Balancing Campaign Promises With Economic Realities
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The twenty twenty four election will go down in history for any number of reasons, the latest withdraw of a candidate for a major party in modern history, the estimated at eleven billion hours spent on advertising alone, two assassination attempts, two parties who strategy often seem to consist solely of stoking fear and voters about the other party and its plans, but in the end, the twenty twenty four election worked.

Fears of election in interference of fraud, of a disputed election, of weeks of uncertainty about the outcome, did not come to pass more than one hundred and fifty million americans cast ballots in a free and fair election. And the markets loved IT. The dwt jone's industrial, or average, and the S M P.

Five hundred both had their best week of twenty twenty four. The Russell two thousand small cap index had its best week in more than four and a half years, whether you are preferred candidate one or lost. The focus now turns to how the new administration and the newly elected congress will address a host of thorny policy issues, from taxes and terrace to debt and deficits to regulations and geopolitical chAllenges.

The decisions made in the year ahead will have profound implications for investors, for the markets, for the economy and for the american people. Welcome to washington wise, a podcast for investors from Charles swap. I'm your host, mike townsend, and on this show, our goals to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

Coming up in just a few minutes, i'm going to offer my thoughts on the election and the implications for investors of some of the key policy issues that loom in twenty twenty five. But first, three quick updates from washington on non election issues. The federal reserve met last week and as expected, decided to lower the target range for the federal funds rate by twenty five basis points.

The fed's next meeting is december seventeen and eighteen, and the market will be watching carefully to see whether the fed takes a pause in the rate cutting cycle. The fed, of course, is very data dependent, and there will be plenty of economic data released between now and then for the fed to sift through, according to C. M, is fed watch tool, which is a great resource for gauging the markets expectations for fed rate moves.

The chances for a december rate cut went from eighty three percent on november first to fifty nine percent on november twelve. But more notable is that on november twelve, the chances of a rate cut at both the december and january meetings is less than thirty percent. The consensus seems to be that a pauses is coming.

It's just not clear whether there will be in december or january. But the piece of fed day last week that really captured my attention came down in chair room powers news conference. He was asked whether in the wake of president let down on trumps Victory, he would resign if ask, and he responded with one word no.

Later, he was asked about whether trump could move to fire him or other fed governors. Any responded with five words, not permitted under the law. All of this stems from trumps comments during the campaign about one in more of a voice in monetary policy decisions.

Trumps issue with paul, whom is important to remember he nominated as fed chair, dates back to the twenty eighteen to twenty twenty period when he was frustrated that first power was raising rates and then that he wasn't cutting rates fast enough. He called power on the other fed governors bone heads in two and nineteen, and called power an enemy of amErica in twenty twenty. Now trump themselves has backed away from the idea of trying to fire power before his terms chair ends in may of twenty twenty six.

Some in trumps orbit has speculated about firing Michael bar, the fed vice chair for supervision, whose role includes overseen regulation of banks. But trying to fire any of the fed governor seems unlikely to me IT would inevitably trigger a long drawn out court chAllenge won that. As was clear from powers short comment at last week's news conference, the fed is confident IT would win, but triple have the ability to nominate a new fed governor in early twenty twenty six when Adriana googlers term expiring and then a new chair later in twenty twenty six when powles term expires, so he may be content to wait for those opportunities.

There's also talk in washington that he may nominate a successor a year or more in advance, creating a kind of shadow chair that he could use to push a different message than powerless pushing. This is all part of a broader discussion about the fed maintaining its long standing independence. The fed guards, this independent zea lousy.

But some are concerned that trump may try to undermine IT. It's a topic i've been getting asked about by investors a lot recently and one that will likely continue to be part of the discussion throughout twenty twenty five. As the fed navigates a complicated economic situation amid a new trumpet administration, second congress is back in washington for what is known as the lame duck session.

Post election sessions of congress always have very strange dynamics, and this one is no exception. This week is also orientation for newly elected members of congress, and each party is holding leadership elections for the next two years. That means that outgoing members of congress, those who are retiring or who just lost their reelection races our side by side in the capital with their successors, talk about awkward.

But the old congress does have some subsidy work that IT needs to focus on. Although I suspect most of that work will take place after thanksgiving. Lawmakers want to replenish disaster relief funds at both the small business administration and the federal emergency management agency, or female.

After this falls, hurricanes and senate democrats will be pushing to confirm as many of president biden's judicial nominees as possible before they lose their majority at the end of the year. But the bigger issue is the looming explore ration of government funding. Congress still has not passed any of the twelve appropriation bills that fund every federal agency and government program for the fiscal year that began back on october first.

