Overview
Government in America is undergoing massive changes that will baffle historians for decades.
Donald Trump: Founder
Though he didn’t open its first restaurants, Ray Kroc identified himself as the founder of McDonald's. His aggressive cost-cutting and real estate strategy backed by tough negotiating tactics redefined Mcdonald's in his own image, and in the process sidelined the original “founders” of the company.
The parallel here is that Mr. Trump, an avid supporter of Mr. Kroc’s McDonald's, has founded a new vision for the Republican Party and, thus the country through a strong electoral win, support from the three branches of government, and the sidelining of the “neo-cons” or neo-conservatives such as the Cheneys, Bushes, and Koch brothers. With RFK Jr.’s assistance, non-traditional appointments are being proposed, with an apparent focus on loyalty and a willingness to break from prior norms. With the two firebrands—Mr. Musk and Mr. Ramaswamy—acting as “efficiency gurus,” we expect a complete break from the past and a significant reduction in the government footprint.
“In Your Face”
Perhaps the most startling nomination to date was that of Mr. Gaetz, who has been particularly aggressive in questioning the DOJ’s practices and has faced personal investigations by the DOJ and the House of Representatives for alleged illegal behavior. He shares federal scrutiny with Mr. Trump and Mr. Musk. We expect the media to have ample fodder over the next six months. The irony here is that the current administration was reluctant to fire anyone, whereas the incoming one seems to be considering firing everyone.
Military
Following the trend of firings, a board of former senior military officials is reportedly being formed to investigate the actions of senior defense officials. After believing he was undermined by some in his prior administration, we are told that Mr. Trump is considering loyalty as a key consideration. Likely high on the list of departures are those who mishandled the withdrawal from Afghanistan, while the list of new hires will likely include individuals skilled in newer forms of defense (e.g., drone and AI-based technologies).
Resetting Priorities
Supposedly, under the current administration, FEMA funds were withheld from areas that did not support the current administration.¹ We expect that, with new oversight, there will be a different approach.
China and Europe
In the case of China, we expect Trump to use tariffs and other measures to rein in the mercantilism and jingoism of Xi’s government. Similarly, Europe is likely to absorb a greater portion of its defense costs.
Relevancy
Regarding relevance for sophisticated institutional investors and risk managers, our view is that we are at a major inflection point. Just as the Reagan years are remembered as a major positive shift for investors, the current transition has the potential for similar, if not greater, gains. However, watch for the negative effect of tariffs if implemented (and not just used as a negotiation tactic). If Mr. Musk is correct in projecting over $2 trillion in annual savings in federal government costs (total spending in FY 2023 was $6.16 trillion²), there is room for massive disruption.
Sources
[1] https://www.nationalreview.com/news/whistleblowers-accuse-fema-of-mismanaging-funds-leaving-first-responders-idle/
[2] https://usafacts.org/state-of-the-union/budget/