Top Bankers See US as Bright Spot as Second Trump Term Nears

A chorus of top bankers said they are feeling positive about the prospects for the US economy under President-Elect Donald Trump and think his tariff threats will be manageable.

At the same time, many senior financiers and asset managers at Bloomberg’s Women, Money and Power conference on Tuesday said they see Europe facing slower growth and political division that will hold the continent back. Both regions will need to tackle inflationary pressures that have eaten into people’s living standards, the executives said at the gathering. (…)

“One thing that works in Europe and Brussels is, ‘Oh my God, the Americans are going to get ahead again’,” Botin said. “That’s the one thing that seems to work.”

Anne Walsh, chief investment officer of Guggenheim Partners Investment Management, said markets had failed to price in the risk of France’s political chaos following a no-confidence vote earlier this month. Germany’s economy is also facing “recession pressures,” she added.

“On a fundamental basis, Europe has struggled and I think will continue to do so,” she said. (…)

The event’s speakers offered a generally positive view of the US economy, with business figures predicting that Trump’s vows to impose wide-ranging cross-border tariffs would be watered down.

The incoming administration “are probably going to use the tariffs as a bargaining chip and it probably will not be as bad” as many fear, according to Paula Volent, chief investment officer of Rockefeller University’s $2.5 billion endowment. (…)

Here’s how tariffs work per a BBC piece:

In practical terms, a tariff is a domestic tax levied on goods as they enter the country, proportional to the value of the import.

So a car imported to the US with a value of $50,000 subject to a 25% tariff, would face a $12,500 charge.

The charge is physically paid by the domestic company that imports the goods, not the foreign company that exports them.

So, in that sense, it is a straightforward tax paid by domestic US firms to the US government.

Over the course of 2023, the US imported around $3,100bn of goods, equivalent to around 11% of US GDP.

And tariffs imposed on those imports brought in $80bn in that year, around 2% of total US tax revenues.

If the US importing firm passes on the cost of the tariff to the person buying the product in the US in the form of higher retail prices, it would be the US consumer that bears the economic burden.

If the US importing firm absorbs the cost of the tariff itself and doesn’t pass it on, then that firm is said to bear the economic burden in the form of lower profits than it would otherwise have enjoyed.

Alternatively, it is possible that foreign exporters might have to lower their wholesale prices by the value of the tariff in order to retain their US customers.

In that scenario, the exporting firm would bear the economic burden of the tariff in the form of lower profits.

And/or the currency of the exporting country is allowed to decline, partly or fully offsetting the higher tariffs for the importer.

• China’s yuan slid on a report Beijing is considering allowing the currency to weaken in response to the threat of a trade war with the US.

The BBC continues:

But economic studies of the impact of the new tariffs that Trump imposed in his first term of office between 2017 and 2020 suggest most of the economic burden was ultimately borne by US consumers.

A survey by the University of Chicago in September 2024 asked a group of respected economists whether they 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, through price increases”. Only 2% disagreed.

Trump imposed a 50% tariff on imports of washing machines in 2018.

Researchers estimate the value of washing machines jumped by around 12% as a direct consequence, equivalent to $86 per unit, and that US consumers paid around $1.5bn extra a year in total for these products.

There is no reason to believe the results of even higher import tariffs from a future Trump administration would be any different in terms of where the economic burden would fall.

The non-partisan Peterson Institute for International Economics has estimated Trump’s new proposed tariffs would lower the incomes of Americans, with the impact ranging from around 4% for the poorest fifth to around 2% for the wealthiest fifth.

A typical household in the middle of the US income distribution, the think tank estimates, would lose around $1,700 each year.

BTW:

Trump imposed tariffs on solar panels and washing machines at the start of 2018, moves that might have pushed up prices in those sectors even though they also overlapped with plans to open washing machine plants in Tennessee and South Carolina.

His administration also levied tariffs on steel and aluminum, including against allies. He then increased tariffs on China, leading to a trade conflict and a limited 2020 agreement that failed to produce the promised Chinese purchases of U.S. goods.

