Podcast Season 6 Episode 3: 2026 Policy Outlook and Market Implications with Dan Clifton

Yeah.

Yeah. So first, thank you for having me today. Thank you for having me today. And I think about that client event that we did last spring, and it was just coming at us like a, you know, just coming at us like a fire hose in terms of everything the president wanted to do. And I think the difference today than where we were in the springtime is that now some items have actually gotten done. Like the tariffs were at the beginning stage. Now the tariffs are in place. We have a good range of outcomes of where those tariffs are going to be. There's obviously going to be a Supreme Court decision on them. But at this point, investors can kind of handicap where those tariffs are. What you're now starting to see, though, is a big shift on monetary policy where the Federal Reserve has now got more comfort on tariffs and are starting to lower interest rates. They've expanded their balance sheet. And I thought the administration made a huge mistake last summer, and Congress made a huge mistake last summer by delaying when the tax cuts in their one big beautiful bill would come into effect. And now you're going to start seeing those tax cuts come into effect. So I like to say the mistakes that the Fed made by holding off on monetary policy, the mistakes Congress made by holding off on tax cuts made 2025 a bit more grindier, but it's actually creating a much more, a much better backdrop for 2026 for the US economy, and you could start to see those decisions take hold.

Correct.

Yeah. So I'm sorry for not being specific on that before, but right there's two major levers on tax cuts. Number one is the consumer tax cuts. So, in 2025, consumers got tax cuts for a higher state and local tax deduction, an increase in the child tax credit, lower taxes on tips, overtime, senior citizen income. And when you add all that together, it's about $170 billion of gross additional tax refunds. And there's some offsets to that. You're going to get a higher tax liability from capital gains. You got some other consumer programs that are winding down. And when you put it together, it's about a 40% increase in the size of tax refund season in February, March, and April of this year. So wildly accretive to the US consumer. And then behind that are these business tax cuts, which are about $200 billion of business tax cuts. Those are really three major provisions designed to get companies to make investments. So if you invest in research and development, which is something healthcare, technology, and industrial companies do a lot, you can now write off that expense because Congress is saying we want you to do more research and development, develop new technologies. A second is what's called a 100% expensing of capital good orders. This is when you buy a large piece of equipment for your factory. If we are going to do more reshoring here in the United States, then we should be incentivizing companies to make those investments and change the rate of return on being able to make those investments. And the third, which is brand new and never been done before, is this idea of allowing companies to write off 100% of their factory purchases. And so, we're still waiting on the rules for that, but eventually we're going to get the rules, and it's going to make it much more cheaper to build factories here. So when you put that together, it's like $350 billion of incremental fiscal policy stimulus in 2026 as part of our big shock and awe economic policy.

Yeah, so I think there's two different types of investment that are happening. One is the investment that was happening regardless of these tax bills, and that is going to be the AI data centers. When we came into 2025, we started talking to a lot of construction companies and trying to get a sense of what they are. And what they would argue to us is that there was really two types of environments in the building world. There was the AI data centers which were being built and nothing else. Maybe some multifamily housing units, but it was like a depression in anything other than AI data centers. And so the AI data center trend is going to continue, and it's now cheaper to do the AI data centers because of these tax provisions, but that was probably going to happen regardless of whether the tax bill passed. Now, the key is whether you're going to get new factories that were going to be built, that weren't going to be built, that are now going to be built. And I think that's going to be an important distinction. Obviously, you got to wait for the rules on the factory purchases, but you should start to see pickup in capital good orders and research and development in the next quarter or two because those rules are fairly straightforward. We had these provisions in place.

I would agree with that, and if you look at the trade data that was released this week, you're starting to see a lot less trade coming in from Ireland, which is the pharmaceutical companies, which is exactly what Trump was trying to achieve by getting those pharma companies to be able to commit to more development here. And then you have the very important life science tool industry where you're also seeing investment that's happening in the healthcare space overall. So those are very good points. I just do think that they're going to accelerate once the rules become clear on many of these tax provisions because the hurdle rate to make that investment is now going to be significantly lower when you could write off the cost of that from your taxes.

So, it's very interesting. I mean, there's a real possibility that you get your tax refund for 2025 tax cut and your money gets withheld for 2026. So, you're getting two years of tax cuts this year. Okay? I mean, like that's even bigger than what I just outlined to you. Now, I'm a little bit hesitant on that. And the reason is that for those changes to be made in your paycheck, the taxpayer has to fill out a form, and that form then has to be given to their employer to make those withholding adjustments. I would feel a lot better about the size of those withholding changes being made if I saw two things. Number one, a broad outreach from the Trump administration to the major employers in this country telling them that they should be doing a campaign to get their employees to change their withholding, and we haven't really seen that. Number two is the Treasury Secretary should have done advertising on the TV. I see Kristi Noem and Homeland Security doing lots of advertising. I thought the Treasury Secretary should have been doing ads and saying you can have higher take-home pay if you do this, but you got to proactively make the change. So, the IRS really did make it possible because they changed the form. The form used to be very simple. How many kids do you have? What's your income? You know, it's like four or five lines. Now, it's like how much tips did you have last year? What was your state and local taxes? They've literally created these separate line deductions. So it's complex. There's a lot of friction there. And so we've been conservative in our estimate. We'd rather come in low than overestimate that. But I think that when you can see it, you'll be able to see it in withheld income tax payments. We get it every day from Treasury. So we could see whether people are taking that deduction. And then there will be the personal income data that comes out in about a month or so where they have a line item which is called real disposable income. And that's after tax, after inflation income. So we'll see if people are using it. If not, I would anticipate that Treasury will make some adjustments. So, I do think that there will be withholding. We've just been a little bit more conservative until we see more activity on that because it is a difficult process.

Yeah, so awesome question. So I, you know, again, I think the backdrop for economic policy is as good as I've ever seen it. It's big, it's bold, it's not fully inflationary, and you got a nice productivity tailwind that's developing here that makes it a little bit easier to absorb, but it's not all roses, Tim. There are definitely headwinds there. And something that I've always stressed to my clients is the first year of a presidency is very different than a second year of a presidency. The president is going to be far more populist starting in two weeks from now when he goes to Davos in Switzerland and outlines an extremely populist agenda on electricity rates and healthcare and housing. So you're going to have to get used to that. You're already starting to see it. He's talking about banning institutional ownership of home sales, ending dividends and share buybacks for defense companies so that they invest. So you're starting to see the early stages of that. And so the rhythm of the first year of the Trump presidency is going to change. And then second is now you got this Supreme Court decision on tariffs, and the Supreme Court decision on tariffs can be like, 'Hey Trump, you don't have the authority to do this.' Now, from my vantage point, that's another $250 billion tax cut because you're getting rid of those tariffs, but the bond market's going to look at that differently, and they're going to look at it as an additional $250 billion deficit increase that they were not provisioning for. And could that raise bond yields? And what we've been arguing, Tim, is that the president has the authority to resurrect these tariffs and he can move pretty quickly. It's not going to get them all, but it's a legal way of being able to do it. He can get about 80% of what he wants real initially. But that's going to create uncertainty for companies. What rate am I collecting? How am I doing this? These rates were X under the old system. Now they're Y under the new system. So you can see how there could be some uncertainty that resonates from that decision if the Supreme Court does throw those out.

The second is on the Fed turn. Now, I believe that what's happening at the Fed is very important for our shock and awe thesis on economic policy. The Fed is now more worried about employment than they are about inflation. And that's a very big change from 2025. There were two media reports, New York Times and Wall Street Journal this week making the claim that tariffs reduce employment more than they raise inflation. And it's not by accident that those articles are there. And what we call that is a turtle on the fence. The turtle just did not get on the fence by itself. It's impossible. Somebody put that turtle on the fence. That's the Fed putting those articles in major media publications that give them the flexibility to be able to lower rates. And as those tariffs begin to run off on a year-over-year basis, they'll have some cushion. And as you know, in December, the Federal Reserve has announced that they are expanding their balance sheet by $57 billion per month while all this consumer stimulus is coming out. So policy is broadly agreed. Now what's going to happen is that you're going to get an announcement in the next couple of weeks where a new Fed chairman is going to be selected. There's going to be questions about whether that Fed is independent. There's going to be questions about how fast the Fed wants to pull back its balance sheet, which could be different than the current chairman, and whether the regional presidents are going to be able to remain in their current role if there's enough members on the Federal Reserve to begin to remove those regional presidents. So, there will be a bit of an uncertainty that comes associated with it. But like I like to joke, there's probably no worse job in the world to have in July of 2026 than to be the Fed chairman, the new Fed chairman appointed by Trump going into a midterm election, the economy is accelerating and him putting pressure on you every day that you need to be able to cut rates. Now, in all fairness, the two Kevins, as we call them, Kevin Hassett and Kevin Warsh, who are the top two contenders, they are literally arguing that we are in a productivity boom. And if you're in a productivity boom, that means that where the Fed funds rate could be is actually lower than the current consensus estimates. And that there's a real possibility that rates can go lower without stoking inflation. And that's going to be the test. That's going to be where some of the uncertainty comes from because most of the modern economics profession is not.

