Managing the Trump or Harris trade

Yesterday, I visited the Federal Elections Commission’s website to take a look at the donation activity of primary dealers. Primary dealers are counterparties to trades initiated by the Federal Reserve Bank of New York when the bank is conducting monetary policy for the Federal Reserve System. In an admittedly simplistic example, if the Federal Reserve is buying or selling bonds, it will trade with these large banks where the banks act as the Federal Reserve’s underwriters.

These banks also play a similar role during auctions conducted by the U.S. Department of the Treasury where the Treasury is raising funds in order to carry out Congress’ fiscal policy. These large banks will purchase federal government IOUs and either hold them in their own portfolios or resell them to investors.

These dealers play a crucial role in the American economy by acting as a conduit for capital and supporting the narrative written by fiscal and monetary policy: that the United States is a reliable jurisdiction for investment and wealth creation.

Like any other business entity, primary dealers have an interest in minimizing the impact that regulations may have on their spreads, the difference between the price they pay for buying securities and the price they charge for selling them. I would suppose they are watching the upcoming presidential elections closely, and in particular trying to determine the impact of a Trump Trade or Harris Trade on their revenues and profits.

Politics, as I have shared before, is an industry. To get what you want, when you want it, from where you want it, calls for an investment of capital. Based on data from the FEC, it appears that as of the end of July 2024, these large banks appear neutral on whether they will benefit from a Trump Trade or a Harris Trade, at least to where either trade impacts the financial sector.

So far, the banks are not reporting contributions from their affiliated political action committees that support or oppose either candidate. While bank political action committees have been contributing to “down ballot” political candidates i.e., state and local, and other political action committees on both sides of the aisle, so far, I see no caping for Vice President Harris or former President Trump in terms of donations to the candidates’ respective campaigns.

Consensus may argue that a Trump Trade bodes better for large banks. A Trump Trade comes with expectations of deregulation, tax cuts, and fiscal spending that boosts economic output. In addition, some analysts believe that the Federal Open Market Committee will implement multiple cuts in its federal funds target rate before the end of 2024. Such cuts may create a need for higher deficit spending on the part of the federal government where such spending not only boosts economic activity but may also expand the money supply leading to an increase in price levels.

Regarding a Harris Trade, consensus is betting on a lukewarm reception by a Harris administration of the financial industry. Ms. Harris has built her brand around consumer protection, most notably as the California attorney general who was able to secure a $20 billion settlement for California consumers harmed during and in the aftermath of the 2008 financial meltdown.

I suspect that primary dealers will maintain a neutral stance at least in terms of donations to either candidate. No matter which administration takes office, there will be no change in the infrastructure that implements monetary policy or underwrites fiscal policy.

But how about on the ground level? On the surface, whether a bank PAC sends money to the Trump or Harris campaign appears inconsequential. Neither administration will have any control or direct impact on monetary policy. Higher regulatory costs could squeeze primary dealer revenue or profits, but if higher regulatory costs are limited to larger banks and not extended to smaller banks, we could see no major impact on bank infrastructure or consumer access to banking.

For a state or local executive, to whom the banking industry donates is of little to no concern. What local and state executives should be keeping their eyes on is the impact of each candidate’s policy on the banking infrastructure and access by local and state constituents to banking services.

Alton Drew

27 August 2024

For more on my take on the American political economy, purchase my e-book at amazon.com/author/altondrew.