Wall Street Seems Unconcerned by Trump Rhetoric—for Now

By Jonathan Nicholson

June 2 — Presumptive Republican presidential nominee Donald Trump has raised the specter of U.S. bondholders taking a loss on their assets and of a trade war with China. Usually, that kind of talk from a major-party White House candidate would spook financial markets.

But in another display of Trump's apparent ability to defy conventional political wisdom with few consequences, U.S. financial markets to date have shown little reaction to his remarks. Theories about that abound.

Those ideas include: the markets discounting the possibility he will win the White House in November, or disbelieving that as president Trump would try—or be able to—follow through on his ideas. Some experts theorize that markets in general may agree with Trump, even if wonky Washington policy types don't.

Ultimately, it may take time to determine which of the competing theories wins.

Trade War?

Trump's economic rhetoric has often focused on international trade and the size of the U.S. government's accumulated debt. But his proposals on those issues have raised eyebrows among many economists (See previous story, 05/12/16).

Trump has said he will rewrite international trade agreements and has reserved particular scorn for China and the deficit in goods and services the U.S. runs with China every year. “Our trade deals will be renegotiated,” Trump said in a May 20 speech to the National Rifle Association. “We won't be having trade deficits of $500 billion a year with China anymore, folks.”

A day earlier, at an appearance on behalf of New Jersey Gov. Chris Christie (R), Trump dismissed concerns that his plans for countervailing duties against Chinese goods, if the Chinese don't open their markets, will result in a trade war. “Who the hell cares if there's a trade war?” he said.

Trump also raised the prospect that holders of U.S. government-issued bonds would accept less than full repayment for loaning money to the government, a stance he softened only days later. In an interview on cable business channel CNBC May 5, Trump said, “You know, debt was sort of always interesting to me. Now we're in a different situation with the country. But I would borrow, knowing that if the economy crashed, you could make a deal.”

“I don't want to renegotiate the bonds,” he said. “But I think you can do discounting, I think, depending on where interest rates are, I think you can buy back. I'm not talking about with a renegotiation, but you can buy back at discounts, you can do things with discounts.”

Trump said May 9 he only meant debt could be bought back if it could be repurchased on terms favorable to the government, not that he favored forcing bondholders to take a loss or a debt default. “You never have to default because you print the money,” he said.

‘So Surreal.'

For Wall Street, the stance may puzzling, at least for now.

“Some of the more outlandish things he has said on the economic front have been so surreal that the market has not known what to make of them. Investors may be wondering whether he will dial back the rhetoric after the convention,” said Lou Crandall, chief economist with analytical firm Wrightson ICAP in an e-mail.

Crandall raised the prospect of markets selling off in order to shed risky positions if Trump looked likely to win the White House. “At this point, a Trump victory would definitely trigger a risk-off trade to some extent, but it remains to be seen whether he will continue to push as hard for a big, beautiful trade war during the general election campaign as he has during the primary season.”

Doug Holtz-Eakin, president of the conservative American Action Forum and an economic policy adviser on Sen. John McCain's (R-Ariz.) 2008 presidential campaign, said a combination of doubt that Trump can move on his beliefs, as well as uncertainty about them, have calmed markets so far.

“Trump says stuff and markets just don't believe it's going to happen. They don't think he believes in anything he says, it's all posturing for the election,” Holtz-Eakin said. “For the moment, he's got a free pass.”

“He's been all over the map on everything,” Holtz-Eakin added. “There's no reason to put any particular weight on any single position.”

But if he remains competitive and continues to consistently say things that give markets heartburn, there could be a reaction, Holtz-Eakin said.

‘Thinking Out Loud.'

Rep. Dave Brat (R-Va.), a Trump supporter and an economics professor, said the lack of reaction in financial markets shows they are comfortable with Trump, even as they may doubt his ability to do some of the things he has talked about, like get bondholders to voluntarily refinance U.S. debt.

“They know the executive can't do that alone and he's highly unlikely to go after that,” Brat said. “I don't know what message he was trying to get out there with those comments. We're not going to default on a dollar and he knows that.”

Brat said Trump simply doesn't speak in the “code words” about economic policy that make official Washington and political circles comfortable.

“He's doing totally different messaging. He's not doing this tight, scripted stuff that everybody hates, where you say something meaningless about Fed rates and you don't mean it,” Brat said. “He's just thinking out loud and seeing how people react, and bumping up against the markets or China or Mexico and seeing what's my competition thinking here. That's what I think he's doing.” he said.

Vaudeville Comedy?

Rep. Jim Cooper (D-Tenn.), an anti-deficit Democrat who teaches health-care policy at Vanderbilt University, said Trump's debt remarks may spur the financial community to take action similar to what Republican national security figures did in March when they issued a public letter condemning Trump's proposals.

“I think they're still thinking he doesn't have a chance to win, but the greater his probability of success—and it's only this weekend that you saw polls showing him within striking distance—the leaders of American finance will have to start taking actions like our military leaders did when they wrote that letter saying this is so bad we can't even follow his orders,” Cooper said.

“To threaten the Treasury bond, that's something our worst enemies abroad could only dream of doing. To have that suggested by a presidential candidate, a presumptive party nominee, is so outrageous I think a lot of folks have trouble even imagining he that he could be serious, that this must be some sort of vaudeville comedy routine, not a serious policy proposal,” Cooper said. “Perhaps he is just joking with us, but it's a very dangerous joke.”

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com.

To contact the editor responsible for this story: Heather Rothman in Washington at hrothman@bna.com.