When Trump first became president in 2017, the federal government collected $34.6 billion in customs, duties and fees. That sum more than doubled under Trump to $70.8 billion in 2019, according to Office of Management and Budget records.

While that sum might seem meaningful, it was relatively small compared with the overall economy. America’s gross domestic product is now $29.3 trillion, according to the Bureau of Economic Analysis. The total tariffs collected in the United States would equal less than 0.3% of GDP.

If Mexico, Canada, and China faced the additional tariffs proposed by Trump on all goods imported to the United States, that could be roughly equal to $266 billion in tax collections,

Goldman Sachs’ research warns “that a 10% across-the-board tariff will boost core prices by about 1% and delay a return to the Federal Reserve’s 2% inflation goal.”

Incoming Treasury Secretary Scott Bessent, expected to be the voice of temperance in the Trump administration, said that “tariffs can’t be inflationary because if the price of one thing goes up, unless you give people more money, then they have less money to spend on the other thing, so there is no inflation.”

But Trump has also promised to cut taxes, giving people more money…

Importantly, Bessent also said in various recent interviews and articles:

• “Last year, we imported some $3.1 trillion in goods. We are the largest importer in the world and thus the single most important market for other countries’ exports. Our size gives us market power and the ability to dictate terms — other countries need us more than we need them. We have but to use that power.”
• “Tariffs are also a useful tool for achieving the president’s foreign policy objectives. Whether it is getting allies to spend more on their own defense, opening foreign markets to U.S. exports, securing cooperation on ending illegal immigration and interdicting fentanyl trafficking, or deterring military aggression, tariffs can play a central role.”
• Trump’s threats of steep levies on Chinese imports as a “maximalist negotiating position.”
• “The last thing President Trump wants is create inflation”
• “Tariffs are a one-time price adjustment.”
• “I would recommend that they would be layered in gradually.”

Yesterday:

Trump picks China hawk to be top State Department economic policy official

President-elect Donald Trump has tapped Jacob Helberg to be the State Department’s top economic policy and trade official, selecting a China hawk for an integral role in U.S. efforts to secure supply chains.

The undersecretary of State for economic growth is often referred to as the senior U.S. economic diplomat and advises the secretary of State on international economic policy. They also oversee bureaus that manage policy around tech, energy resources, global food security and the environment.

In a Truth Social post on Tuesday, Trump said Helberg, one of the leaders in the push to ban Chinese-owned social media platform TikTok, will be “a champion of our America First Foreign Policy” as undersecretary of State for economic growth, energy and the environment. He added that Helberg “has the knowledge, expertise, and pragmatism to defend America’s Economic interests abroad.” (…)

Helberg, a tech executive who serves as a member of the U.S.-China Economic and Security Review Commission, has been an advocate for a more muscular policy toward Beijing. In 2023, he founded the Hill and Valley Forum, which brings together venture capitalists and lawmakers concerned about the rise of China and its impact on the U.S. tech sector. (…)

Trump’s mention of Helberg’s pragmatism is noteworthy. Scott Bessent is also know as a pragmatic.

Now this:

US Considers New Russia Oil Sanctions to Weaken Putin Ahead of Trump Biden looks for ways to sap Kremlin’s war machine in Ukraine

The Biden administration is weighing new, harsher sanctions against Russia’s lucrative oil trade, seeking to tighten the squeeze on the Kremlin’s war machine just weeks before Donald Trump returns to the White House.

Details of the possible new measures were still being worked out, but President Joe Biden’s team was considering restrictions that might target some Russian oil exports, according to people familiar with the matter who asked not to be identified discussing private deliberations. (…)

One model for broader US sanctions could be to impose restrictions similar to those on Iranian oil. In that case, buyers of the oil face US punishment. Such a move would be fraught with risk, given that powerful countries including India and China are major consumers of Russian crude.

Most immediately, such limits could spike oil prices, causing global economic strain. (…)

Importantly when discussing inflation in the U.S.:

Productivity increases 2.2% in Q3 2024; unit labor costs increase 0.8% (annual rates)

Nonfarm business sector labor productivity increased 2.2 percent in the third quarter of 2024, the U.S., reflecting no revision from the preliminary estimate. Output and hours worked were also unrevised, increasing 3.5 percent and 1.2 percent respectively. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.0 percent in the third quarter of 2024, as previously reported.

Unit labor costs in the nonfarm business sector were revised down 1.1 percentage points to an increase of 0.8 percent in the third quarter of 2024, reflecting an equivalent downward revision to hourly compensation to an increase of 3.1 percent. Unit labor costs increased 2.2 percent over the last four quarters. (…)

  

During the current business cycle, starting in the fourth quarter of 2019, labor productivity has grown at an annualized rate of 1.8 percent, reflecting a 2.5-percent rate of growth in output and a 0.7-percent rate of growth in hours worked. These rates are not revised from the preliminary third-quarter estimates. The 1.8-percent annualized rate of productivity growth in the current business cycle thus far is higher than the 1.5 percent rate of the previous business cycle from the fourth quarter of 2007 through the fourth quarter of 2019.

Manufacturing sector labor productivity increased 0.9 percent in the third quarter of 2024, a 0.1-percentage point downward revision from the preliminary estimate. This revision reflects a 0.2-percentage point downward revision to output to a decrease of 0.4 percent and a 0.1-percentage point downward revision to hours worked to a decrease of 1.3 percent. (…)

Total manufacturing sector productivity increased 0.6 percent from the same quarter a year ago.

Unit labor costs in the total manufacturing sector were revised down 3.6 percentage points to an increase of 1.7 percent in the third quarter of 2024, primarily reflecting a 3.8-percentage point downward revision to hourly compensation. Manufacturing unit labor costs increased 1.8 percent from the same quarter a year ago.

Manufacturing sector labor productivity has grown at an annualized rate of 0.2 percent during the current business cycle, as output has netted no growth and hours have declined 0.2 percent. The 0.2-percent annualized rate of productivity growth in the current business cycle thus far is above the 0.1-percent rate of the previous business cycle from the fourth quarter of 2007 through the fourth quarter of 2019, and is below the long-term rate of 2.1 percent since the first quarter of 1987.

Preliminary measures for the third quarter of 2024 were announced today for the nonfinancial corporate sector. Productivity increased 3.4 percent in the third quarter of 2024 as output increased 4.2 percent and hours worked increased 0.8 percent. Productivity increased 3.9 percent over the last four quarters. Unit profits of nonfinancial corporations increased 0.5 percent in the third quarter of 2024 and increased 1.1 percent over the last four quarters.

Small Business Optimism Jumps Above 50-year Average in November

The NFIB Small Business Optimism Index rose by eight points in November to 101.7, after 34 months of remaining below the 50-year average of 98. This is the highest reading since June 2021. Of the 10 Optimism Index components, nine increased, none decreased, and one was unchanged. Following last month’s record high of 110, the Uncertainty Index declined 12 points in November to 98.

“The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners,” said NFIB Chief Economist Bill Dunkelberg. “Main Street also became more certain about future business conditions following the election, breaking a nearly three-year streak of record high uncertainty. Owners are particularly hopeful for tax and regulation policies that favor strong economic growth as well as relief from inflationary pressures. In addition, small business owners are eager to expand their operations.”

Key findings include:

• The net percent of owners expecting the economy to improve rose 41 points from October to a net 36%, the highest since June 2020. This component had the greatest impact on the overall increase in the Optimism Index.
• The net percent of small business owners believing it is a good time to expand their business rose eight points to a net 14%. This is the highest reading since June 2021.
• A net negative 13% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, seven points better than October’s worst reading since July 2020. The net percent of owners expecting higher real sales volumes rose 18 points to a net 14% (seasonally adjusted), the highest reading since February 2020.
• The net percent of owners expecting higher real sales volumes rose 18 points to a net 14% (seasonally adjusted), the highest reading since February 2020.
• Twenty-eight percent (seasonally adjusted) plan capital outlays in the next six months, up six points from October. This is the highest reading since January 2022.
• The frequency of reports of positive profit trends was a net negative 26% (seasonally adjusted), up seven points from October and the highest reading of this year.
• Twenty percent of owners reported that inflation was their single most important problem in operating their business (higher input and labor costs), down three points from October and surpassing labor quality as the top issue by one point.
• Thirty-six percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up one point from October.
• Seasonally adjusted, a net 32% reported raising compensation, up one point from October and a historically very strong reading. A seasonally adjusted net 28% plan to raise compensation in the next three months, up five points from October and the highest reading of the year.

