Podcast - Tariff turmoil, Trump 2.0 and a big beautiful bill

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

Moz Afzal:
Welcome to Beyond the Benchmark, the EFG podcast. If you are regular listeners, you're probably wondering what on earth has happened to Moz's voice? A little bit croaky have been on a global tour already so far this year, and a nonstop talking has finally caught up with me, but I'm very pleased to say I have Dan Clifton from Strategas here with me. Dan, welcome.

Dan Clifton:
Well, good morning. Thank you for having me. 

Moz Afzal:
Yeah, I'm really looking forward to it. And the good news for many of the listeners is that you won't hear my voice too much. It will be down to Dan. So Dan, maybe we kick off straight away. Trump 2.0 in your assessment, how has he started?

Dan Clifton:
Well, Trump 2.0 is very different than Trump 1.0. The way I like to talk about Trump 2.0, or at least to think about it, is this is a president, he's the first president since 1893 to win a second US presidential term that wasn't in a non-consecutive manner. So here's a guy who has second term experience, but he has a first term energy going into that. What I mean, we started to really see this around inauguration weekend where the supporters of the president were like, Hey, we got shot at, we almost went to jail. And then we ended up winning the popular vote, winning all the swing states, and it felt a lot like the Obama inauguration when Obama had first won of just this kind of hope and these are all the things that we can do. So very aggressive on that. And then why the experience matters is they knew where all the levers were because they had done this once before, so they were able to move in a very aggressive fashion and immigration and energy and deregulation and trade policy very, very quickly and get a lot there.

So it was like drinking from a fire hose those first couple of weeks in terms of trying to understand what is actually happening from a policy perspective. But let me just give you a couple of quick points. Number one, Trump won on inflation and immigration and he got the immigration stuff done. I mean, he closed off the border. There is no flow coming into the US. Well, I think it's been the big differences on inflation is that a lot of voters thought that they were going to get back to a 2019 economy that when he was in his first term, and in fact what he did was he actually got more anxiety over all this tariff and trade policy issue. And so what we're seeing in Trump's numbers is for the first time since he became president in 2017, he's really underwater on the economy. Even during the height of Covid when he had double digit inflation, double digit unemployment, he was still not viewed as bad on the economy by American voters.

And so he's been underwater. Now we have seen improvements, we call it the Peter Navarro de Scott Bessent handoff when Peter Navarro was in charge. They were aggressive on tariffs. Trump's numbers came down. Since that baton has been passed to the treasury secretary who's created a more orderly trade policy and has begun to kind of reduce those level of tariffs and create these kind of trade discussions with other countries, you've seen Trump's numbers begin to rebound. And I think you'll start to see that in the consumer sentiment numbers. So much more aggressive, very active on trade policy, it's created a bit of anxiety moving forward, but now you're going to start seeing the rest of the agenda coming through. And these are things that we'll talk about today, the passage of the major tax legislation, what can happen on deregulation, and you'll start to see more and more of that.

But this has been trade policy first and foremost. And it's interesting when I spoke at your conference in January and what we had on the podcast is we talked about this idea that we were going to get a lot of liquidity and a lot of liquidity with cushion on bond yields and the dollar probably help European equities. But one of our main points was Trump will never do 500 billion of tariffs in one quarter and he not only did 500 billion Moz, he did 600 billion in one quarter. So definitely the tariffs came in higher than expected initially, and now they're starting to walk that back and getting to a more normalised process.

Moz Afzal:
Yeah, let's tackle tariffs first then before fiscal, obviously he's now got this TACO catchphrase phrase, which is clearly now how do you think he'll react to that first of all? And the second thing is, where do you think we are now in terms of market and people's perception of overall tariff burden and where do you think we'll end?

Dan Clifton:
Yeah, the president stated the union to Congress in early March was a defining moment. The president had a long laundry list of all the tariffs he wanted to do, and when you add that up, it comes out to over 600 billion, it almost comes out to 700 billion of tariffs. And I think right there at the beginning of the march was a uhoh moment for the market where they were like, whoa, these tariffs can be bigger than what we had anticipated. So that's the whole lead off to April 2nd. And why that's an important background is that on April 2nd, the president just basically threw everything out onto the table at once and basically said, here's the worst case scenario. And what you've seen is a dramatic market reaction and a dramatic political reaction that said, okay, we need to start making some changes, like should auto parts be in auto tariffs?

No way. A lot of people in South Carolina, Michigan are going to lose their jobs if that's in there. So they pull that back. They realise having 145% tariff on China is not tariffs anymore. It's an embargo. And yes, it hurts China, but the shelves are going to be empty here. The small business owners aren't going to be able to get their parts here in America and they're going to have to lay off employees. So what they started to do was to begin to tweak those tariffs and they got them down to a level. So we went from about 685 billion of tariffs to about 240 billion of tariffs. And that's an important change because when I'm at 240 billion, I can sterilise a bit of that through fiscal policy and the market can digest it a little bit better. So we've seen the worst case scenario, directionally it's getting better.

And then on top of that, you get this massive court case that happens that says no, the president has basically over exceeded his authority on tariffs. They threw out 90% of his tariffs in that court decision. That's the 10% universal, that's the reciprocal, that's China, that's Canada, and that's Mexico. And so now you're going to see more uncertainty actually because those tariffs went away, where now you got to go through the court systems and the first thing that I would point out to you is does Trump get a stay on that court decision that allows those tariffs to still be collected? If Trump doesn't get a stay on that the next couple of days, at some point they have to stop collecting those tariffs and that's a really big deal. But we anticipate that this will go all the way to the Supreme Court. We're at the beginning of a long court battle and it's got to play itself out.

My sense here is that from an investment perspective, Trump has all the legal authorities to be able to reimpose these tariffs in a legal structure. And he can do that through different mechanisms like section 3 38 of the 1930 tariff Act. And if I was them, I would start doing that right away this morning. I would start the clock, get it started. But he has definitely alternatives where the status quo on tariffs doesn't change very much. I think most importantly though, he's losing his main leverage to get countries to negotiate with them in areas they probably wouldn't have negotiated before. And what the Trump team argued in court over the last week or so is that if the court throws out these tariffs, it would, their words, kneecap their ability to get these trade agreements. And so the president really wanted a trade agreement at the G7 in mid-June.

It's what he was pushing for. But if I'm Europe or another country, why would I sit down and do a negotiation with them while those legal authorities are up in the air itself? Maybe there's geopolitical considerations, but the main reason is now gone. And so that's why if I was Trump, I would just say, Hey, forget what we did on the International Economic Emergency Power Act. Let's just go and do what we know that we have the legal authority for, try and get those tariffs back in place so that I get my negotiating leverage back into effect. And that's what we'll be watching for over the next couple of days. But this is a major event. I mean, that could affect fiscal policy, it could affect trade policy, it could affect monetary policy given how much emphasis Jay Powell has put on these tariffs and thinking through monetary policy. And it's great. I mean every month we get these big events from Trump. He definitely keeps it interesting. And last night was as interesting as it comes.

Moz Afzal:
So I was going to ask just a quick follow up. So we're thinking about a pause now in terms of these crazy comments he’s been making, Europe it was last Friday, then he rolled back over the weekend. So are we going to see a stop of that or do you think that just carries on in the background?

Dan Clifton:
Yeah, I think the TACO reference that you put out, Trump always chickens out on tariffs is probably not the right view to have about the tariffs itself. And so what I see is that Trump went in, he went all in, now he's trying to get some sort of negotiation. He never fully wins, but he is getting policies done that probably wouldn't get done ordinarily. I was very taken back by the decision on Friday to go after Europe. I get it. The Europe negotiations are going slow. There are a lot of decisions that need to be made that are very tough for Europe to make. US agriculture the value added tax. And he said, okay, let me go speed this up. But the reason why we were taken back by it is he set a 50% rate. What we think is happening in the White House and Treasury is that they have a model and that model adjusts where the maximum revenue is from those tariffs and 50% is way beyond the revenue maximisation level.

So I often joke the treasury secretary was out of the country at the G7 finance minister's meeting and Peter Navarro got to sneak in that White House again and played at Trump's worst instincts, and then they showed Trump the revenue model over the weekend and all of a sudden that walked itself back. So I get the TACO reference, I'd be very careful using it because you're only going to stoke them to do something down the road itself. But I do think that we're in a much more manageable situation on the tariff side, by the way, it's all bad. I mean it's like 250 billion tariffs. It's bad. It's going to hurt growth, it's going to hurt earnings, but it's more sterilizable.

My colleague Courtney has really developed great research on what's called policy uncertainty. And in April we had the highest level of policy uncertainty ever on record. Now think about that, that's like more than March of 2020 when we were locked in our houses and didn't know we were going to die. So it always seemed a bit extreme to us. But what Courtney has developed is this idea that when you get these big spikes of policy uncertainty like you saw in March and April, you get very good equity market returns 3, 6, 9 and 12 months down the road because policymakers get burned on the stove and then you begin to see those corrections. And so I think directionally we're moving in that area. The question is, is Trump going to reimpose these tariffs? We think he will. And then can we sterilise those tariffs through the tax bill to a certain extent, we probably can, and a lot of this starts to become a little bit more manageable.

Moz Afzal:
So let's move on to the tax bill now. So obviously it made it through phase one, but the sense we have is, and everyone he has is this is just not great. The generally view is not great and it probably will be amended and probably won't survive as in its current form. Do you want to just walk us through that and what do you think the big potential surprises could be?

Dan Clifton:
Yeah, awesome. So Congress has to do with tax bill before the end of the year. We have about 400 billion of tax cuts that expire on December 31st. If Congress doesn't act, those tax rates will go up. It will primarily hit middle class families and it will probably lead to a recession in the United States. So congress will act. It's not a question of if it's a question of when and how. And rather than just doing a simple extension, they're trying to make it a bit more comprehensive. And the reason why I bring that up is that this is the first time in 30 years that the bond market is paying extremely close attention to a US fiscal policy measure. I know in 2011 debt ceiling about whether we were going to go off the cliff and all that, that's all interesting to us. But what has happened is that the US interest costs has surged, and when it goes over 14% of tax revenue, the bond vigilantes come out.

And the good news is we've been below that for 30 years, we're now above it. So Congress can't just do what they've normally done over the last 30 years and simply extend these tax cuts. They got to pay for it. So one big part of this bill is that there's a trillion and a half dollars of spending cuts that are in this bill, and those spending cuts are on renewable energy projects in the inflation reduction Act. They're on student loans, they're on Medicaid, they're on food stamps, this is spinach and this is spinach at a size that we have never seen before. So then they say, okay, now we need a little bit of candy in this bill. So what they do is they extend the tax cuts and then they add some other provisions to the bill. On the business investment side, they allow companies to write off a hundred percent of their cap goods purchases.

So if you are going to make an investment in the US and cap goods, you could write it off. If you do R&D  research and development, you could write that off for the first time ever. If you want to build a factory in the United States, you can write off a hundred percent of your factory purchases we've never done. There is a real chance that if this bill makes it through in this way, you're going to get a factory building boom in America because the tax wedge is so advantageous to do that, we may wind up overbuilding and have empty factories here based on this. Right? So that's what they trying to do on the business side. And then on the consumer side, they kind of plused up some of these tax cuts. So higher child tax credit, higher standard deduction, and then you got Trump's political stuff in there, no tax on tips over time and social security.

So I look at it and I'm like, eh, there's some good, there's some bad, doesn't get me excited. And the tariff revenue coming into the US is so plentiful right now. They had enough revenue that they could drop the corporate tax rate from 21 to 15% and drop each individual income tax rate 2%. What that would've done would've been a full sterilisation of the tariffs. Instead, they chose the other way to do that. Okay. I don't think it's bad. I just think that the market response to it is they're extremely worried about the deficit. And so that's where you started to see the bond vigilantes come out. And what I've tried to argue is that the tariffs are not in the baseline. The tax cuts are not in the baseline. If you just look at the tax cuts, then you're missing what's happening on the tariffs.

And let give you this stat, the tax cuts are going to generate about a $2.3 trillion deficit increase over 10 years. The tariffs bring in about 2.1 trillion over 10 years. So over a 10 year window, it's going to kind of net itself out. What's happened here is that you're going to have a timing difference. You get a lot of stimulus upfront and you got a lot of spinach on the back end. So from that vantage point, you're going to get a slightly higher deficit. But it's interesting when you read the Moody's downgraded United States, they're talking about 7, 8, 9% of GDP deficits. And the way that we have it as we're basically flat at 6.3%, by the way, flat is not good, but there's a difference between an expanding deficit and a flat deficit. And the flat deficit means that there's tools that the treasury secretary has that could minimise the yield impact.

