In investment-banking circles, there's grudging respect for the folks at Goldman Sachs. Even arch-rivals acknowledge the Goldman team works hard, and admit Goldman nourishes an enviable partnership culture.
But no one who works with or at Goldman believes the firm's executives can walk on water, spin straw into gold or perform any other miracle of financial alchemy.
Which is why banking types are increasingly concerned with what they see as a growing disconnect in equity markets. On the one hand, you have stock valuations driven sky-high by U.S. President Donald's Trump's promise of massive tax cuts. To justify the ongoing Trump rally, you've got the earthbound reality of what can be achieved by the two former Goldman partners charged with creating a new tax regime, Treasury Secretary Steven Mnuchin and National Economic Council director Gary Cohn.
Mr. Mnuchin, a former mortgage trader, and Mr. Cohn, most recently the investment bank's president, arrive in Washington with well-burnished Wall Street credentials. They are also political rookies. Recall what happened the last time a Goldman superstar went to Washington. Former Goldman chief executive officer Hank Paulson was installed as Treasury Secretary in 2006. The global financial crisis hit two years later.
As Gluskin Sheff + Associates chief economist David Rosenberg pointed out in The Globe and Mail, stock markets are soaring as the U.S. President simply repeats the same sound bites on tax cuts. Campaign promises included slashing U.S. individual and corporate rates, hitting imports with a border tax and bringing more than $2-trillion (U.S.) in offshore capital held by U.S. companies back to the United States. Let's think about how those promises might play out, focusing on that last idea, that Mr. Trump offers up some combination of tax holidays or punishing levies that brings home the $2-trillion that corporations such as Apple, General Electric and Microsoft hold overseas. The idea of all this cash pouring back into U.S. coffers seems to captivate investors, but does moving cash from one jurisdiction to another justify a massive increase in a company's valuation?
And would leading U.S. companies promptly reinvest in their U.S. operations, creating the jobs Mr. Trump promised in the election campaign? Or would smart investment bankers, the folks who took over from Mr. Mnuchin and Mr. Cohn, advise that this cash is best spent on acquisitions in high-growth markets outside the United States. Would cash-rich companies simply launch massive share buybacks – the stock-market equivalent of binging on a dozen chocolate-covered doughnuts; it feels good at the time, but does little for your long-term health.
As the former Goldman bankers have no doubt realized, rewriting U.S. tax codes is a daunting job – much like reworking U.S. health-care policy. It's not that it can't be done; policy wonks all agree the tax regime needs an overhaul. But nothing we've seen to date on tax policy is likely to be close to where the Americans end up.
The tax cuts President Trump promised as a candidate don't translate into a realistic economic strategy, much less the underpinnings for a prolonged equity rally.