We don’t cover politics very often in our commentaries, since we prefer to stay laser-focused on the topics most relevant to what we do at Old Hill. Nonetheless, with the election fast approaching and the two candidates as polarizing as we have ever seen, we’ve taken a look at what a victory for either candidate could mean for our business, and those of our borrowers, so we can adequately prepare for either outcome.
Importantly, our comments should not be construed as an endorsement of one candidate over another. We are keenly aware of the passion and vehemence of each camp, and are frankly happy to leave analysis of the broad pros and cons of Mr. Trump and Mrs. Clinton to other venues. Instead, we have looked at each candidate through the narrow lens of private debt in general, and Old Hill’s specific sector and structure niches in particular.
Our world can be essentially distilled into two silos: The financial construct of the deals we make, and the macroeconomic environment in which the companies we finance operate. With the former, policies that affect Wall Street and structured debt – taxes, banking, capital requirements, etc. – loom large in our ability to develop transaction components advantageous to parties on both sides of a deal. The latter directly impacts everything from deal flow to default rates.
Affecting both is monetary policy. The level of interest rates, as well as their direction and rate of change, is a yardstick for the transactions we structure, investors’ demand for yield, and the availability of credit in general. And while a presidential campaign may be full of golden promises about fixing the economy and generating jobs, elected presidents actually hold relatively little sway over broad economic and fiscal policy. However, they do appoint the seven members of the Federal Reserve’s board of governors, so monetary policy one of the few areas they can impact directly.
Characteristically, Donald Trump has both praised and condemned Janet Yellen’s handling of U.S. interest rate policy. The businessperson in Trump is on record praising Yellen’s cautious approach to normalizing interest rates, while Trump the candidate accused her in September of keeping interest rates artificially low in an effort to help President Obama. Nonetheless, in May Trump said, if elected, he would “most likely” replace Yellen when her term ends in 2018. It is a contradiction that, at best, would add uncertainty about the Fed’s direction precisely when markets may have finally come to grips with it. Trump, as the self-described “king of debt”, probably understands better than most presidential candidates what higher interests can do to businesses and the economy as a whole, and he has said higher rates would make it more expensive to service the U.S.’s outstanding debt. Yet it is hard to see how he could find a more dovish Fed governor than Yellen, and harder to see how a faster ascent helps Trump’s platform.
Clinton, meanwhile, can be expected to renew Yellen’s stewardship of the Federal Reserve, which all else being equal, would maintain the current pace and degree of monetary policy normalization, which is to say easy monetary policy indefinitely. For us, this is important. The absolute level of interest rates will not greatly impact what we do for some time to come, but the speed and scale of rate increases – or rather the discounted perceptions of them – can dramatic engender consequences of their own.
Since much of our work involves manufacturing businesses, consumer companies and wholesale or specialty finance clients, we’re also keenly interested in which candidate will impact the American consumer the most. This is obviously a very tall order, but there are some basic observations to be made.
Trump’s trade doctrine involves renegotiating every deal so that it increases GDP growth, lowers the trade deficit, and strengthens the U.S. manufacturing base. Sounds fantastic, and on the surface, there are clearly international trade relationships that could use with a more U.S.-centric approach (China chief among them). However, implementing such tenets without starting a trade war or spiking import costs is tremendously difficult, and leaving aside whether such negotiations are feasible at this point, may be impossible. For instance, the horse is out of the barn when it comes to restoring the U.S. manufacturing base, at least not without massive government subsidies, and lapping massive tariffs onto U.S. trade partners importing cheap goods risks retaliation that could cripple U.S. industry across the board.
Clinton, in contrast, is widely expected to maintain the status quo when it comes to international trade, which may be laudable from a rising-tide-lifts-all-boats perspective but has clearly disadvantaged U.S. companies. It has, however, benefitted consumers, as prices are low while goods and labor move more freely than ever. From our perspective, the best route would be a middle-ground approach that did not jack up prices for goods made overseas, but incentivized companies to develop their operations here, repatriated orphan profits locked elsewhere and did not allow punitive measures against U.S. goods and services to go unanswered.
Which sectors do best under which candidate? Most pundits believe energy and defense do well under a President Trump, while a President Clinton will be anti-energy and favor healthcare due to her desire to repair, not repeal, Obamacare. Neither defense nor healthcare are large parts of what we do, so this is less important to us than which candidate’s policies result in more money in the pockets of consumer to buy durable goods, and capital in the coffers of companies to buy equipment and expand.
Energy, however, is an area we see some activity. Trump clearly supports total independence from international energy markets, and advocates the full build out of America’s conventional and offshore energy resources in coal, natural gas and oil. Clinton, meanwhile, will expand support for alternative energy sources like solar and wind, while likely increasing regulations and environmental requirements asked of conventional energy providers. Expect a President Clinton to be all green in this regard, while a President Trump will do the business deal first and ask questions about the environment later.
The Materials sector wins under either candidate. Clinton has detailed a five-year, $275 billion plan to rebuild infrastructure in the country, while Trump’s determination to “boost infrastructure” lacks specifics (aside from the infamous wall) but would be “at least double” what Clinton’s plan would spend. In either case, a broad commitment to repair and rebuild roads, bridges, airports and other critical transportation infrastructure will be a boon for companies in this sector, so it is an area we will be watching.
Overall, Clinton is clearly the regulation candidate. If she wins, we expect existing financial regulations to be maintained, or even extended, further dampening lending activity by traditional financial institutions. The vacuum created by higher capital requirements and other risk-mitigating mechanisms has resulted in the largest surge in private debt formation in U.S. history, according to Preqin, which has created an attractive environment for lenders like Old Hill.
Trump has stated he would repeal most, if not all, of the Dodd-Frank Act that started the disintermediation of banks following the financial crisis. In addition, his party’s platform calls for the reinstatement of the Glass-Steagall Act separating commercial and investment banks. This would not immediately impact what we do, but would return some balance to risk and capital ratio requirements in financial institutions and probably bring banks back into the business of lending to SMEs, but it would likely take 2 years or more.
The tax policies of the two candidates are much more distinct. Clinton’s plan is anchored in traditional Democratic Party platform positions - keep taxes as they are for the middle class, raises them on the wealthy, maintain the corporate tax rate, raise the estate tax and eliminate the carried interest provision. Trump, on the other hand, wants to cut taxes for the middle class, simplify the code from the seven tax brackets to three, cut the corporate tax rate from 35% to 15%, eliminate the estate tax and let pass-through corporations claim the lower rate. He also wants to eliminate the carried interest provision, although with some caveats.
For us, lower taxes on corporations means more money for investment and expansion, which translates to greater deal flow and, importantly, lower default risk. On the surface, Trump’s tax plans are attractive from our point of view, although the devil is in the details and there is a contradiction between Trump’s criticism of U.S. debt levels and the near-certainty that his tax plan would end up dramatically increasing the deficit.
Ultimately, what matters most to us is a healthy rate of economic growth and smart monetary and fiscal policies. Beyond the typical election-year sound bites, neither candidate has provided detailed information about how their plans would create the conditions for such an environment. For the time being, we don’t think a win by either candidate moves the asset-backed lending needle materially in either direction, at least not initially, although traded markets might react strongly in either case. The current low-yield, moderate-growth scenario will continue well past November’s election, which means environment for customized asset-backed transactions will remain attractive for the foreseeable future.
Original article featured HERE.