Yeah. So again, I think what's happening here is really important, and I'm very glad that we kind of segregated this question out rather than with the other questions because I do think that it deserves a lot of attention. On December 2nd, the Department of War, or Department of Defense as we used to call it, issued what's called a national security strategy. And it was very different than the first Trump term and very different than Biden's national security strategy because instead of going after China and Russia, it talked about this idea that the Western Hemisphere needs to be shored up, that our enemies are countries that are trying to undermine the US are operating now in nations in our own backyard. And Venezuela. Venezuela was probably the worst actor of those three. You had Iran, China, and Russia all operating in those countries plus the Cuban influence at the same time. So, there's a belief that there was an Iranian drone factory that was in Venezuela. Those are way too dangerous to happen. And the central thesis is when the Berlin Wall went down, the world globalized, it became unipolar US leadership. Now we're moving back to a multipolar. China exerting its influence, Russia exerting its influence. You almost have to basically shore up your backyard before you can project strength outward. And so you can understand why Venezuela is so important to the chessboard because if you can take control of that or at least get that influence out of there, then it makes it harder for our enemies to be in Colombia or be somewhere else. Panama is another good example, and making the fake IDs, the fake passports, and the weapons and all the things that are done to undermine us. So that's why Trump is keeping the existing regime in place, but using oil as a tool. And he's like, if you don't do what we need you to do and you allow Cuba and Russia and Iran and China to be here, we're just going to cut off your lifeblood. And that is the oil. And so that's why they actually think they're going to get some cooperation. Your best press day is always your first day. And that was last Saturday.

So it only gets worse from here. I don't want to make it sound like roses, but think about what happens if you now have all this US production. The Saudis are pumping and you get the Venezuela oil. You don't even need to increase it. You just need to be able to market it better. Now you're talking about a $50 barrel of oil. That makes it much harder for Putin to exist as a war machine, and it allows Trump to actually have some leverage in those Trump-Ukraine negotiations and start bringing an end to the war. Just this week again, Trump gave the green light for the Senate to put sanctions on Russia, which are pretty biting secondary sanctions. A big, big change, almost like he needed the Venezuela change to happen. Now if you think about China, one of the biggest questions that are out there is, is China going to go after Taiwan? And I think what Trump is doing here is that he's making it more difficult for them to do a blockade or more difficult for them to go after Taiwan because he's not only going after Venezuela oil, he's now going to be much more aggressive with Iranian oil. It's almost like Trump needed all this other oil to be able to start taking the Iranian oil offline without spiking US prices. Now he's got the ability to do that. And if China doesn't have access to Iranian and Venezuela oil, it makes it much more difficult for them to achieve their objectives in Asia. So I view this almost as like Trump going after the choke points of Russia and China rather than going after Russia and China directly. And it has a larger significance. Okay, maybe that's true, maybe it's not. Some people will disagree with me. But what does that have to do with Greenland? And if you look at what is going on in Europe right now, just about every European leader has given a speech this week in very negative tone about Trump and what US policy is. Again, the national security strategy was very negative on Europe. The vice president, JD Vance, is very negative on Europe. But Greenland's extremely important. If you think about the US, the US is separated by two oceans. It's very hard to attack the US. That's been our natural advantage. Well, you know, Russia and China bought a lot of what are called icebreakers, and you almost feel their pressure coming. And if the polar caps are really starting to melt, it's going to make Greenland the most important area on the geopolitical chess map. And the US has a military base there. You can argue that, you know, all it takes is a negotiation. I'm sympathetic to it. But I almost feel like what Trump is saying is this is way too important for the security of America to be dependent on other countries to be able to do this. And that's probably where he's taking it from, or at least trying to get some sort of negotiation for a better deal overall. By the way, I think there's a natural resource angle to all of this. I don't think it's the sole angle. I think it's the defense of the US, and he feels that something's coming. Like again, Trump this week basically said that he wants to ban share buybacks of dividends for defense companies. That's him saying that I don't think that you're building the munitions that we need in case of an emergency. He's putting the US on a war footing. That's what he's doing. Okay? Not saying that we're going to have a war, but preparing if China did something or if Russia did something that we're more prepared for that. Now you think about Greenland, they have the best rare earths. The Venezuela rare earths aren't exactly the best. Greenland's are heavy and it requires massive levels of investment to be able to get those out of the ground. And I do think that that's going to be a big component of why you would want Greenland as well. But, you know, at the end of the day, he could be trying to get Greenland to declare its independence from Denmark. And then they need the money. I mean, Denmark doesn't really have any debt. Doesn't really need the money if we wanted to buy Greenland. But if Greenland becomes an independent state, then you probably are going to get a much better deal out of that, and that's probably something that's driving it.