CEO sentiment gets Trump bump

CEOs have high hopes the former president will usher in an era of low taxes and regulations.

Mainstream economists warn the economy will take a hit from some of Trump’s proposals, but CEOs see a brighter outlook for their industries in the months ahead.

The index — first seen by Axios — jumped 12 points from last quarter to the highest level in more than two years.

Cisco CEO Chuck Robbins, who chairs the Business Roundtable, said in a statement that top executives feel “energized,” with Washington set to “consider measures that can protect and strengthen tax reform, enable a sensible regulatory environment, and drive investment and job creation.”

US Households’ Views of Finances Are Brightest Since Early 2020 Share of consumers seeing better year-ahead finances climbs

Nearly 38% of consumers foresee being somewhat or much better off, according to data from the Federal Reserve Bank of New York. The percentage of people who anticipate a worse financial situation, meanwhile, dropped to the lowest level since May 2021. About 42% of Americans expect conditions to remain roughly the same.

The survey also showed that consumers have a brighter outlook for equities. The average perceived odds that US stock prices will be higher in a year increased by 1.3 percentage points to 40.4%. Expected income growth also edged higher.

Inflation expectations, meanwhile, increased by 0.1 percentage point across all three time horizons studied in the survey. Americans anticipate 3% price growth in one year, 2.6% in three years and 2.9% in five years. Respondents’ uncertainty about those figures also increased.

John Authers:

(…) The problem, as with so much else, is intense political polarization. People vent to researchers in accord with the line of their favorite party. It’s not clear that these judgments really affect decisions when they go shopping. The University of Michigan has just released its first consumer sentiment survey compiled after the US election. Unsurprisingly, places have switched. Jubilant Republicans, braced for 8% inflation scarcely two years ago, now think it will be more like 1% over the next year. Meanwhile, Democrats’ expectations have roughly doubled to more than 3%.

This isn’t just about inflation. Michigan has been breaking out answers to its core expectations survey by party identification since the 2016 election. The way partisans on both sides are convinced that an election result can transform the economy is remarkable, and troubling:

That said, it’s possible that Trump’s return to office has helped assuage extreme fears of inflation. Michigan publishes inflation expectation numbers on both a median and a mean basis. The mean has recently moved radically higher than the median, showing that the researchers are encountering a large group of consumers who believe that inflation will soon veer seriously out of control. The survey still shows mean expected five-year inflation close to 6% — a number that, if it happened, would virtually guarantee defeat for the Republicans four years from now — but it has begun to moderate.

Bloomberg:

(…) The risk party raged anew on Friday after data showing the continued vigor of the labor market. The S&P 500 ended the week at fresh records and the Nasdaq 100 is up more than 28% this year. Credit markets continue to validate the good vibes across Corporate America, with borrowing premiums sitting at the lowest in more than two decades.

Along the way, the last-remaining short traders are taking hits. Among 126 ETFs that seek to profit from declines, only 14 are up this year and the average loss is 27%, according to Bloomberg Intelligence. For every single dollar invested in these so-called inverse funds, there’s $11 betting on gains instead across leveraged long ETFs, based on the amount of money tracking those strategies. An index tracking the most-shorted stocks is up some 30% this year alone.

“It’s hard to be bearish on risk right now,” said Cayla Seder, macro multi-asset strategist at State Street. “Liquidity remains abundant, the Fed has started its cutting cycle all while economic data continue to generally surprise on the upside.”

