On Trump, the $50 trillion guardrail

IMG Credit: CNN

 Returning to the White House devoid of many of the guardrails of his first term is Donald Trump.

Many Congressmen who identify as Never-Trump Republicans have either converted or lost. The incoming Trump administration is not likely to welcome former economic adviser Gary Cohn and other anti-tariff voices. Jack Smith, specialised counsel, plans to resign. And the Supreme Court has bestowed upon presidents comprehensive immunity from prosecution.

Still, the $50 trillion US stock market could be another factor discouraging Trump from some of his most extreme impulses.

Obsessed over market movements, Trump saw the Dow Jones Industrial Average as a real-time gauge of his performance during his first term. Regularly tweeting even the most basic market benchmarks, Trump deviated greatly from the hands-off approach his successors and predecessors adopted with the market.

More recently, sources told CNN's Kayla Tausche, Trump was "euphoric" over the initial surge in the market following his all-encompassing victory this month.

A market collapse brought on by a Trump policy proposal—say, shockingly high tariffs on China or a concerted effort to fundamentally alter the Federal Reserve—could at least give the president pause, if not force him to completely back off.

"I do not see Congress or the courts restricting the presidential authority. Isaac Boltansky, director of policy research at BTig, said ultimately the stock market is the only entity with actual influence over the president's agenda.
If Trump moved to remove Fed Chair Jerome Powell, with whom he has had a complex and occasionally divisive relationship, investors could respond quite negatively.

Fears about Trump's trade policy caused markets to tumble several times at least in part during his first-term trade war with China.
For example, worries about the US-China trade conflict caused upheaval in December 2018 markets. Sources told CNN at the time that Trump was hungry to negotiate a deal with Chinese President Xi Jinping during a high-stakes conference in Argentina due to that market volatility. Trump expressed concern about declining stocks and even worried about the losses possibly harming him politically when markets failed to recover.
Given Trump's promised 60% tariffs on China, a major US trading partner and source of supplies and parts for American businesses, it is simple to see how a similar narrative could unfold in 2025.
Trump's China tariffs and ideas for 10% to 20% across-the-board tariffs on all US imports will be inflationary, economists warn.

Donald Trump is concerned about independent validators. And the market is the largest unbiased observer of his success. Ed Mills, Washington policy analyst at Raymond James, described it as a daily voting system. "It acts as a possible binding restriction to aggressive policies."
Not everyone finds the market serving as a guardrail appealing.
Yale Chief Executive Leadership Institute founder and president Jeffrey Sonnenfeld told CNN that Trump is unlikely to pay attention to worries expressed by investors.

"There is zero chance that he will take personally any negative feedback from the stock market," declared Sonnenfeld. "If anything is negative, the blame falls on everything except him." He will point the finger at Democrats, the pharmaceutical companies, the technology firms – anyone. He will never be responsible for it.
The bond market now takes front stage.
While the bond market did not celebrate the election outcomes, the stock market did at first. Treasury bonds fell in value, sending yields skyrocketing in part due to worries about Trump's policies increasing trillion-dollar national debt and driving inflation. Investors are preparing for fewer Fed interest rate cuts even while they start to expect faster US economic growth.
Particularly for mortgages and business loans, if bond rates climb too high they could slow down growth by increasing borrowing costs.

By creating competition from typically dull bonds and rendering stocks more expensive by comparison, higher bond rates can also lower stock prices.

This has already begun to show up recently, which helps explain why record stock highs are being pulled back from.

"One of the main things spooking equity investors is the abrupt rise in 10-year Treasury yields (and the related inflation and deficit concerns)," Lori Calvasina, head of US equity strategy research at RBC Capital Markets, noted in a Monday client note.

The bond market might have other ideas even if Trump has demanded significant new tax cuts and a full extension of the 2017 tax law.
Should bond holders begin to rebel against the concept of sharply increasing budget deficits, Trump's efforts in Congress could finally be doomed.

"This is going to come to a head starting in the bond market," Boltansky remarked. "The bond market vigilantes will inform us whether they are ready to purchase the paper we are producing."

If CEOs and investors begin to object to Trump's proposals to deport millions of illegal immigrants, a move that could also help to lower inflation, a similar narrative could develop.
Of course, it's not obvious how strong a market reaction would have to be before it would cause Trump to adjust.
"We have no idea how much suffering he is ready for," Boltansky remarked.

We could be about to learn.