They passed a temporary extension of funding in late september that keeps the government open and Operating through december twenty th. So that's the new deadline. And there are a couple of path forward here.

One and probably the most likely is that congress will pass another temporary extension of funding and punch the whole issue to the new congress that convenes in january. Some republicans are eying a march deadline to give the new congress, the new administration, a few weeks to settle in. Before confronting the issue.

There are some republicans who would like to pass the appropriation bills and finalize the current years funding before that december twenty and deadline so that the issue is not on the table when the new congress takes over in january, they want to clear the decks for president elect trump to take office without having a new funding deadline looming right off the back. But that's not likely to happen, particularly because the senate, for now, is still controlled by democrats who probably aren't too eager to help out the republicans. Finally, on the last episode, I talked about some of the key announcements from the I R S about taxes in twenty twenty five.

The one thing we are waiting for was the twenty twenty five retirement savings contribution levels. Now we have that information for foo in k in other employer sponsored retirement plans, the contribution limit will rise from twenty three thousand dollars in twenty twenty four to twenty three thousand five hundred dollars in twenty twenty five. The catch up contribution for individuals fifty and over will not change.

IT will be seven thousand five hundred dollars again next year. Put that together and save us fifty and over can save a total of thirty one thousand dollars in their plan next year. But there is also a new wrinkle courtesy of a provision of the security two point o.

The retirement savings law that passed congress at the end of twenty two. That law created what's become known as the super catch up contribution for workers age sixty, sixty one, sixty two and sixty three, and only workers who are those ages. There is an additional catch of contribution of three thousand seven hundred and fifty dollars that will be permitted beginning next year.

One other thing to note, there will be no changes to the contribution limit for individual retirement accounts or I R S. That will remain at seven thousand dollars in twenty twenty five plus in additional one thousand dollar catch up contribution for workers fifty and over. There's no super catch up for the I R A holders.

Now that's a lot of numbers, so we will put a link to the I O S press release in the show notes. On my deeper dive today, I want to explore the four policy issues that I think will be most relevant for investors in the context of last week's election outcome. But first, just a quick reminder on where things stand in the battle for control congress, in addition of president elect trumps sweeping Victory in both the electoral college and the popular vote, republicans, as expected, flip the senate.

They needed to flip just two seats to capture the majority, and they ended up winning four in montana, ohio, pensylvania and west Virginia, giving the republicans a fifty three to forty seven margin in the senate next year. But democrats were able to hold on to four senate seats in states the trump one, including arizona, michigan, nava and wisconsin. This kind of ticket splitting between the presidential race and the senate race has become increasingly unusual.

IT happened just once in twenty twenty and not at all in twenty. Turning to the other side of the capital. As I record this, we still do not have official results in the battle for the house of representatives due to the slow counting process in some very close races in california in a handful of other locations.

But IT seems clear at this point that republicans will emerge with a tiny margin of one to five seats in the house. That close margin in the house will be really interesting to watch over the next two years and a potential stumbling block on some issues. It's essentially the same size majority that republicans have had in the house over the last two years, a congress that will go down in history as the least productive in terms of legislation.

Past house republicans struggled over the last two years to remain on the same page, leading to unprecedented uses like the fifteen vote marathon in january twenty twenty three to elect a speaker, followed nine months later by the ouster of that same speaker. While most house republicans in twenty twenty five will be trump loyalest, the margin is likely to be so small that just a few lawmakers who don't go along with the party line on a particular vote will cause a lot of problems. IT will also make attendance important, as republicans won't be able to afford many absences and still be able to pass the agenda.

One looming complication is that trump has already indicated that he will tap two sitting republican members of congress for cabinet or other high level posts in his administration. If we value us through, those lawmakers will have to resign from the house and their seats won't be filled for several weeks. Until special elections can be held in a razor than house majority.

Two or more temporary vacancies could be problematic on some key votes. With the election mostly in the rear view mirror, markets and investors are beginning the process of passing out the potential impact of some of trust policy proposals, from lower taxes to higher terrace to an immigration crackdown and much more. But the market has a long history of responding positively to an election simply being over.

In fact, in the last fifty years, the market, as represented by the msci all country world index, has only gone down in the period from election day to inauguration day, twice, once after the two thousand election and once after the two thousand eight election. In both cases, the economy was in recession and a bear market was already underway. Generally, global markets cheer the end of A U.

S. election. Present electron p, and his team had pivoted quickly to the transition process. Twenty twenty five, in many ways, should be viewed at the beginning of year five of the trump presidency, rather than year one of a new presidency. Trumps transition in twenty and sixteen was chaotic and disorganized.

