversight Committee (FSOC) which is tasked with maintaining - as its name implies, financial stability. You may remember TARP, that massive rescue plan in the wake of the Global Financial Crisis. The Treasury, through various channels also shapes financial regulations of not only institutions but also to… well, you and me. Remember, IRS reports to the TS, who can directly influence things like easing payment and filing guidelines, etc.
Finally, I would be remiss if I did not cover the US dollar. Did you know that the Treasury can also get involved in currency "stabilization" in coordination with the Fed. That is right, the Treasury manages the Exchange Stabilization Fund (ESF) which is used to influence the value of the US currency through open market buying and selling. To be clear, while Treasury works closely with the Fed on interventions, it is the Treasury that unilaterally drives them. This is important to remember. My regular followers know that I have been talking an awful lot about the strong US Dollar running up to election day, and how it was one of the key indicators I followed throughout election night and beyond. The Dollar has been rapidly gaining in value for two principal reasons. The first and more direct reason is the rise in Treasury yields. The second is in anticipation of Trump's aggressive trade policy which is expected to weaken foreign economies. While most people are happy to learn that the Dollar is strong, it is typically not enjoyed by the President. Sure, your stronger dollar buys more crumpets if you travel to the UK, or more Tacos al Pastor in Mexico City, but it makes US products more expensive to foreigners. Even more important, it makes repatriating foreign revenues costly, eating into corporate earnings. It is because of this that most Presidents, including the one about to return to Washington, favor a weaker currency.
That brings us back to the President's pick for Secretary of the Treasury, Scott Bessent. One can say that Bessent is a bit of a currency expert. He worked for OG hedge fund giant George Soros when he famously profited from selling the Pound Stearling. Bessent went on to found his own global macro-focused hedge fund with seed funding from Soros, and he has been involved in currency trading, among other things, ever since. Bessent will, in fact, be invaluable to Trump as he navigates his way through the very tricky business of global trade and its impacts on interest rates, currency strength, inflation… and ultimately, your pocketbook. Now, it is important to remember that Bessent is a speculator and has been for almost his entire career on Wall Street. The bad is that the US economy is not something to be trifled with, but the good is that Bessent spent his entire career learning how to assess risks and returns, something most politicians have very little care or understanding of. The early word on the street is that, while Bessent has already pledged to uphold Trumps promises for tariffs and tax cuts, he is considered to be a thoughtful moderate. Therefore, we might expect a more measured approach when it comes to policy deployment. Interestingly, the Bessent announcement has already caused the Dollar to pull back. As mentioned before, the President would like to see a weaker, not stronger, Dollar, and let's just say that the market believes that Bessent could pull it off.
Speaking of "pulling it off," Bessent must still be confirmed by the Senate, but he is not expected to encounter resistance. That said, and I have left out a whole lot, the Secretary of the Treasury is an extremely important cabinet position, and it will have a direct impact and many indirect impacts on all of us over the next four years, as it already has this morning. So, really, this "man of the minute" is going to be the man of the next four years. Pay attention.
FRIDAY'S MARKETS
NEXT UP
- Chicago Fed National Activity Index (October) is expected to have improved to -0.20 from -0.28.
- Later this week, we will get more regional Fed reports, more housing numbers, Consumer Confidence, FOMC Meeting Minutes, GDP, Personal Income, Personal Spending, and PCE Deflator. That should be enough to keep you busy for a week abbreviated by Thanksgiving. Put down that turkey leg and download the attached calendars for times and details.