Yet suspicions are only growing that market froth is running rampant thanks to the trend-chasing set. The latest sign: Bitcoin surpassed the once-unimaginable $100,000 mark earlier this week in a broad rally that’s lifting coins across the digital-asset industry and inspiring animal spirits.

Richard Bernstein, who heads the eponymous Richard Bernstein Advisors LLC, says the top seven megacap stocks may look stretched, even if the broader market isn’t. But Bitcoin? Yep, it’s a “bubble on steroids,” he said. “There’s nothing fundamental going on. It’s all about liquidity.”

Bubble or not — the crypto frenzy dovetails with a now all-encompassing risk rally. Unprofitable tech companies are up 20% so far this quarter and junk-bond funds are now on course for a record year of inflows. It’s all lending a fresh boost to wealth creation. The number of millionaire 401(k) accounts at Fidelity Investments hit a record high of 544,000 in the third quarter. The net worth of US households also reached a fresh record in the second quarter of $163.8 trillion, according to data from the Federal Reserve.

The price, as ever, is driving sentiment. US consumers’ confidence in the stock market is at unprecedented levels, according to data by The Conference Board.

Underscoring the sense of investor infallibility, the cost to hedge against around a 10% drop in the S&P 500 has been falling for the past two months. Protecting against a bigger selloff is even less fashionable. The latest sign: one of the few remaining ETFs designed to withstand so-called Black Swan events has filed to liquidate this week, after years of losses.

To Lindsay Rosner, there are plenty of good reasons to be bullish for now — and plenty of good reasons to pay up for insurance along the way.

“We feel tail hedges will continue to play an important role in portfolio management,” said the head of multi-sector fixed income investing at Goldman Sachs Asset Management. “We are short-term constructive on the risk environment as we await clarity on what US policy will be and continue to monitor potential inflation risk to the upside.”

Fundamentally, from Ed Yardeni:

Q3’s revenues per share and earnings per share rose to new record highs, while the profit margin edged up to 12.6%. (…)

In any event, the industry analysts’ consensus outlook for annual earnings per share remains bullish (chart): 2024 ($243, up 10.0% y/y), 2025 ($275, up 13.2%), and 2026 ($310, up 12.7%). Are they too bullish? We don’t think so. We are forecasting $240, $285, and $320 as productivity growth boosts margins in our Roaring 2020s scenario.

Goldman Sachs reviewed the Q3 corporate earnings season by analyzing company fundamentals, equity analyst forecasts, and management commentary.

In addition to continued healthy real revenue growth, we draw three main takeaways for the economy. First, sentiment around the health of the US consumer improved to the highest level in nearly three years, and solid real income growth across the income distribution next year should narrow the dispersion in spending growth across income levels. Second, the labor market appears fully rebalanced, which continues to put downward pressure on wage and price growth. Third, when asked how they planned to mitigate the impact of potential tariff rate increases, management teams provided three strategies: passing along the higher costs to customers, stockpiling goods ahead of the implementation of tariffs, and reshuffling supply chains to avoid tariffed countries.

Chinese Exports Climb as Firms Rush to Get Ahead of US Tariffs Exports to America jump to highest in more than two years

Companies in China rushing to ship goods to the US before new tariffs drove exports higher in November, while imports unexpectedly fell in another sign of continued weakness in the domestic economy.

Exports rose almost 7% to $312 billion in November from a year earlier, the customs administration said on Tuesday. Shipments to the US hit their highest level since September 2022, while exports to Southeast Asia surged to a record, likely as Chinese firms aimed to have goods processed there and then shipped to the US before Jan. 20, when Donald Trump returns to the White House. (…)

The unexpected drop in imports shows just how weak Chinese demand is, with inbound shipments falling almost 4%, the largest contraction since February, when the country was on holiday for Lunar New Year. (…)

In recent months, the volume of exports has risen faster than their value, a reflection of price cuts by firms both at home and abroad. Prices at the factory gate dropped in November for the 26th straight month despite the government’s attempts in recent months to stabilize the economy and boost demand. (…)

China now sells more goods to almost 170 countries and economies than it buys from them, the highest since 2021. (…)

Equity investors are hopeful…

Bond investors not so much: