So much for the Trump honeymoon with Wall Street and hedge funds.
Yes, Pershing Square Capital Management’s William Ackman famously woke up the morning after the election a born-again Trumpite. And Third Point’s Daniel Loeb last week pledged allegiance to President Donald Trump’s policies. But Tuesday’s New York Times report that Baupost Group’s Seth Klarman expressed detailed concerns about Trump in his year-end letter highlights just one among a growing number of hedge fund managers worried about the new president’s policies and inconsistent ideology.
The managers’ wariness toward Trump counters the widely held narrative that Wall Street and the business community at large are giddy over the potential benefits of Trump’s promised agenda, including massive tax cuts, repatriation of overseas corporate cash, a major Democratic-like infrastructure spend, and the curtailment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and other regulations.
According to the New York Times, Klarman told clients, “Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers.”
Klarman also expressed skepticism over Trump’s plan to bolster inefficient and uncompetitive enterprises in the face of automation and globalization. “The reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off,” added Klarman, one of the most respected investors, who has been managing his Boston-based fund for about 30 years.
Last week Bridgewater Associates founder Raymond Dalio expressed concerns in a note to clients about Trump’s populist policies after embracing his economic policies following the election.
Meanwhile, David Einhorn of Greenlight Capital said he continues to hold gold as one of his longtime major long plays, explaining that Trump does not hold “any core policy beliefs and is apt to change his mind as he sees fit.” He warns in his fourth-quarter letter this will lead to more political and economic uncertainty and less stability. “There has been a knee-jerk decline in gold since the election, as investors presume that higher short-term rates are good for the dollar and bad for gold,” states the report, signed by the firm.
“Ultimately, we believe the case for gold is broader: greater economic, geopolitical and policy uncertainties, much wider budget deficits and the possibility of an inflation problem all support gold,” the hedge fund manager’s report says, adding a snarky comment about “what might be required to decorate the White House” to Trump’s tastes.
Maverick Capital’s Lee Ainslie III also expressed concern about Trump in his fourth-quarter letter, dated January 17. The Tiger Cub tells clients “the list of disparate objectives and potential policies” among Trump, his cabinet nominees, the House, and the Senate “is large and seems to grow daily.” Ainslie also worries that the range of important foreign policy issues “has arguably never been higher.”
Ainslie warns that proposed trade and tax policies could be inflationary and boost the deficit, and he worries about Trump’s “habit of sending random and sometimes bizarre tweets in the early morning hours.” He adds that “such uncertainty on a vast range of critical issues will likely breed higher volatility in the equity markets.”
The firm that seems the most spooked by the Trump presidency is Clint Carlson’s Carlson Capital.
In a fourth-quarter letter, the Dallas firm explained why it fears Trump following through with his threats of a trade war. “For the U.S. to reduce corporate tax rates and incentivize manufacturing, U.S. policymakers intend to tax imports and subsidize exports,” the firm states. “This reverses Bretton Woods 1.0 and 2.0 and will likely set off a trade war.”
Carlson adds that either Trump’s proposed border tax system or a tariff will cause the U.S. current account deficit to shrink, which in turn will cause the dollar to appreciate. This will put pressure on emerging markets to raise interest rates aggressively to defend their currencies.
“Worse still, corporations in those regions have built up U.S. dollar denominated debt to manufacture and export goods to the U.S.,” the firm’s letter elaborates. As this will cause interest rates to rise, Carlson worries that in the short term “the dollar will overshoot as foreign corporations rush to pay down this debt.”
And just as paying down dollar debt becomes more expensive in their local currencies, foreign corporations’ sales will decline due to falling U.S. demand, according to Carlson, which worries that a “border adjustment mechanism” may cause “a global depression and a major equity market decline.”
It couches this assertion that it is still unclear whether it will happen. “But at the very least we expect that U.S. trade policy will put downward pressure on global growth,” Carlson adds.
Suddenly, November 8 seems soooo long ago.
