Words on Trump's Agenda

Words on Trump’s Agenda

In this episode of Words on Wealth, host Tim Rocks sits down with Libby Cantrill, Head of US Public Policy at PIMCO, to unpack Donald Trump’s intriguing economic agenda. From tax cuts and tariffs to deficit-driving policies, Libby offers sharp insights into market reactions, inflation risks, and the challenges facing investors in today’s dynamic landscape. She also delves into Trump’s Cabinet nominations, questioning whether they have the ability—or political capital—to truly move the needle on key economic policies. Tune in for an engaging exploration of what lies ahead in these unpredictable times.

This episode is also available on Apple Podcast. 

Introduction

Welcome to Words on Wealth, a podcast by Evans and Partners that unpacks the key trends and opportunities shaping markets, the economy and your financial well-being. Join us as we make sense of the issues that matter most to you.

Tim Rocks

Hello, welcome to Words on Wealth. My name is Tim Rocks, Chief Investment Officer at Evans & Partners. Today, I’m delighted to be joined by Libby Cantrill, who’s Head of US Public Policy at PIMCO. PIMCO is one of the world’s largest fund managers, particularly in debt and credit. And thank you very much for joining us, Libby.

Libby Cantrill

Thank you. Wonderful to be here.

Tim Rocks

Why don’t we just start by… the mood in Washington must be pretty interesting at the moment. One thing is sort of pretty clear that Trump is trying to blow up the Washington bureaucracy. you know, like what is the mood like?

Libby Cantrill

I’m here in New York. I would say that the centre of gravity right now is actually not in Washington. It’s down in Mar-a-Lago in Florida. But in terms of just kind of the vibes among folks who are currently in DC, think that Republicans are cheering for what was a pretty definitive victory, at least at the top of the ticket. Now, think we would highlight the fact that actually Republicans didn’t do as well down ballot in terms of the congressional races, and that could have implications for how much Trump could actually get done. But they’re pretty jubilant, and for good reason. Democrats are hand-wringing and Monday morning quarterbacking and what have you. But I think just in general, there’s some skepticism. Again, there’s enthusiasm for what Trump may be able to do, but there’s also skepticism. And some of the things that President Trump, incoming President Trump has announced, might be more difficult to do than I think maybe with the market narrative at least, or just sort of broader kind of storytelling that folks are telling themselves may indicate just because of some of those down ballots, very narrow congressional majorities, but also some of the things even with the Doge, with the Vivek Ramaswamy and Elon Musk, there are actually many more guardrails that I think they even appreciate. I think a lot of this may be harder said than done.

Tim Rocks

Okay, well that’s very interesting. Let’s explore some of those points. Can we start with some of the proposed appointments to key positions? Clearly some of them, shall we say, are not particularly qualified for the roles that they’ve been proposed for. What role do you think the Senate will play here? Do you think that the Senate will push back on some of these?

Libby Cantrill

I would say that as a starting point, remember that Republicans will have 53 to 47 in terms of the Senate composition. So 53 Republicans, 47 Democrats they just in order to get folks confirmed, they only need 50 votes. So they have some cushion in terms of the number of people they could lose and still get folks confirmed. I think the starting condition or starting kind of position of the Senate will be trying to get folks confirmed. There’s usually kind of the general sense that the whoever the president is should have the people that they want in their cabinet. And I think that’s pretty bipartisan. However, as you say, there have been some folks who have been nominated, Matt Gaetz in particular, the representative from Florida who has some hair on him to say the least. And I do think, we’ll see, but I think that the confirmation of him is unlikely. Everyone else, however, I do think will give, I think Republicans in the Senate at least we’ll try to give the benefit of the doubt. A lot of this will come down to the Senate confirmation hearings and what have you. Usually there are one or two or maybe even three folks who don’t get confirmed for a variety of reasons. And so, we could see that happen. Yet again, I do think Matt Gates is probably the least likely to get confirmed. Even RK Jr. However, it will really depend on how he does in his hearing. I think that the Senate takes this advice and consent role and probably seriously. may sound kind of like, you know, something that that might just be kind of perfunctory, but it actually is a pretty substantive oversight mechanism. In fact, it’s where their only oversight mechanism of the administration. And so, they take it pretty seriously, Democrats and Republicans alike. So, I do think that some of these folks will have pretty difficult confirmation hearings. And so, depending on how those go, they may not get confirmed.

Tim Rocks

Okay, okay. Now let’s return to that comment you made about the guardrails. So it is a big question about how much the checks and balances in the system really hold here in terms of his ability to get his agenda through. Do you want to just explore that a bit more, whether he’s got enough majority in the Senate and in the House to do most of what he wants to do?

Libby Cantrill

Yes, I think this is maybe where the financial press has not been nuanced enough because while in the Senate he does have, you 53, 47, a relatively healthy majority, least for when you can, for those things that only require 50 votes, not 60. And they’re, you know, not to go into kind of mind numbing details here, but there is a mechanism called budget reconciliation that only requires 50 votes, not 60. That’s the way that President Trump passed his tax cuts back in 2017. However, you still need 60 votes for most legislation in the Senate. So that will be one kind of guardrail. The other though will be in the House. And again, I don’t think there’s maybe enough attention that’s been paid to this, but he still, has that Republicans have the House, so they won the House, but it is by an incredibly narrow majority. If you look back in 2017, Republicans had a 23 seat majority. Now they may only have a two or three seat majority, meaning that they can only, lose two or three votes and still get things passed. Now, and remember that Elise Stefanik and Matt Gaetz and some of these other folks who have been blocked from the House to go into the administration, those seats will all be vacant for at least for a bit before their special elections and what have you. That just practically means that the very narrow majority will be even more narrow. So, I do think that even though Trump has the power of the bully vote pulpit, he won decisively so he comes to Washington with a mandate that in order to do the hard things, the easy things are going to be easy, regardless of, like for tax cuts in particular, those will be able to be passed in the House, regardless of how narrow the majority is. But for the other stuff, for big spending cuts, for instance, or a rollback of the Inflation Reduction Act, all of that stuff is going to be a lot harder to do with this very narrow majority. So, I do think that’s the sort of composition of Congress really will matter in terms of what actually Trump can get done, at least legislatively. And a lot of the stuff the market is responding to or hoping for has to go through the Congress, particularly as it relates to tax cuts. But even this idea of massive deficit reduction, they would need the cooperation of Congress. So, I think people should remain skeptical, particularly with the doge with that Elon Musk and Vivek Ramaswamy headline, that in terms of like the ability to actually get that stuff done.

Tim Rocks

Well, I do like that there’s two heads to the government efficiency department. Anyway…

Libby Cantrill

I would just point out that they’re not a department nor they part of the government. So Department of Government Efficiency, they’re basically none of those things. So, you we wish them luck, but in terms of their ability to really move the needle, I think I remain skeptical.

Tim Rocks

Yeah, yeah. And then also within the Senate, there’s not quite homogeneity of views within the Republican Party anyway. You still have that freedom caucus that could be quite resistant against some measures as well.

Libby Cantrill

That’s exactly right. I do think that it’s a little bit difficult, but even because we have a two party system, People with pretty divergent views are kind of forced to choose one party or the other. And that’s the same as voters, but it’s also the same for members of the House and in the Senate. So, you do see you know, some of those more firebrand, more kind of, you very conservative folks. You also see moderates from swing districts or swing states who are going to be much less inclined to just rubber stamp a Trump agenda. So, there are these, again, they’re subtle, and I don’t think the press is really attending to them, but there are differences. Like there is no unanimity in the Democratic Party. There’s really no unanimity in the Republican Party either. And I think that once this maybe sugar high fades a little bit, you may see some of you know, those, you know differences, you know kind of come out one last thing I’ll just say is you are seeing some of these divergences even with the nominations with the Treasury Secretary nomination Which has been I think accurately described as a knife bite That it is, know, these are different factions and Trump world kind of fighting in order to get their person to be not guy because they’re all they’re all dude. There’s their guy to be nominated.

Tim Rocks

Yeah. Yeah. All right, can we now just go through some of the major policy areas and your best guess about how they might play out, maybe starting with the big ticket one of tariffs. Obviously, know, big numbers being banded around in the lead up to the election, but what do you think is a most likely outcome for what is deliverable?

Libby Cantrill

Yeah, so I think on tariffs, you know, that there’s a lot of unilateral authority around tariffs. So, the Congress doesn’t actually have to act on tariffs in most ways. And what we’ve seen with Trump 1.0 was that he used that unilateral authority, particularly as it relates to China. And you think that, you know, that tariffs are likely to go up on China. I also think he’s kind of widened the aperture to include countries that have a trade deficit with the United States. He really is very focused on the trade deficit. Australia does not actually trade. Australia has a trade surplus with the US. So, you all are in the clear. But he is very likely to focus on, again, not only just China, but some of these other countries. Now, part of this is going to be a negotiating tactic for sure. But I do think that folks shouldn’t underestimate the veracity behind his threat about imposing tariffs. believes in tariffs. He thinks tariffs work. He thinks tariffs reduce the trade deficit. There’s evidence that they did reduce the trade deficit when he put them on China because the US has gone down since then. So, I think it’s a little bit mixed, I think he cares about, he definitely cares about the markets. He cares about deals, but he also does care about tariffs. He’s self-proclaimed tariff man. So, I would say it’s kind of half true. I do think that like there will be the direction of travel on tariffs is absolutely clear. They will be going up and we probably will see an announcement day one from the Trump administration. But in terms of going up to 60% on China or 10% baseline tariffs, I don’t think it will exactly look like that. But again, we do think that tariffs will be more elevated. The other thing I will just say is that we could see tariffs being put together with the tax cuts and the benefit there is that you could use the revenue from tariffs to actually offset the cost of the tax cuts. I think that some of those narrow majorities might get in the way there. Members of Congress don’t love legislating on tariffs. But again, you might see that as well. So, I think kind of bottom line is that yes, tariffs are going up probably not to the extent and to the degree that he has threatened. But I do think that we shouldn’t underestimate kind of again, the intensity or the enthusiasm around tariffs.

Tim Rocks

Yeah, yeah. But there must be very aggressive lobbying going on behind the scenes though, because I mean, the largest importers into the US from China are companies like Apple and Walmart. They’re not Chinese companies that are… so you know, those companies must be pretty aggressively fighting behind the scenes. And you’d think people like Boeing and the big pharma companies that would fear or would be scared of retaliation must be fighting a good fight behind the scenes as well.

Libby Cantrill

There will be, of course now the president hasn’t been seated yet, so we’re not, this is like all kind of, and there is definitely some outreach to the president-elect or what have you. I think that President Trump’s though answer to a lot of that is Tim is sort of like to bring it back to the United States then. This is a view like why are you relying on Chinese components to put into your phone? And of course, that’s because of this idea of comparative advantage and we’re not, we’re a service sector, a service economy, not a manufacturing economy. But I do think it’s something that, you know, it’s a little bit more, it’s a little bit harder, I think, than just to make an argument that some of these national champions will likely make, I mean, for sure. And maybe they do get some relief, but I don’t think that is necessarily as compelling with this group of folks as it would be under a different administration.

Tim Rocks

Yeah, yeah, okay. And then on the tax cuts, you assume that he’s granted his mandate and those go through?

Libby Cantrill

Yeah. So again, like the narrow majorities in the House and the Senate won’t be obstacles to passing the tax cuts. That’s because I always I liken that to like the, know, eating your dessert is much easier to eat your dessert versus eating your vegetables. The spending cuts or the vegetables, those things I think will be more difficult in a divided or in very narrowly united Congress. I think that what we will see on the tax cuts, which may or may not influence kind of animal spirits, is that you won’t see necessarily a 10-year extension of the tax cuts. That’s usually how tax writers like to write tax policy over a 10-year period of time, because it gives folks the certainty in order to actually make decisions without fear that some of the tax cuts will expire. But I think that the more realistic expectation is to maybe see them extended for four years because it’s lot cheaper. So, if you have it for four years, then you can pass the next presidential election, whomever is going be the next president, they’ll have to deal with it. that politically, the winner reduces the impact on the deficit, but also then hands it to whomever is going to be the next president.

Tim Rocks

Yeah. And then on the Elon Musk thing, the government reform, sounds like you’re a bit skeptical that that will amount to much.

Libby Cantrill

I look, like they, think it’s like, should be like into a very well resourced like think tank. And that they are out of the government. They probably are not going to be part of the government. I doubt they get government. They will be then subject to a bunch of conflict provisions. I don’t think they’re probably going want to adhere to. I don’t know, I could be wrong. And I think that, you they’re going to have like good ideas. A lot of this waste and fraud though has been identified already. I mean, does the GAO does a report every year, every other year that basically identifies with fraud in the government. A lot of times, ironically, it actually has to do with understaffing and overstaffing because they don’t have the staff to actually enforce things or to monitor things. how government programs are kind of played out or what have you, don’t have the resources to ensure that there is no fraud. Thought, I think I am a little bit skeptical. Maybe we do get some cost savings. Of course, I wish them well. I just think practically speaking, they are not the first folks to identify there is waste in front of the US government. So, I guess I’m just a little bit, I think that this has been tried before with not much success.

Tim Rocks

Yeah, yeah. All right. And so bringing that together for GDP overall and inflation, perhaps overall impacts. What are the thoughts of PIMCO? Have you revised any of those sort of big forecasts at all based on the Trump win?

Libby Cantrill

So, I think, you know, we’re expecting a sequencing here. So, you know, I think this is what Trump advisors have told us too, that they’re going to kind of work on the tax cuts and then sort of do the tariffs. And so, they’re trying to offset any potential, know, deleterious growth effects from the tariffs, you know, by tax cuts. Now, course, arguably, you could make an argument that those are both potentially inflationary. Who knows? I don’t think what we’re talking about tax cuts is really an extension of current policy versus an additional tax cut. I think that is something that’s important to keep in mind. But yeah, think it will likely be, again, trying to sequence it. In terms of inflation, mean, of course, tariffs are inflationary. It could be dagflationary because not only do they impact inflation, they also actually affect growth in terms of demand destruction or ex-retaliation or what have you. So, they’re kind of a two-sided coin, if you will. And so, I think it’s a little bit too early to say exactly what our estimate is. Of course, taking it in extreme, it’s a 2 % inflation hit. It’s an increase at the 2 % GDP hit. But again, some of this is going to be, you know, probably more massaged and likely more sequenced.

Tim Rocks

And potentially more likely be 2026 before there’s meaningful impacts, I guess on the time the tax cuts come through.

Libby Cantrill

Yeah, I think that’s true. And again, like, of course, tariffs are a one time price and level increase, right? Versus they’re not like cascading. It’s just like, you know, it’s like a tax. Which no one likes to talk about, it is a tax. So just a one-time tax and then the price level recess. And so, it’s not as if like it necessarily is the, you know, continuous upward and you know, pressure on inflation or what have you. But again, I think it’s a little bit, it’s a little bit too early to tell, but that said, you know, we’ve liked the steepness of the yield curve. We think the U.S. yield curve here, the yield curve in the U.S. should be steeper, not flatter. And one of the reasons is because deficits are high. Deficits are about 6.5 % of GDP. They’re probably just going higher, not lower necessarily, even with the Doge. But we also think that investors should be compensated for holding longer term bonds. And it shouldn’t necessarily should be getting more than they get for 10 years. So, we do think there should be some steepness in the back end of the yield curve. You know, there was a violent sell off obviously the day after the election that’s kind of flattened a little bit. But we do think that’s the way for us to invest it is in terms of the shape of the yield curve versus, you know, from a duration perspective, necessarily. So that’s the way we think it should manifest itself. And that’s a kind of a nice hedge for a variety of other potential factors that could impact inflation.

Tim Rocks

Okay, so but yeah, plus the move in the US 10 year bond yields been quite spectacular. It’s almost got to four and a half percent. So, you think that’s sort of justified and are you increasing your –

Libby Cantrill

Just to be very clear, we think that the yield curve just shouldn’t be flat ratio necessarily create we shouldn’t get like between 10 year and third the 30 year that there should be more of an upward level we have seen more of that right you’ve seen the 30 years sell off, we have had an underway to the duration on that loss. We call the curve steepener across our portfolios that sort of take advantage of that kind of normalization of the yield curve as lower yields go decreased and anticipation of more fed cuts. And as the 30 year kind of sells off a little bit more. In terms of the 10 year, again, we’re not, we have more exposure. It’s kind of the belly of the curve versus at the 10 year. But we do think like, you four and a half different sounds so far off. If you think that the real neutral rates around 1%, you know, and then you add a 2 % inflation target there abouts, and then you kind of add a one and a quarter, one and a half term premium. I think the term premium historically has been about, you know, 135 bits or something. So, it’s more or less fair value, maybe a little bit, you know, maybe a little bit cheap. And as a result, you know, we’ve been dipping our toes in when you’ve seen these kind of big fell-offs. But again, our kind of our stronger view is around just the shape of the ill curve versus the absolute level.

Tim Rocks

Yeah, yeah. All right, great. Look, thank you so much, Libby. That has been so interesting. Good luck with the next couple of months and years. I think you’re going to have a very, very busy time. But thank you very much for your time.

Libby Cantrill

Thanks so much. Appreciate it. Thank you.

Tim Rocks

Bye-bye.

Disclaimer

This podcast was prepared by Evans and Partners Proprietary Limited AFSL number 318075. Any advice is general advice only and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where this presentation refers to a particular financial product you should obtain a copy of the relevant PDS, TMD, or offer document before making any investment decisions. Past investment performance is not a reliable indicator of future investment performance. Directors, employees and officers at Evans & Partners and its related entities may have holdings in securities listed. Any taxation information is general and should only be used as a guide.