Guest Blog by Larry Tabb: Finance in an Era of Trump

With a new election comes a new year, a new President, and what looks to be a new beginning. But what does it mean? While the President-elect has been on many sides of many issues, as Donald Trump picks his cabinet, his direction comes into much sharper focus: deregulation. While historically the heads of cabinet positions have been stewards of their appointed jurisdictions, these new faces seemingly stand in opposition to this tenet, with the goal either of streamlining or entirely eliminating the Departments they’ve been selected to lead.

The choices for these posts can be viewed from two perspectives: pro-development or anti-protectorate. But from either trajectory, these picks will have significant ramifications: a climate-change denier at the helm of the EPA, an anti-Obamacare choice in charge of the HHS, an avowed critic of the Department of Energy selected as its head, a general to lead State, a pro-school choice leader guiding Education, and an ex-banker leading Treasury. From one perspective, you could say the foxes are guarding the hen house; but from another, we could easily see years of anti-growth bureaucracy being scaled back or stripped away entirely.

I will take no position on whether this is good for the environment, parks, education, minorities, women’s health, or world peace; however, when it comes to finance, it will be categorically good for the markets and excellent for big finance. In almost every category, for almost every position, Trump has stacked the cabinet with pro-business, anti-bureaucracy leaders. While many do not have experience running government agencies, they do have experience being frustrated by the Washington red tape it appears they are being tasked with cutting.

So what will change?

The elimination of governmental red tape will certainly cause more projects to be proposed, initiated, and financed. The competition for investment capital will accelerate, while banks and markets will be called upon for financing – both debt and equity. This has been the historic role of investment banks, a role that has been undermined by regulation and usurped by private equity. These changes will drive interest rates higher and the stock market up. They will also drive up the cost of human capital and the things we need to survive (food, clothes and fuel). While this will increase inflation, it hopefully won’t drive ’80s style inflation (18% interest rates); but it most likely will push inflation past the 2% Fed goal.

Greater growth and inflation should also enable the Fed to reduce its balance sheet. This will be helpful to investors, as well as the active management community, as quantitative easing raises the value of all assets, while infrastructure projects and regulation reductions will benefit some while hurting others. Winners over losers and efficient capital allocation is what big finance does best, and if President-elect Trump’s picks are confirmed, we could see big finance at its biggest – turning back the past 10 years of industry hardship and malaise.

So where will this money come from, given banks are handcuffed by onerous regulation, capital, and capital usage regimes?

Well, FinReg will be one of the first sets of rules to tumble. I believe that large sections of Dodd-Frank, Basel III, and Sarbanes-Oxley either will be hived off or watered down. Sections of Dodd-Frank – including Volcker, the Consumer Finance Protection Bureau, the mandates enforcing Basel III, and parts of the too-big-to-fail legislation – will see the shredder. While we may not get back to pre-2008 banking, it will be much closer to ’07 than 2016.

While some financial regulations will be cut, however, not all FinReg will meet the shredder. Much of what has been done over the past decade will not be repealed, and will continue to move forward. While the ranks of surveillance and compliance professionals will decline as automation increases, the days of rogue traders hiding tickets in drawers and bonus-fueled, decadence-laden parties will hopefully remain memories past. Much of the compliance and surveillance infrastructure, including the ways firms centralize and manage risk, data, and people, will remain. Firms invested hundreds of millions of dollars into this infrastructure and will be hesitant to let it lapse, given some of the largest government settlements were not an outcome of the crisis, but of poor practices and flat out fraud. So while a number of banking rules will fall, many of the controls will remain.

While the controls will remain, it should be a great decade for banks. Rules, be they good or bad, will be repealed. Projects will need capital and yield curves will steepen, but higher rates will increase the need/desire for equity capital and the demand to go public.

While many may be unhappy with the election results and worried about the state of personal freedoms, human rights, and global affairs under a President Trump, his cabinet picks, from a business and jobs perspective, provide significant hope of a better economy, more jobs, and a much stronger state of banking and finance. While we may not like the social impacts driven by these changes, they absolutely will drive growth and prosperity. Let’s just hope that with this growth and prosperity comes the domestic and global tranquility that most desire.