Since Donald Trump won the presidential election, cabinet picks have been coming fast and furious. Some of them have led to many an eyebrow raised, but financial markets really couldn’t care less as to who is going to run health, education or how many departments are going to be run by ex-Fox News personalities. What they are concerned about is who will be running the divisions more closely related to economic policy and there are three main bodies – Treasury, Commerce and Trade. The reaction to the leadership picks for each of these has been positive and relieving at the same time, given what these individuals bring to the table.

Let’s start with last Friday’s announcement that Scott Bessent would be the choice for Treasury Secretary. Bessent is CEO and CIO of hedge fund Key Square Capital and spent most of his formative years working with George Soros and has a deep understanding of macroeconomics. While he has spoken publicly in favour of tariffs, he has indicated that they rank lower down in importance compared with lower taxes, controlling the deficit and reducing regulation. Indeed, the Treasury Secretary’s two main areas of responsibility are fiscal policy (read taxes) and managing the mountain of federal debt.

The Department of Commerce, on the other hand, is more focused on economic growth policies, economic data and analysis, as well as the census. Unlike Treasury, this is where any tariff initiatives by the Trump Administration would be crafted. The pick to lead Commerce is Howard Lutnick, who is currently CEO of Cantor Fitzgerald, a financial services firm based in NY. It is worth noting that Lutnick was Elon Musk’s pick for Treasury, so the fact that he takes the less prominent brief may be an indication that the influence of the world’s richest person isn’t as huge as previously thought. That said, Lutnick is better positioned (from Trump’s perspective) for Commerce. The role requires a strong connection with other business leaders, which Lutnick has, while the gentleman also supports tariffs and cryptocurrencies.

As for the Trade, the choice for who to lead the department was also pretty intuitive. Jamieson Greer is a trade lawyer and was also the chief of staff to the then Trade Representative in Trump 1.0, Robert Lighthizer. Greer supported the Chinese tariff strategy back then and does so today, but he has not been as aggressive on broader tariff initiatives. He could be key to another kick at the can in terms of North American trade.

The market’s response to the picks for these key economic cabinet positions has indeed been positive. Stocks jumped on Monday in reaction to Bessent’s nomination and volatility declined. Maybe, just maybe, the economic management under Trump 2.0 could be “normal” in the sense that policies would be well thought through and weighed against second-order effects on things like global trade and growth, as well the fiscal health of the U.S. Unfortunately, “normal” or “calm” doesn’t sit well with the incoming chief. And so as to not let us all get carried away with the notion that economic policies might be conducive to an extension of the economic cycle, Trump went to social media on Tuesday stating that in addition to tariffs on China, he would implement 25% tariffs on Canada and Mexico.

Unlike Bessent’s remarks about leveling the trade playing field with China, Trump is using tariffs as a way to crack down on illegal migration into the U.S., along with the cross-border shipping of street drugs. The CIBC Economics group put out a piece examining this latest announcement, which you can find here, and the verdict for now at least is that we just don’t know what will actually come out of the oval office on Trump’s inauguration. The “threats” could simply be an attempt at gaining leverage to drive a result which sees less migration of undocumented individuals, as well as drugs. For Canada and Mexico, showing results on this will be challenging – especially Canada – where the problem is a fraction of what is happening on the southern border. Nor is it logical to use a trade weapon to address a border issue, when it is the country receiving said problem flows that should be tightening up on access.

As we head towards inauguration, most analysts are converging on a base case scenario where a greater level of common sense in the key economic departments should limit the degree of chaos and clumsiness and the proposals under Trump 2.0 would create. This view also leans on the fact that not all of the policy prescriptions in Trump 1.0 saw the light of day. That said, the first foray into tariffs did have materially negative effects on the U.S. and global economy.

Certain sectors experienced dramatic transformations, such as the technology sector. Perhaps the most vulnerable to global supply chain disruptions, tech firms like Apple and semiconductor manufacturers faced significant challenges. Complex international production networks suddenly became strategic liabilities. U.S. farmers also became unexpected collateral damage, with Chinese retaliatory tariffs decimating export markets for soybeans, wheat, and other agricultural commodities. As for the intent of protecting and boosting U.S. manufacturing, domestic firms found themselves caught in a complex bind—protected by tariffs but simultaneously facing increased input costs and reduced international competitiveness.

The tariffs' impact extended far beyond bilateral U.S.-China trade. The International Monetary Fund estimated a cumulative reduction of approximately 0.8% in global GDP between 2018-2020 directly attributable to these trade tensions. Emerging markets bore significant brunt, with export-oriented economies like South Korea, Taiwan, and Germany experiencing substantial economic pressure. The post-World War II multilateral trading system found itself under unprecedented strain.

Contrary to initial administration projections, these tariffs acted as a de facto consumption tax with profound inflationary implications. Economic analysis revealed a startling fact, that was predicted by most economists. Approximately 80% of tariff costs were absorbed by U.S. importers and consumers, not Chinese manufacturers. The Consumer Price Index (CPI) experienced incremental but consistent increases. Some economists have estimated that tariffs contributed between 0.3-0.4 percentage points to overall inflation during this period—a significant but often overlooked economic impact.

While some key advisors and cabinet picks claim that Trump’s first go round with tariffs didn’t cause prices or inflation to rise, they forget that economic growth was stagnating, which acted as a cap on inflation. You can’t be as reckless with trade policy this time around as pipeline inflation pressures haven’t disappeared and tax cuts could reignite economic demand at a time when we are seeing costs go up because of tariffs.

In our discussions with clients since the election, the message has been straight forward. We are unlikely to see any major shifts in market sentiment before January 20^th as investors will want to see what the actual policy landscape will be before positioning one way or the other. After that day, the range of outcomes is so wide that one will need to remain highly liquid and be able to shift allocations quickly depending on whether calm or chaos prevails.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle