WFA Musings - What Should CEOs Do in a Trumpian World?

In a little over 50 days in office, President Donald J. Trump has pushed almost all of his chips on the table in his quest to “Make America Great Again.”

To be fair, the President is faced with some monumental issues which his predecessors have ignored or made only modest progress against. For instance, China has wildly abused its WTO status since it was admitted to this global trade arbiter in December 2001. Under the direction of the PRC, China has stolen vast amounts of US intellectual property and price gouged their way to completely transplant the locus of manufacturing from the U.S. to China for everything from t-shirts to batteries, to solar, to pharmaceuticals. Our leviathan sized government spends $2 trillion dollars more than it brings in. In his first term he approved an additional $4.8 trillion in ten-year borrowing excluding the $3.6 trillion that was borrowed to fund the CARES Act and other Covid relief. So, while guilty of adding to our national debt in his first term, he now recognizes that the size of our borrowing needs to be reduced. Finally, our immigration system is broken and must be fixed, and we are way over regulated. These are critical areas which need the attention of the President, and he is going about doing so, albeit, in a manner that has been uncharacteristic from other previous leaders of free world.

Trump’s massive, roller-coaster realignment of our trade relationships around the world with friends and foes has totally discombobulated the global economy and international order. Adding to the turmoil is the attempted rapid restructuring of the federal bureaucracy to reduce the cost of our government. In addition, the President’s promise to bring to an end the wars in Ukraine and the Middle East appears to be stalled and causing angst amongst our allies. Throw in the President’s retribution tour against “WOKE” policies and his political enemies and you have the makings of a crisis of uncertainty on “which way is up” around the world.

On one hand, you have the President and his administration asking everyone to take a breath and trust that given time and some pain, Humpty Dumpty will be put back together sturdier and more beautiful than ever before. On the other hand, you have a growing body of disbelievers who predict economic calamity and irreparably frayed relationships around the world with some of our closest allies and friends.

When I examine the unfolding barrage of Executive Orders and pronouncements, they align almost perfectly with what the President said when he ran for office in 2024 and, in some cases, like his trade philosophy, what he has been saying for decades. We know through exit polling that the vast majority of independent voters who elected Trump were fixated on having him do three fundamental things: 1) make core goods and services affordable (i.e... tame inflation and lower interest rates;) 2) shut down the Southern Border; and 3) end the wars. We also know that these independent voters, who ultimately pushed Trump over the top in another tightly fought election where he won by 1.5% of the popular vote and by very close margins in the seven "swing" states, disregarded the other rhetoric and hyperbole coming from the President in the campaign in favor of him delivering on the Big Three promises. 

What we now know is that in addition to the Big Three, the President’s “other rhetoric” is exactly what he meant and is part of his widespread agenda. Notwithstanding his belief that he was given a mandate; the reality is that he was given permission by those critically independent voters to concentrate on the Big Three promises and only those promises. While the MAGA voters bought into all the President’s desires and promises, the vast majority of Americans did not. In fact, the polls showed that 70% of the electorate did not want either Trump or Harris as their choices. This reality is clearly not accepted by the President or his closest advisers...at least for now.

So, where does that put you if you are a CEO trying to navigate this uncertain terrain? Philosophically, one needs to be maniacally realistic about the environment in which you compete, very nimble, and tenacious. Let me take each one of these on one at a time.

MANIACALLY REALISTIC

If there was ever a time when scenario planning is relevant, now is that time. With the blistering pace of Executive Orders flowing from the White House and the unpredictability of what the President will do next, anyone who believes that they can predict the next move is fooling themselves. Arguably, Trump believes he is a master deal maker and clearly thrives in chaos and controversy. His Achilles Heel is his carbon paper-thin ego as evidenced by his denial of losing the 2020 election and his current retribution tour against some of his former aides who rebuked him about that election outcome. Pausing the reciprocal tariffs is just one other example of a man who does not like to be admonished directly by Jamie Dimon of JP Morgan or indirectly by his patron saint, Elon Musk, on the lack of grey matter in trade czar Peter Navarro’s brain. Exempting smartphones, computers, and equipment used to make semiconductor chips is another example of how quickly Trump retreats when he is faced with overwhelming resistance from supposed supporters like Apple’s Tim Cook. Even Trump understands that a $3600 iPhone will roil the public at large. What has yet to sink in is that 60% of what Walmart sells comes from China. The doubling of the prices on those products will come to roost very quickly and will pose a further threat to the integrity of Trump’s trade policies. Moreover, no sane person will believe this is a transitory inflation surge that the Fed will ignore: It must be hoped the Fed has learned that all surges propagate and multiply for years and thus must be promptly fought with immediately higher interest rates. A tirade of Trumpian insults against Powell has already begun.

To effectively combat unpredictably, one needs to ask two questions: 

1.     What is your game plan if indeed the tariff wars become prolonged, and we have a recession coming in the second half of the year with possible stagflation over the next few years? Ray Dalio, billionaire founder of one of the world’s largest hedge funds, Bridgewater Associates, believes this scenario will most definitely lead to a recession, if not a depression.

2.     What is your game plan if the tariff policies are just an attempt to negotiate better deals with our major trading partners and we end up by mid-summer with all our major trading partners coming to some mutually agreeable resolution with the US, the lone exception being China? Within this scenario, there would seem to be two reasonable outcomes, tariffs are eliminated altogether, or they settle in at 10% on both sides. As for Mexico and Canada, it is likely to revert back to NAFTA 2.0 or USMCA.

China is the wild card. Clearly, the current scenario of 145%, and maybe 245%, tariff on China and 125% tariff on the US is not sustainable. While common wisdom says China loses more than the US based on trade flows, this game of chicken boils down to the sentiment from the American consumer. It is currently at 50.8 in the Michigan survey which is lower than in the Great Recession and the second lowest reading since 1952. As noted earlier, Trump is beginning to cave in on hugely popular items like the iPhone. Autocratic Chairman Xi is not worried about consumer sentiment. However, he does worry about the state of his economy. We would not be surprised if he threatens a selling spree on the $750 billion China holds of US Treasury bills. Along with Jamie Dimon’s prediction of a recession, the unexpected selloff last week of US treasuries sent a shock wave through the White House. We would model three scenarios with respect to China: 1) the current regime of tariffs lasts through the second quarter and drops back to 25% on both sides; 2) the current regime lasts until the end of the year and then drops down to 25%; and 3) tariffs are eliminated by the end of the third quarter. Under the second scenario, the US will definitely be in a recession. Without getting technical, this scenario modelling exercise should start at the business unit level and roll-up to the corporate level. Utilizing the Monte Carlo method is perfect for this type of analysis.

NIMBLE

1.     Making long-term investment decisions is strongly discouraged. While Trump touts his objective of reindustrializing America through his tariff policies, if he continues to pause and cave in, it would be foolish to bring manufacturing back to the US knowing that it would likely raise the prices of your goods. While “globalization” is a naughty word in the halls of the Treasury and Commerce Departments, it has helped to propel the growth of the world economy and ours. Keep in mind that in a contest between Trump and globalization, Trump loses. Never bet against the structural. Globalization is structural. Furthermore, “the decline of US industry” is one of the most misunderstood phenomena of my lifetime. I believe that US industrial value added, in real terms, is at an absolute high. What has declined is industry’s percentage of GDP, and much more visibly, absolute, and relative levels of employment. And this decline happened 30 years ago. Low value-added industries are never coming back and, if they did, we would have to import lots more immigrants because Americans do not want those jobs.

2.     Make darn certain that your liquidity is protected. Keep discretionary costs to a minimum and identify divestitures that will bolster the balance sheet and rid yourself of poor competitive positions. It is a propitious time to clean up the portfolio.

3.     Make a list of strategic acquisition targets and be ready to pounce when the financial markets open up. The regulatory environment has abruptly changed for the better when it comes to mergers. Pricing will be very favorable as the markets begin to wake up from this economic nightmare. Waiting to do the work of figuring out what you might target until the markets stabilize will be too late. The firms that are prepared in advance will scoop up the best deals.

4.     Stay close to your people. Communicate, communicate, communicate as often as possible about the stability of your enterprise and readiness to act when the end state is predictable.

TENACIOUS

1.     Steady and focused leadership is paramount. You can only impact what you control. Your responsibility is to your constituents. Reinforce the values of the firm and your commitment to delight your customers. Honestly and clearly identify the tariff element of your price increases to keep the trust of your customers and to help them plan in their own scenarios.

2.     Keep your head down. Unless you are Jamie Dimon, Warren Buffet, Steve Schwarzman, Larry Fink, Elon Musk, Tim Cook, and a handful of other business giants, wading into the political turmoil will be counterproductive.

3.     Be optimistic with your employees and realistic with your suppliers, customers, and shareowners.

The job of the CEO is to plan for the worst and be prepared to adapt to positive signs when they arise. I have had the opportunity to work with a number of clear-eyed and successful business leaders over the last 45 years. A signal virtue of great CEOs is a high tolerance for ambiguity. If a leader can provide (adequate) internal certainty in a world of high external uncertainty, the folk will follow. Learning is pain; innovation requires disruption. Disruption creates opportunities and risks. 

Strong forces are beginning to emerge that will rein in ill-conceived and counterproductive initiatives. Be it the bond markets, the Supreme Court, a more assertive Congress, irate consumers, or global whiplash to name a few, these counter balancing forces are making their sentiments known and we have seen plenty examples of retreat by the President. The issue is one of time. This is why sophisticated scenario planning is so important.

The American Experiment will prevail. It may get tarnished, but it will persevere in the end. That is my BET! Good luck to all and onwards.

Bill