IT took months for him to pick people to feel key positions and get them confirmed by the senate. There are about four thousand government positions that the president needs to fill, with about twelve hundred requiring senate confirmation. In two thousand and sixteen, he did not have a ready to go list of people to fill those jobs, and he did not have already to go list of policy priorities.

That won't be the case this time. His team has spent months getting loyalists to fill positions as quickly as possible and has reportedly prepared more than two hundred and fifty executive orders for him to sign on day one or soon after on everything from immigration to the federal workforce to climate change and environmental issues to terrify no incoming administration executes the transition perfectly, of course. But the four years of experience the trump party has in the White house and the Better preparation of the team around him means he's much more likely to hit the ground running this time than he was the first time around.

And that's important because twenty twenty five is shaping up as one of the most consequential years from a policy standpoint in a long time. The combination of several statutory deadlines on issues like taxes and the debt ceiling, plus the priorities of an incoming administration that is likely to have a unified washington, sets up for a dizzying series of policy debates next year that will have far reaching consequences for investors, companies and the markets. At the same time, the policy agenda will be complicated by the promises trump made on the campaign trail, and this is no difference in any other candidate.

All candidates make a lot of promises during a campaign, but the gap between campaign promises and those promises becoming law is an enormous one. Like all incoming president trump, undoubted be forced to cast aside some of those promises to compromise on one thing in order to get another thing passed, to cut deals and to acknowledge that he can do everything, and who need to baLance those promises with the cost to the economy and the very real concern of reigniting inflation. Moreover, there is no predicting what geopolitical, economic and monetary factors might occur twenty, twenty five and beyond that could alter his priorities.

So with that backdrop, here are the four policy issues that I think will most affect investors next year. Issue number one is terrace. Over the course of the campaign, president electron never waive red in his enthusiastic support of terrorists, at one point calling tariff his favorite word in the english language. Tarifa had been around forever, and certainly other presidents have utilized them, including joe biden. The difference now is the depth and breath of the trump plan.

He is called for a ten to twenty percent across the board tariff on all imports, a sixty percent tariff on chinese imports, and if you want off ideas like a two hundred percent tariff on cars imported from mexico, the result would be the highest tariff s on foreign goods in nearly a century. His ability to do this unilaterally is not Crystal clear, but congress has granted wide attitude over the to the chief executive when IT comes to impose I N terrace, and a republican congress in twenty twenty five may be inclined to include terrify as part of a larger tax package anyway are racing any doubts about the administration's ability to put them in place? But many economists believe trumps tariff proposals Carry significant economic risk.

Turfs are usually passed on to consumers in the form of higher Prices, which could trigger another round of high inflation and slower economic growth. Trumper have to recommend that with his promises to reduce inflation and specifically lower Prices for goods, terrace could also instigate a global trade war with other countries slapping similar terrorists on U. S.

exports. Last month, the international monetary fund, or I M F, forecast that U. S, G, D P would slow by about four tens of percent if across the board, ten percent turfs were imposed and other countries responded in kind.

But the I M F did not model scenarios. Other economists have concluded that of the sixty percent tarifa on china and a hire or across the board rate of twenty percent are included. The hit to U.

S, G, D, P becomes more significant, approaching one and a half percent in washington. There is long, in a sense, that any terrifying the trumpet administration may impose will fall well short of his plane to put a terf on, well, absolutely everything. More likely, they will be used as a negotiating tool as trump six to work agreements with other countries to lower their trade barriers.

If that's the case, then the impact of terrace on the U. S. Economy, Prices and inflation may well be less than is projected. A key to all this will be how china reacts to additional tariff. s.

The united states remains china's largest foreign market, and steep levies could have a material impact on china's economic growth at a time when its economy is already in africa's state. During trumps s first term, terrace brought china to the negotiating table, and the two countries signed an agreement, but china did not live up to its end of that agreement, casting doubt about its reliability. China's weaken economic state this time around may bring you back to the negotiating table, but IT also makes china less predictable.

When IT comes to terrorists, the specifics are important. The amount of the tariff, which imports they apply to the country's targeted and how those countries respond, all will be critical factors in what the broader economic impact will be, the markets will be keeping a close size and whether the reality of terrorist matches the president's campaign rhetoric. The second big issue, in one with even more direct impact on investors, is taxes.

I've been talking for a long time about how the biggest policy issue in twenty twenty five will be taxes. And the Candy is is the fact that all of the twenty seventeen tax cuts that were approved during the first year of the first trump administration are set to expire at the end of twenty twenty five. That includes lower individual income tax rates, higher standard deduction, the higher amount of assets that can be inherited without trigger ing the estate tax and dozens of other provisions.

