Wall Streets Fanaticism towards Trump Ignores Painful Lessons of the Past

Coin World News Report:
Wall Street has had an eventful week. Donald Trump’s significant victory in the presidential election has left investment bankers and private equity tycoons more excited than ever before.
Now, they are betting on a massive deregulation, hoping that Trump will dismantle the regulatory wall built under Biden’s leadership, and open the doors for new trades, risk financing, and expanded credit limits. The election results seem to have given Wall Street a green light to break through boundaries, and they are prepared to take full advantage of it.
The impact is already evident. Biden’s plans to tighten capital rules and regulations regarding climate disclosure and outsourcing may fall through. Some executives are even discussing Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, and Michael Barr from the Federal Reserve as if they have already left.
Private equity and asset management firms are eagerly awaiting a Trump-friendly SEC that will quickly roll out new financial products. These companies hope to add cryptocurrencies, private credits, and private equity options to individual investment portfolios as soon as possible.
Bankers also hope that under Trump’s leadership, the Federal Reserve will ease its strict annual stress tests on risk levels, allowing banks to take on more aggressive risks. Investors are even betting on mergers, such as the one between Capital One and Discover, to go through smoothly.
Dreams of deregulation and Wall Street’s confidence boost
Wall Street big shots believe that shedding regulatory “bloat” will kickstart growth. They think that regulations have accumulated over time and some cuts should have been made earlier. “The banks are back,” said an insider. “Trump wants to ‘build, baby, build,’ and that takes financing.”
But there is one problem. Some see opportunities, while others see disasters. Trump’s anti-regulation stance, supported by his new “efficiency czar” Elon Musk, may prompt skilled regulators to resign. Wall Street hopes for quick approvals, but a massive regulatory exodus may leave institutions unable to handle issues.
A skeptical senior executive reportedly said, “A lot of the enthusiasm is based on mistaken premises. We are preparing for the next bubble. It’s definitely coming.”
Experienced Wall Street professionals know the dangers of going too far. A senior banker warned, “With too much deregulation, more banks will fail.” He pointed out that Trump relaxed regulations on mid-sized banks in 2018.
This nonchalant approach eventually led to the regional banking crisis in 2023. The consequences proved that Michael Barr’s “Basel III endgame” proposal was reasonable, which would increase capital requirements—it took the industry a year to resist this proposal.
National regulatory risks and lessons from the past
Wall Street’s dream of a toothless federal regulatory agency comes with hidden risks. If the federal government relaxes, states may step in and fill the gaps with their own regulations. It has happened before. In 2001, Harvey Pitt, the chairman of the U.S. Securities and Exchange Commission under George W. Bush, wanted to create a “kinder, gentler” SEC.
At the time, investment banks were attracting IPO clients with favorable analyst coverage promises, even for unprofitable companies. Pitt attempted to quietly address this issue by meeting with major banks and urging them to resolve conflicts of interest.
However, before the reforms could be implemented, New York Attorney General Eliot Spitzer launched a public investigation. He exposed damning emails that humiliated the industry and angered investors who were hit by the bursting dot-com bubble. Ten banks had to pay record-breaking fines of $1.4 billion and implement costly reforms.
This victory motivated Spitzer and other state prosecutors to pursue more cases, and state-level actions still pose a threat to Wall Street today.
Some professionals may view Spitzer’s actions as ancient history, but they should remember the cyclical nature of this industry. If clients feel cheated, they will not forgive. A robust regulatory framework can protect companies but can also limit them. Remember the collapse of Silicon Valley Bank? Remember how bad it was?
Stocks, cryptocurrencies, and a frenzy of buying
In this year, analysts have questioned the sustainability of the rebound, which has increased stock valuations by trillions of dollars, pushed Bitcoin to new highs, and fueled a surge in credit.
However, every skeptic has been proven wrong. With Trump’s return, the market is experiencing a new wave of optimism, and investors are worried that they are not optimistic enough.
The numbers are staggering. The stock market has gained $2 trillion in five trading days, with $20 billion flowing in on Wednesday alone. Small-cap stocks have risen nearly 9%, bank stocks are up, and Bitcoin has reached a historical high of over $80,000.
Matthew Sigel of VanEck declared that the bull market is “stronger than ever before” and expects Bitcoin to reach $180,000 next year and $3 million by 2050.
Only bonds remain skeptical, fearing the price of Trump’s anticipated fiscal stimulus. However, even Treasury yields stabilized this week. Wall Street is now busy predicting how high this prosperity will go.
Sky-high valuations and the Fed’s interest rate strategy
This frenzy permeates every corner of Wall Street. The S&P 500 index hit its 50th record this year, closing the week with a 4.7% gain. The “fear index” VIX saw its largest weekly decline since 2021. But such rapid growth may cause investors to overlook cracks in the economy.
In September, concerns about the labor market briefly hit the S&P 500, which fell 4% in a week. In August, economic tensions and hedge fund adjustments triggered a nearly 10% correction, and the VIX experienced its largest surge in 30 years.
After two years of rebound, current valuations have become absurdly high. While Trump once touted rising stock prices as the scorecard of his presidency, the risks are now much higher.
Election day returns are at record levels, indicating that another rebound may not be triggered by tax cuts alone. The rising cost of borrowing caused by ballooning budget deficits may curb the benefits of his business-friendly policies.
Then there is the Federal Reserve. Some banks, such as Barclays and Toronto-Dominion Bank, are lowering their expectations for rate cuts in 2025, fearing that Trump’s immigration policies and tariffs may drive inflation. Nevertheless, the recent Fed meeting only fueled optimism in the risk markets.
Fed Chairman Jerome Powell confirmed the strength of the economy and avoided mentioning future rate cuts after a 25 basis point cut on Thursday.
Despite a slowdown in job growth, economic indicators remain robust. Citigroup’s U.S. Economic Surprise Index, which measures the trend of economic data versus expectations, still shows positive momentum.