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November 25, 2024

The Next Treasury Secretary’s Plan to Secure America’s Future

After some last minute jockeying by rivals, President-elect Donald Trump has chosen to put forward hedge fund manager Scott Bessent as the next Secretary of Treasury for the United States. Bessent is focused on growth as well as fiscal discipline. His nomination led to upside in both the stock and bond markets today.

In contrast with Janet Yellen, the current Treasury Secretary, Scott Bessent does not hold a Ph.D. or have a background in academia or government. Rather, he is a true creature of the markets, a “global macro” investor who specializes in currencies, interest rates and anticipating broad economic shifts.

Bessent was an outspoken advocate for Trump throughout the campaign. He has been seen as a contender, perhaps the lead contender, for several months, although in recent weeks, competition emerged from other interested parties.

The most serious alternative appeared to be Howard Lutnick, Chairman and CEO of Cantor Fitzgerald, a diversified financial institution that built its Wall Street reputation on superior trading execution. More recently, Cantor Fitz, under Lutnick’s leadership, has been focusing aggressively on opportunities in cryptocurrency and other emerging technologies.

Lutnick, a long-time Trump supporter and fundraiser, will instead have a seat in the new administration as Commerce Secretary. In this capacity, he will play an important role directing Trump’s industrial policy, which includes coordinating important infrastructure activities related to energy and tech.

Market maven

The capital markets tend to prefer stability, predictability and proven competence, which explains the positive reaction to the Bessent appointment. While prior Treasury Secretaries have had a Wall Street background, Bessent is a true money manager and arguably possesses a level of sophistication and familiarity with financial instruments that is unprecedented for the role.

Bessent has been trained by some of the most legendary investors on Wall Street, including Jim Rogers, Jim Chanos and Stan Druckenmiller. He previously held a senior position at Soros Fund Management, which has quite understandably raised eyebrows among conservatives.

It is important to understand that George Soros’s money management operation, which has been a major presence in the financial world for decades, is totally separate from his political and philanthropic activities. One can view Soros’s political activism with deep disdain while acknowledging Soros Fund Management has been home to some of the best investors in the industry, including, to be fair, George himself.

Bessent’s expertise is in global macro investing. While many if not most investors are focused on companies and their prospects, Bessent focuses on the big shifts that occur within the economy, which manifest themselves in movements in bond yields, exchange rates and other major market variables.

Having a seasoned and successful global macro investor as Treasury Secretary presents a remarkable opportunity. Bessent should have a depth of understanding of the connection between economic policy and macroeconomic outcomes that would elude even leaders of major financial institutions.

3-3-3

Scott Bessent has put forward what he has described as his “3-3-3” plan. He drew inspiration for the plan from former Japanese Prime Minister Shinzo Abe’s “three arrow” economic agenda.

Shinzo Abe was the longest serving PM in Japanese history. Tragically assassinated in 2022 after stepping down in 2020 for health reasons, he left a legacy of deep structural reforms meant to reinvigorate the stagnant Japanese economy.

Shinzo Abe was also a dear friend and confidant of President Trump. Trump was said to be shattered by news of his death. Abe would not deny that he nominated Trump for the Nobel Peace Prize in 2019 (a secret process).

Few people know what a great man and leader Shinzo Abe was, but history will teach them and be kind. He was a unifier like no other, but above all, he was a man who loved and cherished his magnificent country, Japan. Shinzo Abe will be greatly missed. There will never be another like him. - Donald Trump

Abe and Trump at Mar-a-Lago

The Japanese economy—dragged down by deflation, low population growth and a private sector that historically lacked focus on shareholder value creation—is today seen as quite promising by many leading global investors. Much of this improved outlook relates to the structural reforms that have followed the “three arrows” of Abenomics: looser monetary policy, fiscal stimulus and deregulation.

The U.S. economy faces much different challenges versus Japan, but Bessent, like Abe, wants to galvanize political capital around the most pressing economic priorities. His 3-3-3 plan consists of (1) restricting the budget deficit to 3% of GDP by 2028; (2) targeting 3% real GDP growth through deregulation; and (3) producing an incremental 3 million barrels of oil or equivalent per day.

Bessent’s focus on budgetary discipline is welcomed by the capital markets, given the potentially inflationary impact of excessive government spending.

While Bessent favors extension of the earlier Trump tax cuts, he simultaneously wants to see a freeze in discretionary spending growth. One presumes Treasury will work in close coordination with the Musk/Ramaswamy-led Department of Government Efficiency (DOGE) to restrict federal spending and eliminate waste.

Implementing tariffs

While many on Wall Street are deeply wedded to free trade orthodoxy, Bessent has embraced Trump’s support for smart tariffs as a negotiating tool, a method of revenue generation and a way to promote U.S. industrial priorities.

Investor concerns about the imposition of tariffs are not without some basis, however. Any form of taxation can be disruptive to economic activity, especially if tax policies are crafted in a clumsy way. Perhaps the most reassuring element of Bessent’s appointment is that he will likely be extremely sensitive to potential market reaction to White House policy.

Academic economists and banking industry leaders may certainly have a decent read on the consequences of policy decisions. But an individual who has spent his entire career living and breathing financial market behavior arguably has a heightened perspective on these matters. Nothing sharpens the senses like direct responsibility for billions of dollars of investor capital.

Non-inflationary growth

One of the biggest challenges Trump will face, which will also be one of the most important areas of focus for markets, is the question of whether he can deliver economic growth without putting upward pressure on inflation. To the extent tax cuts and deregulation drive increases in economic activity, there is the risk of demand outpacing the economy’s capacity to produce.

When inflation is anticipated, long-term bond yields tend to rise. Rising yields are not only a headwind for the stock market, they present a severe challenge to the federal government as the U.S. tries to grow its way out of the enormous $36 trillion debt burden that Trump is inheriting.  

Bessent has demonstrated an understanding of the careful balancing act required here. He recognizes the need to create the conditions for non-inflationary growth through spending discipline and supply-side expansion in energy markets and elsewhere.

The positive market reaction to Scott Bessent’s appointment—along with the enthusiastic endorsement of so many well-known investors—does not surprise us.

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