If congress does nothing, all of these provisions will expire at the end of next year, and beginning in twenty and twenty six, revert to their three, twenty seventeen levels. The top income tax rate, for example, would go from thirty seven percent back to thirty nine point six percent, and most of the other tax rates would also change. The state tax exemption amount, which is related to be thirteen point nine nine million hours per person in twenty twenty five, would be cut in half regardless of the election outcome.

This was always going to be a tRicky issue for lawmakers, but if the republicans retain their majority in the house, you'll be able to move quickly to extend these expiring provisions by using a process called budget reconciliation. This is a parliamentary procedure, the expiates consideration of tax issues in congress and crucially, allows them to be passed with a simple majority by passing the need for a sixty vote supermajority in the center. It's how the twenty seventeen tax cuts were originally passed in the first year of the previous trump administration, and IT was used in the bad administration to pass the inflation reduction act.

IT only works if one party controls the White house, the senate and the house of representative. Using budget reconciliation means a tax package could be considered and past quickly in the new congress. Probably in the first or second quarter of twenty twenty five, but the details still have to be hashed out among republicans.

The plan is likely to extend all of the expiring provisions, a move that on its zone is estimated to cost four point five trillion dollars, according to the non partisan congressional budget office. And that's before considering all the other tax changes that trump proposed on the campaign trail. He called for an end to the taxation of tip in count of social security benefits and of overtime hours.

He wants to see a corporate tax cut. He proposed making the interest paid on other loans, tax the dog like mortgage interest, and is called for eliminating the ten thousand hour cap on the state and local tax deduction, a cap that was part of his own tax well in two and seventeen. Adding this to the tax bill next year would take the cost above ten trillion dollars, according to the committee for responsible federal budget, a washington, D.

C. thinktank. Increasing the budget deficit and the national debt, even adding the most ambitious estimates of revenue gained by imposing all of his terror proposals, which some analysts have pg, that about three trillion hours would only make a relatively small dent in the overall fiscal impact to the plan.

There are many deficit hawks among house republicans for whom a tax cut proposal that only increases the deficit would likely be unpitying. So expect some compromises to be made, some items to be dropped. Eliminating the tax on tip income appears to have some real momentum in washington. Even calmly, haris supported the concept and her campaign.

But others, like eliminating taxes and social security benefits, may just have a Price tag that is too high one to watch to eliminate in that ten thousand hour cap on the state local tax deduction, a proposal that has passionate supporters among lawmakers who represent high tax states like new york, new jersey, california and lenoir. But the cost in terms of revenue lost is enormous. And there are many republicans who represent states like oklahoma or kansas.

Just a name a couple of random, where this is just not an issue at all. One idea gaining some momentum is doubling the cat from ten thousand dollars to twenty thousand dollars for married couples as a way to provide some relief without adding as much to the federal deficit. The coming tax debate is going to be a complex and ever evolving one.

How be following this as closely as anything in twenty twenty five? The third issue is the debt ceiling ing, which I feel someone that is not getting the attention that deserves. The debt ceiling is the cap put in place periodically by congress on the total amount of that the united states can acculturation.

The that ceiling was suspended amid twenty twenty three as part of a bipartisan deal. The law suspending IT says that the dead ceiling ing will return on january y second of twenty twenty five at a level expected to be north of thirty five trillion dollars. At that point, the united states will not be able to accumulate any more debt until the limit is raised.

The treasury department can use cash on hand to pay its obligations, and IT can take what he calls extraordinary measures, a series of steps to avoid defaulting on our debt. But those steps are temporary, and typically by congress, only three to six months, congress will have to raise the dead sea aling by mid twenty twenty five. Doing so is always a controversial and difficult vote on capital hill because it's not about getting the federal debt under control.

It's about literally increasing the amount of debt. IT draws attention to the staging size of the nation state and the inability of law mick's to manage IT. In twenty twenty five, the responsibility for raising IT will fall to republicans if they have unified control and washington.

But in twenty twenty three, seventy one house republicans voted against the debt ceiling increase. There is a small handful of republicans who have never voted for a dead ceiling increase. Usually, IT takes a mix of republicans and democrats to vote for a that ceiling increase in order to pass IT in the house, but having been relegated to the minority and washington democrat are unlikely to want to do the majority any favors.

Markets do not like the uncertainty surrounding when in whether congress will increase the debt ceiling mark of volatility historically increases as a deadline for a potential default approaches. The united states has never defauts on its debt, but IT came the closest IT ever has to do in so during that twenty twenty three that seating debate, a repeat of coming right to the brink of the faut could be in the cards in mid twenty twenty five. It's definitely something for investors to keep an eye.

And my forth and final policy issue is welcome to the era of deregulation. The president elect has said that deregulation will be a top priority of his administration. There are various ways that deregulation can take place.

The president can use executive orders to unwind some policies or direct agency to ignore, not enforce, rule or change the position held under the previous administration. Congress can also play a role using something called the congressional view act to overturn rules that were recently imposed by the previous administration. There is a time limit involved in this procedure, so IT really only applies to rules put in place during the final months of the previous administration.

IT requires a simple majority vote in both the house and the senate to avoid a rule during terms. First, president's republicans had full control of the house in the senate in twenty and seventeen, and they use the congressional review at sixteen kinds to overturn rules put in place near the end of the obama administration in twenty and twenty one. Democrats had full control of washington and use the procedure five times to overturn rules the trump administration had approved.

Congress can also just pass laws that overturn or override previous regulations, but that's done via the regular legislature process. So it's slow. Finally, regulating agencies themselves change rules all the time through the ordinary regular ory process.

But this too is time consuming as IT requires an agency to propose a new rule that overrides the previous rule, go through a linkedin public comment process, followed by a review period of those comments before the agency can finalize the new rule. Here's a great example of that process. During the obama administration, the labor department finalized a rule that would allow retirement plans to consider environmental, social and governance factors when choosing investment options for the plan.

If all other factors were similar, the first trump administration came in and unwell that rule prohibiting retirement plans from considering esg factors. Then the bite administration undid that rule and went back to a rule similar to the obama administration. Now with trump two point o coming in the office, that rules, once again a target for being overturned.

All of this makes IT hard for companies to plan for the long term, because the rules seem to change every time there's an election. But there is an additional complication that will have unpredictable effects on the trumpet administration's regulator, d regulatory agenda, the courts. Last summer, the supreme court overturned a standard known as the severn doctorin that have been in place for forty years.

In a nutshell, the severn doctor and said that courts had to differ to the expertise of regulating agencies when they wrote rules to interpret a vay law from congress. That difference no longer applies. What is likely to mean is that many, perhaps most, regulations will face legal chAllenges and ultimately be decided by the courts.

It's likely to be a confusing and time consuming process that will leave many regulations in limbo for months or longer. In twenty twenty five, numerous regulations are likely on the chopping block, and the financial services sector is likely a prime target. Big banks are anticipating that proposed rules requiring them to hold more capital won't come to fruition, and that changes to the stress testing process are also likely.

Banks of all sizes are likely to see the easing of new rules around mergers and acquisitions at the S. C. C, A changing leadership or result in the shelving of proposed rules regarding how stock trading works and the use of predicted data and linux when providing investment advice, rules requiring more disclosure about the risks companies face from climate change already being chAllenged in the courts are also likely to fade away. And one of the biggest winners of the election may be the crypto currency industry, which is sure to come out from a series of lawsuits and other enforcement actions from an anti crypt O, S, C, and find itself for a much friendly or audience, said both the S, C, C and on capital hill.

Other parts of the economy are also likely to see significant impact for a lighter, regulate, touch trump campaign on easing regulations in the health care sector and rolling back environmental friendly rules like the by administrations, emissions reductions for power plants and incentives to boost electric vehicles in twenty twenty five companies will have to take into consideration a lot of competing narratives about the impact of government policy on the business environment generally. On the one hand, a corporate tax cut and sweeping deregulation would be a big win for companies, but terrify could force companies to raise Prices and face a backlash from consumers, and mastery potations in other changes to immigration law could reduce the number of available workers, particularly in areas like construction, agriculture and hospital ality. What the net effect will be on on the economy depends a lot on the details of all these policies and more.

My goal of this podcast in twenty twenty five is to explore these issues more deeply as the policy debates unfold. I'll be your eyes in your ears as washington undergoes a profound shift in direction. Well, that's off this week's episode of washington wise.

We're gona take a break for the thanksgiving holiday, so our next episode will be out in a month, december twelve. I'll be focusing on the twenty twenty five outlets for equities in the economy. Take a moment now to follow the show and you're listening out so you get an alert when that if drops and you don't miss any future episodes.

And i'd be so grateful if you would leave us a rating or review. Those really helped new listeners discovered the show. For important disclosure, see the show notes or sa got com slash washington wives, or you can also find a transcript, I mike cousin. And this has been washington wise, a podcast for investors, wherever you are, stay safe, stay healthy, have a very happy thanksgiving, and keep investing wisely.