The Regulatory Questions to Come, Moody's Update (Held)

The so called "Trump Trade", Moody's Q2

I began writing out the following two weeks ago:

Irrespective of the deplorable attempted assassination of former President Trump this morning (or afternoon depending on where you are) at a rally in Butler, Pennsylvania, it appears that the prospects for a Republican victory in November are strong. Betfair now has Trump as a $1.51 favourite to be the next President of the United States. With President Biden’s clearly deteriorating cognitive abilities on full display, it’s hard to envisage a positive outcome for the status quo.

As they say in politics: weeks can be an eternity.

In the meantime President Biden has stepped down from the Democratic nomination, but not the Presidency. His one-time running mate, Kamala Harris, appears to have sewn up the nomination. Now the cat chases the dog, and a wave of optimism is building around Harris amid her team’s unusually adroit use of social media. I’m sure any definitive predictions made by yours truly will end up looking foolish.

Well I did it anyway.

After Biden’s extraordinarily lacklustre performance at the last Presidential debate on the 27th of June, I tongue-in-cheek tweeted the following:

This hit accord specifically, but the nostalgia of the 2016 “Trump Rally” (which continued on and off for four years) paints many investor’s general expectations of what is to come in a new Republican administration. No one knows for certain what the future will bring but, importantly, Trump has ameliorated his position domestic economic agenda. The battles with AT&T, Bezos and Amazon, as well as his reactionary moves against the likes of Facebook (now Meta Platforms) and Alphabet seem to be forgotten under the rose-tinted realpolitik of our current time; business leaders may be more afraid of the increasingly economically populist Democratic Administration than they are suspicious of whatever Trump has in store for the political establishment.

The political tides, as they relate to the established economy, seem to be moving. In a recent piece, Matt Stoller observed the following on Trump’s updated economic agenda:

He adopted the deregulatory posture of the Bush era and shut down consumer protection in finance. And Trump himself helped bring U.S. drilling firms together with OPEC to increase oil prices in 2020. Then there are the hundreds of judges he put on the bench, who are often hostile to antitrust enforcement.

In the last four years Biden has continued with Trump’s original populist agenda, perhaps even doubling down on it. This has manifested itself in an arguably tougher line with China, and a discernibly more hostile approach to corporate America. I have had no fewer than 7 previous and current investments come under suit from the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFBP) since 2020. As to whether this is a personal indictment, I couldn’t possibly say.

In any event, elements of Trump’s previous agenda marry in nicely with his newfound warmth towards the economic establishment. The rhetoric is different this time around:

What’s fascinating is that he does not criticize big business, and doesn’t much talk about jobs going to China or Mexico, though he does talk about tariffs.

Trump’s first administration was punctuated by a general opposition to the regulatory state. This was expressed as a reluctance to introduce new regulatory burdens as opposed to effectively ending existing regulations, per Brookings:

On average the Trump administration imposed annual net regulatory costs of $10 billion, compared to $111 billion for the Obama administration and $43 billion for the George W. Bush administration.

Most of Trump’s deregulatory actions were, of course, litigated to death (literally), which in part informed his greatest contribution the body politic of the USA - the veritable revolution in the composition of the Federal judiciary. As mentioned by Stoller, Trump not only swung the Supreme Court (SC) towards Textualism in his appointments, he also appointed hundreds of Federal justices to the bench. The tilting of the Judiciary towards conservatism has manifested itself recently in the SC overturning the Chevron Deference. This is, simply, a legal doctrine that acknowledges that the courts must defer to the executive arm of the government in the interpretation of regulatory authorities. Putting aside the fact that the Deference was first acknowledged under the Reagan Administration, and then reasserted during the Bush Presidency, and whether or not one thinks it conforms properly to the separation of powers, the political outcome is clear. A largely conservative body has abrogated power away from a largely liberal dominated body.

The Republican Party specifically, and conservatism generally, once again appears to be the home of big business. For the longest time I had assumed that the Democratic party had been a coalition of the ultra-elites and the dependant underclasses. As politics continues to become more polarised, and populist, it’s fair to say that if the left has to decide between big money donors, and big voting blocs, they’ll pick the later.

As to whether a potential Harris Administration would veer sharply away from the legacy of its predecessor is hard to say. All new governments do this to some extent but it’s unlikely that we see the kind of wholesale changing of the guard that would result in significant policy alterations. The loss in confidence in a renewed Biden Presidency seems to have been genuinely centred around the President’s fitness for office, rather than his policies. Harris stands as a definite laggard to former President Trump as of this writing, but there are cards left to play.

Putting aside Biden’s, and the activists he placed in the regulatory bodies, futile attempts to curb the “excesses” of corporate America, the spectre of a new Trump Presidency seems to be a definite win for the status quo. Conservative courts (newly imbued with authority), married to a (neo?)conservative President would seem to be a recipe for a hands-off approach to business.

One can’t help but wander at the implications of a large scale replacement of the Federal bureaucracy. While the 2024 Republican Manifesto seems to omit any mention of Trump’s plans here, his running mate, JD Vance, has made several sweeping statements over the years, as per the Washington Post:

If Sen. JD Vance (Ohio), the Republican vice-presidential nominee, were to give Trump “one piece of advice,” he said in 2021, it would be “fire every single mid-level bureaucrat, every civil servant in the administrative state. Replace them with our people.”

Even if Trump were a died in the wool economic populist, the firing of 10s of 1000s of career civil servants would effectively neuter the efficacy of the Federal bureaucracy for years. While there might be policy, there certainly won’t be any action: there won’t be anyone who knows how implement it.

The former President is keenly aware that he must attract a sufficiently large coalition of supporters to retake the Presidency and so his public persona since the end of last year has ameliorated on several fronts. He’s nice to business. He’s softened on the abortion question. He’s making nice with any world leader who comes to see him. However, what people do before they need your vote, and after, are decidedly different.

In any combination of Congress, the courts, and President wholesale change seems to be as far away as it ever has been. A couple of trends that I think will continue unabated:

• No price controls, and no regulatory action brought to bear on pricing actions,

• General chaos with respect to the Federal Trade Commission, and the Consumer Financial Protection Bureau. Suits pursued by both of these bodies are likely to be interrupted by an incoming Trump Presidency, and frustrated by the superior courts if the Democrats retain executive office,

• Big tech continues ‘big teching’,

• An acceleration of the GSE’s timeline to once again becoming bona fide public companies.

Hold onto your monopolies.

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Held.

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Moody’s Update (the last update can be found here)

Moody’s reported Q2 earnings on Tuesday, after the close. The results for Moody’s Investor Services (MIS) were very strong. Results for Moody’s Analytics (MA) were decidedly less strong. I have been a greater admirer of the former business segment, and a constant critic of the latter.

The company reported quarterly revenue of $1.871B, and operating income of $793M representing YoY growth of 21.6% and 41.1% respectively. Gross margins were just over 74% and operating margins were 43.6%. Generally speaking the business is enjoying a rebound in issuance volumes for a variety reasons, while parts of their software offerings appear to be underperforming.