CICC: The Path Deduction of Trump's Policies and Trades

After Trump's victory on November 6, the market's expectations for the possibility of quick "bullish realization" of the Trump trade have not faded, but have instead been strengthened. US bond yields are approaching 4.5%, the US dollar index has surpassed 107, Bitcoin has surged, and gold has plummeted. Even the previously unreactive Chinese market and the renminbi have started to show obvious pressure. In the short term, the inertia of the Trump trade still exists, especially for assets with insufficient expectations such as gold, the Chinese market, and the export chain may face more pressure. Recently, the continuous emergence of cabinet personnel has made related policies more "concrete," further strengthening the Trump trade. Upcoming, how Trump's different policies are advanced in terms of order and path will directly determine the pace and even direction of the Trump trade. In this article, we combine the latest cabinet personnel nominees with different policy constraints to deduce possible paths for future policies and trades. Chart: The "Trump trade" has not faded but has continued to heat up since his victory Source: CICC Research Department 1. Progress in cabinet member nominations: Speed, emphasis on "loyalty", establishment of new department Compared to the first term, the nominations for Trump's second term cabinet members reflect several characteristics: 1) the speed of cabinet formation is fast, with the position of White House Chief of Staff confirmed just two days after the election. As of November 16, nominations have been made for 15 cabinet secretaries, with 5 cabinet-level members already appointed, a progress which took at least 3 weeks more in 2016. Key personnel such as Secretary of State Marco Rubio and National Security Advisor Michael Waltz, who are in charge of foreign affairs and hold tough policy positions, have also raised market concerns. 2) More emphasis on "loyalty", with most of Trump's nominees being strong supporters from the previous term and the current round of elections. This is done to avoid frequent changes in officials at the beginning of the previous term, such as the replacements of the Secretary of State and the Secretary of Homeland Security in 2018, and also to ensure the implementation of Trump's policy proposals. 3) Establishment of a new department, while nominating cabinet members, a "Department of Government Efficiency" led by Elon Musk and Vivek Ramaswamy was established to reduce bureaucracy, cut wasteful spending, and mandate that the department's work be completed by July 4, 2026. Unlike normal government departments, this appointment does not require congressional confirmation, making it more akin to a non-cabinet member presidential advisor. Chart: Cabinet member nomination speed has accelerated since Trump's victory, with the average nomination time for cabinet officials in the past week being 3.4 weeks longer than in 2016 Source: Reuters, POLITICO, CICC Research Department Chart: Progress of cabinet nominee and key position officials (as of November 16, 2024) Source: Reuters, POLITICO, CICC Research Department Key economic officials such as the Treasury Secretary and the Trade Representative are still undecided, with Lutnick, supported by Musk, falling slightly behind Bessent in current nomination rates. Robert Lighthizer is also speculated as the US Trade Representative. Additionally, the retention of the Federal Reserve Chairman is also a matter of concern. Powell's second term as Federal Reserve Chairman will continue until May 2026, and he has stated after the November FOMC meeting that he will not resign voluntarily. Trump is also legally unable to dismiss him from his position. Trump has previously said in an interview that "despite disputes in the past, he will not seek to prematurely dismiss Powell as Federal Reserve Chairman," but this remains subject to change. 2. Policy direction from nominations: In line with Trump's proposals, even more hardline Cabinet members and top government officials will be the specific implementers of Trump's policy proposals, so the main views of the nominees can help us understand the degree of toughness in the final execution and details under the overall policy direction. Specifically, Cutting taxes: The direction is relatively certain. Trump advocates for extending the deadline for individual tax cuts, even pushing for the permanentization of tax reform bills, and further lowering the corporate income tax rate from 21% to 15%. The Treasury Secretary candidate Bessent is predicted by the media to support tax cut policies, stating in an interview with the Financial Times that tax cuts will boost economic growth and may not necessarily lead to inflation. Chart: Effective tax rates have remained around 15% over the past five years Source: FactSet, CICC Research Department Tariffs: The direction is relatively certain, but there may be differences in level and scope. Vice President Vance and nominated Secretary of State Rubio both support raising tariffs to promote domestic manufacturing in the US. Rubio proposed the "Stopping Adversarial Tariff Evasion Act" in September this year, which would impose tariffs on all China goods shifted overseas. Potential Trade Representative Lighthizer also supports "trade protectionism", proposing high tariffs on China, revoking most favored nation treatment, and supporting a "weaker dollar" policy in his book "No Trade is Free". Immigration control: Higher certainty and more hardline. Strengthening border security is a consensus among many, including Vice President Vance, Secretary of State Rubio, Attorney General Gaetz, Secretary of Homeland Security Noem, and National Intelligence Director Gabbard.Tom Homan, the newly appointed Border Affairs Commissioner, announced that they will carry out the largest illegal immigration deportation plan in history.Return to old energy: higher