So I think that the consensus is probably overestimating the deficit impact. Now, I still haven't answered your question After all that, now it's going to go over to the Senate. The senate's got to figure out how to amend it. There's no consensus in the Senate because I got deficit hawks in the Senate. I got spending people who want to spend money. They're just as divided as the house was. And so what's happened here is that they're thinking about bypassing the normal committee process and just taking the house bill and having a series of amendments on the Senate floor and letting the will of the Senate amend the legislation. That's really interesting to us because what that's saying is that they're going to make five or six changes, and maybe they're not going to have as deep renewable energy cuts. Maybe they're going to add one or two tax provisions, but if they do go in that direction to speed up this bill, then you're largely going to get what you got in the house.

One other point on that, if they change it too much, they're going to lose that kind of fragile equilibrium that they have in the house of who just passed that bill. I mean, the Republicans have a two seat majority, we call it the five families, almost like the mafia of the Republican caucus in the house. You need all five families to pass this bill and it is going to be quite difficult. So the way that we view this bill is that it's going to modestly provide some near term stimulus in the business investment provisions. It's going to increase the deficit a little bit in the short run. And if you're a bottom up stock picker, there are direct policy investment themes in there that are not impacted by trade. But overall on a macro basis, without a corporate rate reduction or without an individual tax rate reduction, you're only partially helping the sterilisation of the tariffs.

Moz Afzal:
So what does that bring in terms of Powell's impact? If this does pass? Sorry, actually before we go there, when do you expect this to be completed?

Dan Clifton:
Awesome question. Yeah, we think that July 4th is an appropriate time to get this done. That's really hard for the Senate to do that given all the wide disagreements. That's why I'm intrigued by this idea that they would just amend the bill on the floor. It would clearly speed it up and get you closer to July 4th. The reason why I use holidays in America to do this, Memorial Day, which we just went through July 4th and in August recess, is that you don't want to leave this tax pinata hanging out there because what happens with a pinata  Moz,is that you can just hit it and hit it and hit it. And so if they leave it out over the August recess, they're going to get clobbered on it. All the spending cuts will be there. So I think it will be done by the first week of August.

It could get done by July 4th. And the reason why I think August is a more appropriate time for as a backup is that you're going to have to raise the debt ceiling in this bill. And as you get deeper into August, the treasury is going to start running out of cash before they need to raise the debt ceiling. So July 4th is the aggressive target. August is probably the likely outcome the first week of August on when this bill gets done. And that means that there will be no overhang for companies about whether these tax kits get extended, which we've seen in the past when they wait till the last minute, it could freeze up some investment. And there's enough uncertainty on tariffs right now.

Moz Afzal:
Yeah, because they probably need that if they want to write off those factory costs. So I think that's quite important. So how would you see then the Fed and the Powell thinking about the, well, I guess the tax bill?

Dan Clifton:
Yeah, so we got the Fed Minutes yesterday and the Fed Minutes continue this theme that the tariffs were larger than expected and they're going to have an outsize impact, which one increases inflation and lowers growth. And the Fed is making the point that the bias is towards higher inflation, which means that they are going to keep rates higher. If I do a deficit finance bill in the short run, that only fuels the Fed's thinking on what's happening. And it means that they're going to try and remain restrictive in monetary policy. That means that the Fed has to be right for that to play out over time. And I bring that up to you because the Fed was dead wrong in 2018 in trying to anticipate that the Trump tariffs were going to be inflationary. The Fed likes to talk about 2019, but they never talk about 2018 where they kept rates high and they thought that those tariffs were going to be inflationary.

And what was happening was that the economy was slowing down and financial conditions were tightening and it ultimately forced Powell to begin to make those changes. The reason I bring that up to you is that oil prices have been very low. I know we can talk about energy policy. Oil prices have been low. That's the basis of the Trump economic policies to get oil prices low, helps get inflation low. And there's about an 18 month lag on home prices and CPI and how that shoots into CPI into inflation, it's about 30% of inflation. So if you're going to get lower home prices and lower oil prices, it's going to offset some of the impact of those tariffs. And it feels like almost like the Fed is setting itself up again. And so the policy that Fed may have thinking about tariffs and thinking about this tax bill may ultimately change as we get to the end of the third quarter and fourth quarter if a lot of this kind of offset on inflation is there itself. So I think it's worth watching. The Fed seems pretty dug in here, not only Powell but the other committee members. So even if you convince Powell he is got to convince all the other committee members, and that seems like a hard thing to do, but I wouldn't be surprised if the Fed policy begins to change as you come out of it into the second half of this year and some of the data moves against the way they're thinking about the way.

