The Enduring Legend of Robin Hood
There is much folklore about Robin Hood, but the essence of the story and the legend is essentially consistent: “steal from the rich, give to the poor.” Robin Hood rebelled against the tyranny of the Sheriff of Nottingham and defended the interests of the common folk that wanted to earn a living and feed their families. We can debate the historical evidence that supports the existence of a man called Robin Hood, but his legend prevails across film and literature.
Trump as the Modern-Day Robin Hood?
Donald J. Trump, 47th President of the United States and presumed billionaire may not resemble the image of the legendary Robin Hood, but he was swept into power on the promise of reclaiming American jobs from foreigners and immigrants. His rallying cries, however, weren’t just aimed abroad—they targeted enemies both foreign and domestic. Washington elites, offshoring producers, and foreign competitors all came under fire. The Trumpian ethos boomed through Twitter feeds and news articles: Drain the swamp! Stop the offshoring! They’re stealing our jobs!Cutting through the noise, Trump fashioned himself as the modern-day Robin Hood—shouting down the powerful in the name of the common man.
Trump’s “Bow and Arrow”
Robin Hood used his bow and arrows to take back the taxes and tolls by robbing the treasury as it passed through the woods. President Trump has proposed “universal baseline tariffs” of 10% on imported goods to help fund permanent tax cuts. These protectionist measures are expected to “supercharge our industrial base.”
Each new president and their administration receive a mandate to govern. Trump and his merry band are working hard to establish the new policies they’ve created to realize their mandate. But policy change typically follows a process: first comes debate, then revisions and constraints, and only then implementation. Financial markets seem ill-prepared for a straight to implementation approach and fine tune by tweet.
Policy Implementation and Market Reaction
It is difficult to isolate the number of trillions of dollars that were impacted by the “Liberation Day” approach to a policy announcement but there was a clear market correction in stock prices and bond yields. Volatility has been elevated by the various Executive Orders that are still making it difficult to predict, plan and invest. The cost has been high, but it is important to look further at what is changing, and where the opportunities lie.
Market Implications
If we accept that when the smoke clears there is a 10% tariff on all finished goods that enter the United States, then it would be effectively equivalent to a tax on consumption of up to $320 billion. This may not be enough to permanently fund the tax cuts unless an extra 10% is added from $420 billion of Chinese imports in 2024. At this point, the math is still a little suspect but the argument for spending cuts probably gets them into the ballpark.
A quick high-level review of market implications supports the correction that we’ve seen. Using a simplified approach that considers revenue and margins quickly finds reason for revisions to lower earnings. A lower multiple of the lower earnings drives a meaningful price impact. Multiples get lowered when expectations for growth are cut due to higher taxes, lower margins, or spending restraint.
The Unwinding of Globalization and Productivity
Looking deeper into corporate income statements gives further insight into the outlook for growth. Globalization has been a huge source of margin gains for corporations as they sourced supply chain efficiencies, creating economies of scale in cheaper labour jurisdictions. This is a key target for change in the new administration. But it is expected to unwind rather methodically as companies consider where to build alternative plants.
Globalization has been an important driver of productivity gains through offshoring of factories and lower cost labour. The Trump administration is proposing to reverse these gains through an aggressive tariff regime to incentivize corporate America to repatriate these jobs. Tariffs will cause productivity losses for corporations (robbing the rich). As an offset to these productivity losses, there are policy initiatives that propose deregulation and making the income tax cuts permanent. By shifting the debate from external sources of productivity to domestic sources of growth, policymakers could offset some of the impact of the tax increase from tariffs.
Uncertainty and Opportunity in the Aftermath
The net effects and ultimate outcome of Trump’s policy initiatives remain largely undetermined. For now, there is greater certainty around tariffs, as the tax is already being collected. While their legality may be in question until the House of Representatives initiates and passes a bill that is signed into law, the tax is nonetheless being enforced. There is less certainty about replacing the lost source of productivity growth. Will the income tax cuts become permanent? Will those cuts translate into productive investment? Deregulation is the last piece of the puzzle that remains largely unknown. Until further clarity on policy, it seems unlikely that stocks can magically recover the year-to-date losses. However, elevated levels of volatility can still produce opportunities in the option markets.
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