certainty. Nominated Energy Secretary Chris Wright, Interior Secretary Doug Burgum, and Environmental Protection Agency Director Lee Zeldin all advocate for a return to traditional energy sources, expressing support for the development of domestic fossil fuels to increase supply, and planning to overturn some major climate decisions of the Biden administration, such as vehicle emission regulations. Foreign policy: more hawkish. Several nominated or potential key officials, including Secretary of State Rubio, Secretary of Defense Pete Hegseth, and National Security Advisor Michael Waltz, advocate for a relatively "hawkish" policy. Improving government efficiency: the newly established Government Efficiency Commission's main task is to reduce bureaucracy and cut wasteful spending. Musk has stated that the commission may cut federal government spending by at least $2 trillion; nominated Health and Human Services Secretary Robert F. Kennedy Jr. has stated that one of his main tasks is to eliminate departmental corruption; Attorney General Gates also mentioned ending the partisanship and weaponization of the justice system. Policy advancement path and sequence: immigration and tariffs will progress faster, tax cuts may be legislated within the year, while energy policy will take longer. Because different policies have opposite effects on inflation, they will also affect the direction and pace of Trump's current trading. The ultimate progress will still depend on Trump and his team's political thinking and priorities, but in terms of process and procedure, immigration and tariffs theoretically could make the fastest progress, while tax cuts must be legislated before the 2026 deadline and energy policy will take longer to implement. Specifically, Immigration policy: theoretically can be immediately pushed forward post-inauguration. Immigration is a key issue in Trump's campaign, and the president has a high degree of discretion in immigration policy, so post-inauguration, he can use executive orders to deport illegal immigrants, especially since key officials hold a hard-line stance. In the nominated candidates, Border Affairs Manager Homan and Homeland Security Secretary Nominee both stated that they will push for massive deportation plans. However, large-scale deportation actions face high labor costs and obstacles in processing immigration court procedures; Trump can start by terminating previous Biden administration asylum applications to speed up the deportation of illegal immigrants. Tariff policy: some policies can theoretically be immediately effective post-inauguration. The implementation of increased tariffs can be categorized into three types: 1) invoking the International Emergency Economic Powers Act (IEEPA), the president can implement tariffs on Mexican imports without the need for congressional approval or specific investigation procedures, with no theoretical upper limit on tax rates. In 2019, based on IEEPA, the U.S. proposed a 5% tariff on all Mexican goods imported into the U.S., increasing every month until it reached 25%. 2) Under domestic trade laws, including Section 301, Section 201, and Section 232. Since the U.S. has conducted Section 301 investigations on most Chinese exports, if tariffs on existing items on the list are increased, there is no need for a new investigation and they can theoretically take immediate effect. For items not on the existing tariff list but covered by the Section 301 investigation, a hearing must be held, lasting approximately 2-3 months. 3) Legislation through Congress will take longer, canceling most-favored-nation status, implementing reciprocal tariffs, and comprehensive tariffs all require congressional approval. However, there may be some disagreements or legal obstacles to imposing a uniform 10% tariff on all countries. Tax policy: needs a simple majority, must be legislated before 2025. Considering that most of the individual income tax provisions in the 2018 tax reform law will expire in January 2026, Trump may advance tax cuts soon after taking office, unlike the shift to tax reform in 2017 after the failure of the healthcare reform bill in the previous term. The Republican Party can still push for tax cuts through the "budget reconciliation process", requiring only a simple majority (51 votes) in the Senate. Therefore, if legislation is to be completed before the 2026 deadline, tax cuts may need to be completed through the "budget reconciliation process" by 2025. However, tax cuts may further increase the fiscal deficit; the Tax Foundation estimates that Trump's tax cut policy may reduce tax revenues by $7.8 trillion over the next ten years, an average reduction of approximately $770 billion per year, equivalent to 17% of fiscal revenue in 2024. Energy policy: will take longer and require bipartisan cooperation. Under the current energy policy framework, 1) exiting the Paris Agreement and expanding energy development does not require Senate approval, but exiting the Paris Agreement still requires a one-year notice period. 2) Repealing the subsidy policies in the Biden administration's Inflation Reduction Act will require the budget reconciliation process; 3) other environmental regulations require congressional approval. This advancement path is essentially the same as the previous term, with the order of tariffs possibly being expedited. At the beginning of his first term in 2017, Trump rapidly implemented policies, signing multiple executive orders and presidential memoranda to restrict and weaken the Affordable Care Act, withdraw from the Trans-Pacific Partnership, renegotiate the North American Free Trade Agreement, and begin deportations of illegal immigrants. Looking ahead, key milestones include: 1) The implementation of the "first hundred days in office" after officially taking office on January 20, 2025, when the new president may announce a series of policies and executive orders; 2) The State of the Union Address