Moz Afzal:
Yeah, I think the critical thing is the offset. Absolutely. So let's move on to what I probably call myself at least. One of the more successful periods so far, or policy so far has been on foreign policy and I thought the Middle East trip with all the business leaders and all the deals that were done, I actually did listen to the full speech that Trump did in Saudi Arabia, which I thought was actually definitely one of his better ones, thats for sure. It was pretty iconic for the region and hasn't really got much attention here. I would say. I don’t  know if you've got much attention in the United States, I'm guessing it much more than did here, but for me, I thought it was really important and maybe you could just walk us through that. And I guess for me, one of the implicit messages is, is the US administration or this US administration telling everybody around the world that since the second World War, we've been imposing our version of democracy all over the world. And if you don't follow us, you are an enemy implicitly, be it Vietnam, be it sort of Afghanistan, Iraq and so on and so forth. We've seen, and Russia of course, and the Middle East even. So Trump's coming in here with a very different worldview, i.e., we live with you and we're not going to force regime change, which obviously builds a lot trust with those countries. But talk us through that. I think for me that was quite, well, I think the commentators have not really picked that up very well.

Dan Clifton:
No, I think you're right on. It was one of the most consequential speeches that Trump has ever given one of the most consequential speeches on US foreign policy in recent decades. And I do think that you got the right implicit message from that speech overall. I will tell you that there was basically no coverage of that speech here in the United States when it happened, which is amazing when you think about it, you watch it and you're like, wow, this history happening here and it wasn't being talked. But let's just take one step back, and I should have said this right at the beginning, what we call Trump's overall world vision is the big casino. He's a casino operator in Atlantic City, New Jersey as you know. So we call it Trump's big casino. And on one side of that casino is what we see are tariffs.

And the idea here is that he's going to put tariffs on all over the globe and that's going to set up a big negotiation, which is a high stakes deal. Can I get all these countries to do what I want them to do instead of what you referenced, Hey, you got to do democracy our way, so if you don't do democracy our way, you're going to be an enemy. He's like, no, no, no, that's not what I need. What I need is for you to be aligned with us economically and that's the key. And if we're working together economically, then we're going to get along just fine. And he had terms for that. It was very clever on how he set that out. And you're going to have your own governance, you're going to have your own country. I think America first. You should think about your country first, but then let's figure out how to make business deals together.

Awesome stuff. Because when you look at it, the goal of Trump's policy is to get oil prices lower. How do you get oil prices lower? You get less geopolitical risk. I want to see a ceasefire in Russia, Ukraine maybe hard to get. That's what he's trying to get. I want to see the Abraham Accords get done in the Middle East. I want to get an Iran deal done and if I can get that, take that risk out, I drive down the price of oil. I'm driving down inflation, I'm driving down interest rates and it makes it easier to do what we're going to do. By the way, there are things that have happened with Trump's policies that may be unintentional or second derivative, but he always wanted Europe to spend more money. Europe is spending more money now, so hey victory, right? And I think one of the most consequential moments of the Trump presidency so far is does Zelensky Trump meeting in the White House in late February?

Trump and Zelensky could become best friends tomorrow and we can put 500 billion into the war in Ukraine, but you'll never be able to untake back that moment. I think for Europe, they realised, hey, not only do we got to spend money on defence, but we got to spend money on our own economy overall. And that changes the global economic outlook. It changes where you want to invest in fixed income and equities. I mean that was a major change. So this is a broad shift of US policy. By the way, it may reverse with President Rahm Emanuel in four years from now, but in a way I don't think it is. And the way that we thought about the world was Trump put tariffs on China in his first term. If the next president removes those tariffs, that would be interesting to us. And Biden said, I'm going to remove those tariffs.

And Biden got in office, not only did he not remove those tariffs, he increased those tariffs. That's all the politics of globalisation were changing. And I think there's a lot what Trump's doing here on foreign policy and trade policy that are going to be hard for any next president to undo unless there's a national security or depression. And this seems to be the direction that US policy is going in and where that message is most meaningful is in the Middle East where there's still a lot of don't tell us what to do kind of stuff. So I thought it was a very positive trip for Trump. I continue to believe that his foreign policy is where he is getting big wins, but I'll tell you that he is in a real box on Russia, Ukraine right now. He thought that there was going to be enough of an off-ramp from Putin. He's given him six chances to declare victory and in all six times Putin's like, Nope, not enough. It's the same list of demands yesterday that were the same list of demands a year ago. And I think they're caught off guard by how dug in Putin is. And a lot of people say, we warned you about this, but I always thought that they had a larger knowledge of something and it turned out not to be true. It's going to be problematic for them in the next 30 days.

Moz Afzal:
Well, certainly, and I think the Germans have also now committed a significant spend on Ukrainian defence. So I think it's all coming together and I think, I guess it'd be interesting to see if US and Europe are actually on the same side or appear to be on the same side at the moment. Putin's been good at creating the tension between them and manipulating it, but if they do come together, then that may be the force or the pressure that's needed.

Dan Clifton:
Absolutely. And I would just say that they made a decision, pretty important decision in the last couple of days to allow more longer range firing into Russia. So you're starting to see a little bit more coordination. It's probably just at the beginning steps, but the politics around Ukraine have changed.

Moz Afzal:
Maybe a discussion for next time, but it'll be interesting to see what China's role in that particular piece deal would be. Moving on to energy policy and obviously executive orders recently around nuclear United States is very, very far behind China, for example, and other major regions in terms of nuclear. How do you think about the energy policy? Obviously we talked about your price, we talked about drilling, and so how do you think this all wraps up? Because obviously strategically US is in a really tough spot with all this AI infrastructure build and so forth, it's really going to be quite challenge.

Dan Clifton:
Absolutely. So let me just start off from the view that I think the Trump administration came in. They thought that they can add about 3 million barrels of oil right away. We were already at capacity. So that kind of standard shifted to 3 million equivalent barrels because then they started talking about other fuels itself. I've been to Texas twice in the last month. There's deep concern in Texas right now because the price of oil is pretty low. The breakevens aren't being reached. So the quest for this idea of driving down global oil prices to benefit consumers and inflation will have some sort of negative feedback effect into the US economy and the Texas economy, places that are overwhelmingly Trump supporters overall. So at some point you're going to see that balance come particularly when the rigs come offline. Now you're into this AI build out and if you get this kind of factory expensing that we talked about, you're going to see that really begin to accelerate.

So you're going to need the power for that. And what we're doing right now isn't going to get there. So you need other sources and they're pushing nuclear. What's very interesting is the Republicans basically slash the nuclear tax credit in this tax bill and they had to put it back in. So you got it back in and you got the executive order on nuclear that you referred to before and just a real push to diversify out those energy supplies, try and get that build out done pretty quickly. I think it's going to be a big theme for the American economy moving forward in terms of where they're headed on that. It's interesting when we look at this kind of factory expensing, we think it's going to apply to LNG facilities, but we also think that it could apply to refiners, retooling and being able to more efficiently refine US oil and gas.

Right now we're producing a lot of light sweet crude or refining capacities built for heavy shower crude. Is this enough of an incentive to get those upgrades in place? If so, then you can start refilling the strategic petroleum reserve. And that's a way of helping US industry while you're dealing with these lower oil prices overall. So they have their hands full, they have to deal with oil, they have to deal with gasoline prices, they have to deal with natural gas, liquified natural gas exports, and they got to deal with the AI power build out. And for me that means that it's going to be a theme when you see all four of those there. And energy continues to be a theme, but we would favour natural gas production over the rest of them. And then obviously power generation to your point about the AI data centres.

Moz Afzal:
So last point I want to touch upon was on deregulation, obviously maybe it's a longer term agenda, but any sort of quick wins you've already seen. I guess if we are going to get the factory built out, knowing how long it actually takes to get permissions to build a factory, it could be five years before you can even start building in some places, but what are your thoughts around that?

Dan Clifton:
Yeah, the US economy is in what I would call a transition. A lot of the non foreign payrolls were what I would call typical government related, healthcare, education. And I think what the Treasury Secretary are trying to do get us into an economy where you're actually getting more private sector activity, less dependent on this big fiscal spend that you've seen since Covid overall. And so they've had some modest improvements in areas of deregulation. You look at this tax bill, I mean it privatises out the student loan industry. It adds more for-profit colleges. The immigration is a heavy privatisation because it's private operators that are doing that. So you're already seeing that in place, but what you're asking about is something much larger and that is that they're changing the rules to streamline permitting so that they can get these construction projects up fairly quickly. They've made some progress on that.

And then really where I think the meat and potatoes of deregulation are going to happen are in the banking right now. The US has to do Basel three rules. Biden had it. It was overly prescriptive. You're going to begin to see that change. And what I think the treasury secretary is trying to do is take a lot of the cash that's on bank balance sheets and be able to free and unlock that cash. So if you look at JP Morgan, they have like hundreds of billions of dollars of dead capital sitting there. And it could be magnificent what they do if they structure those rules correctly. And I think that's going to be in third and fourth quarter. So it's a little bit of a follow through overall. The last thing that I would point out to you that I think is completely underappreciated is that there's a real push to build a sovereign wealth fund here in the United States.

And right now it's on hold. There was a proposal sent to the president on May 4th. The president said, look, I want to focus on the tax bill and the deficit and get that through. But my sense here is that when you look at some of the news headlines that are out there, the Nippon - US Steel merger and the US getting golden shares for that, the privatisation of Fannie Mae and Freddie Mac and the US keeping an implicit guarantee, Japan trade negotiators talking about some sort of sovereign wealth fund. Those are indications that we are going there. And again, I'm just guessing, but I think what the US is going to do is they're going to take their plentiful gold holdings, they're going to put it through an agency called the International Development Corporation. They'll borrow against that. They're already hiring very sophisticated investment professionals with experience in commodities and minerals because that's what they're going to be investing for.

And then they'll have all these assets that they can hold inside that sovereign wealth fund. So that to me seems something that could be a bigger story in the second half of the year. What people say to me is, okay, Dan, four months ago, tariffs were the big issue. Two months ago the tax bill was going to be the leading issue. What is the leading issue today? And I think in two months from now, it will be this kind of creation of a sovereign wealth fund. And then a lot of it is about being able to invest in Ukraine and get those minerals out if they're there or what's happening in Greenland or being able to invest in the ports around Panama and building out the US fear of influence as the world begins to deglobalize. So it's a big change. The US has no business having a sovereign wealth fund. We don't have oil reserves or oil budgets surplus, but this is the way that you would do something like that. I think that that is going to be something that's going to capture the attention of investors in two months from now.

Moz Afzal:
Sounds very China-esque I would call it in terms of the objective. So maybe wrapping up, Dan's been as always an absolutely fascinating conversation. Maybe last comment for the rest of the year. If you had to pick out two things that outside of the normal sphere of people's thinking, what would you put them at?

Dan Clifton:
And just thinking about the rest of the year, if you think about the way we came in the beginning of the year and the way we did your podcast, we were like, liquidity is the big backdrop for the first half of the year that's gone on June 15th, it's gone, and once this tax bill passes, the debt ceiling gets raised, so you'll have less liquidity. Now you're operating on the fundamentals. So you're losing the cushion gets a lot harder from here. And I don't think what people are thinking about is that there's probably going to have to be big changes at the Treasury Department and at the Federal Reserve and how they manage type of liquidity drain. So we anticipate that you're going to see the supplemental leverage ratio change that will allow banks to buy more treasuries. It will allow treasury to have to be able to get more paper out onto the market.

There are going to be changes like the treasury not filling up the Treasury General account as much as they normally do. Usually it's 800 billion. Hey, why not do it at 400 billion or spread it out over a longer period of time, or the possibility of the Fed having to shift their treasury purchases to be more in line with issuance and to be more in line with shorter term debt so that treasury doesn't have to go out longer term with curve. And so what I'm arguing to you is that you're going to start seeing the challenges of this heavy debt in the second half of the year in a way that we haven't seen before because a lot of the natural cushions that were there for them are going to go away. I don't want people to think that that's like all of a sudden there's going to be a crisis, treasury and the Fed have the tools to be able to manage this. We're going to start seeing them employing the tools, and I don't think that's getting enough tension today.

Moz Afzal:
Okay. Well, we'll certainly look out for that. So Dan, again, thank you very much for again a great conversation and look forward to having you on again very soon.

Dan Clifton:
Great. Thank you, Moz.

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