Trump’s choice of Scott Bessent over Kevin Warsh for Treasury Secretary seems like an upgrade from the perspective of substance. Bessent’s bio suggests he is his own guy and can do, not just solicit. But for markets, especially in the immediate future, there may be two other aspects of the pick that are more important, although also relatively constructive.
First, there is much ballyhoo about how Bessent understands markets and is a great “strategist,” to use Trump’s term. Such commentary seems to misunderstand what the Treasury Secretary’s job is. It is not to outwit the markets. Being boringly predictable and ideally mostly neutral would be closer to the mark. And I don’t assume I am saying anything interesting in pointing that out. It is just a reminder to stay sober. But this focus on who markets will like reinforces the point that Jeremy Siegel made about how Trump is the most “pro-stock-market” president in American history. That seems right, if we take it to mean that Trump wants to be measured by how he affects the stock market – or for now at least he thinks he does. And this choice of Bessent, as well as the spin around it, reinforces the point.
Trump’s agenda is not entirely market friendly. Some aspects are positive and some are negative, as is well known. But choosing Bessent suggests higher odds of Trump pushing harder on the aspects of his policy that are positive for the market. Whether Bessent is a great market strategist is largely beside the point.
Secondly, and on that issue of the trade war, I think I may be picking up in commentary from Bessent’s fans that the purpose of the Trump tariffs may be creeping in a favorable direction. The tariffs were initially proposed to the unwitting electorate as a means of having foreigners pay for the operations of the US government, just as Mexico paid for The Wall. But the problem with tariffs is that they land on domestic consumers and therefore stoke inflation, probably meaningfully if what Trump has proposed were to be implemented. And that would provoke the Fed, which would have to guide aggregate demand growth lower and accept a renewed rise of the medium-term recession risk to reverse the inflation impetus. This is not the main problem for the country with tariffs, especially when accounted over a longer-term horizon. But it is probably what would most concentrate minds in markets. So, if that could be avoided, it would probably be bullish – relative to the alternative.
What I think I hear being proposed now is the idea of using the threat of tariffs to force trading partners to conform with the Administration’s wishes somehow, perhaps by buying American exports or taking some other steps presumably designed to reduce the US trade deficit. Such efforts are unlikely to work at reducing the trade deficit. Rather, they will introduce opportunities for more corruption through self-dealing, weaken America’s reputation as a reliable trading partner, and generate minor welfare losses in the US by directing American resources into the production of the wrong stuff.
But from a market perspective, this is probably all small beer, because whatever damage is associated with this will be limited and will show up only over the longer haul. And in the short run, it would be more than offset by other aspects of the Trump agenda that markets are likely to approve, such as lower corporate tax rates, financial market and anti-trust deregulation, and an associated likely rise of market power and profit margins.
Bessent is also known as a fiscal hawk. The idea that the hawks have been “right” over the past decade or so strikes me as not being burdened with much evidence. But the US probably now has almost enough public debt, so slowing or at least not accelerating its rate of ascent relative to GDP would probably be a win. Whether Bessent will have much influence there remains to be seen. Historically, Trump has had more influence on his cabinet than it has on him. But it would probably be best if future policy change did not steepen the path of the debt/GDP ratio. And on this issue, Bessent probably is at worst not a negative, and he might be a positive, through either his influence or what he signals about Trump’s own priorities.
One final point that goes in the same direction. The utterly clueless cheerleading from the MSM around all this stuff is irksome to a fellow with my perspective. But it is probably symptomatic of a point that is constructive in the short run. Trump’s cray cray is being normalized by the culture. This will probably further encourage markets to retain their focus on immediately tangible effects, like profits or deregulation, and not to obsess as I do about abstractions like rule of law or longer-term worries like competence to deal with an actual macro shock. Trump is getting the benefit of the doubt, until something actually goes wrong.
An example of the cluelessness
Source: CNBC, obviously
Trump wants just gradual tariffs to reduce inflation. And Bessent agrees. This is from the guy whose beat is to understand this stuff. Brilliant.
None of this is resolved, and we will have to keep updating our sense of politics and policies as the news comes in. But at the margin, Bessent seems ok, IMHO.