in February, when the new president usually outlines his legislative agenda to Congress.3) In April, the government will announce the budget for the fiscal year 2025, which may provide more key details about infrastructure, tax cuts, and other important legislation.Evolution of the "Trump Trade": Inertia in the Short Term, Postponement after Taking Office, Waiting for Subsequent Policies The "Trump Trade" still has inertia in the short term. Looking back at the performance of assets after the 2016 election, the "Trump Trade" quickly heated up from November 2016 to January 2017, and the first wave of postponement came from the formal assumption of office, when asset expectations were relatively fully factored in. This is also why we suggest in the previous section to pay attention to important subsequent time points. Therefore, in the short term, it is not ruled out that there may still be further inertia in the development of the Trump trade, with assets that have less expectation of Trump's policies needing to compensate to a greater extent, such as gold, the Chinese market, and the supply chain. After taking office, the progress of policies will directly determine whether the "Trump Trade" will be postponed or reversed. Taking the experience of the previous round as an example, after taking office in January 2017, the Trump trade started to slow down. The unexpected setback in late March came when healthcare reform, which Trump put at the top of his priority list, encountered obstacles within the Republican Party in the House of Representatives, becoming a turning point for the postponement of the Trump trade. The release of the tax reform framework at the end of September and its signing on December 22nd revived the Trump trade, but the implementation of tariffs in March 2018 directly led to a sharp drop in copper prices. This time, healthcare reform was not the top priority, so the progress and smoothness of these key policies will directly determine the progress of the Trump trade: 1) Policies such as tax cuts and infrastructure that have a clear boosting effect on risk appetite, if implemented smoothly, may further strengthen the performance of U.S. bonds, the dollar, U.S. stocks, and pro-cyclical sectors. Conversely, U.S. bonds and the dollar currently provide some "contrarian" trading opportunities, as delays in the implementation of the aforementioned policies may lead to more intense contrarian trades; 2) If tariffs and immigration policies are implemented quickly and to a greater extent than expected, this may intensify concerns about inflation and disruptions to assets of trading partners. Considering the scenarios outlined above, we tend to see a short-term postponement or reversal after taking office, followed by a reactivation after policy progress. Impact in the Longer Term: Policy Thinking and Macro Environment May Be Very Different from the Previous Round When analyzing the impact of Trump's governing strategy, a major reference point is still the first term from 2017 to 2021, such as his business experience, which may make some policies seem tough in the early stages but actually leave room for negotiation, and even the tough stance itself is a negotiating tactic. However, we are concerned that in a certain sense, the current policy thinking and macro environment may be very different from the previous round. If this is indeed the case, there may be a significant risk of the market underestimating its impact. In terms of governing strategy and political environment, Trump's base is more stable and concentrated, and his policy thinking may have evolved: 1) Stronger control of political resources: In this election, the "Republican full victory" can better support the advancement of Trump's policy proposals. Not only that, if the popular vote is considered as "the people's will", the Republican Party has also surpassed the Democratic Party in the popular vote for the first time since 2004, with Trump leading with 50.1% of the popular vote compared to Harris's 48.3%. 2) Trump's final term: U.S. presidents have a maximum of two terms, so without a reelection bid and pursuit of future political legacy, his governing strategy may be different from the first term. 3) Core supporters and the policy stance of the younger generation of the Republican Party: Whether it is Vice President Pence or Cabinet nominees, their political views are highly consistent with Trump and the Republican Party manifesto, and may even be more hardline, which may also affect the direction of policies in this term and the foreseeable future. In terms of the macro environment, the economic environment facing the U.S. and the world is also very different from 2016. Over the past three years, the three major macroeconomic pillars inadvertently supported by the U.S.: large fiscal policy, technological innovation, and global fund rebalancing, are the core reasons for the continued strong performance of the U.S. economy and stocks. This is very similar to the strong growth, large fiscal deficits, and trade deficits ("twin deficits") of the Reagan era, but with a strong dollar and continuous influx of foreign capital, forming a reinforcing "Reagan Great Loop", which uplifts U.S. assets through large fiscal policy and capital inflows, but also increases pressure on other markets, resulting in a divergence between the dollar and non-U.S. assets. Trump's many policy proposals may potentially strengthen or even solidify these three macroeconomic pillars. Of course, this situation is not stable; it will increase U.S. debt burdens and unsustainability, and also increase the fragility of the global trade system. This is how the subsequent Plaza Agreement devalued the U.S. dollar competitively, leading to significant appreciation of the Japanese yen and German mark and stimulating domestic demand. But before this fragile balance is broken, the impact of the "Reagan Great Loop" on global assets is profound.