Oct 2016 - June 2017 - Daily Markets & Politics (Greg Valliere - Horizon Investments)

June 28, 2017

Implications for Tax Reform as Obamacare Bill Stalls

IT WON'T GET EASIER: Chances that the bickering Republicans could pass tax reform by year-end were always slim, but now it's looking nearly impossible. There simply won't be enough time, as we describe below.
FIRST – HEALTH REFORM IS AN ALBATROSS for the party that owns the issue, and for now the GOP is stuck with this millstone. The White House has wasted precious political capital on this – as did Barack Obama – instead of focusing on easier issues like tax reform or infrastructure. Yet the Trump Administration won't let it go, and will waste precious time in July trying to win passage of a health bill that has very uncertain prospects of ever winning support in the House, which may waste even more time on the issue.
HEALTH REFORM IS SO RADIOACTIVE POLITICALLY THAT three fresh Senate opponents emerged yesterday – Rob Portman (Ohio), Shelley Moore Caputo (W. Va.) and, shockingly, Jerry Moran (Kansas). We suspect there could be nearly ten GOP
opponents now, perhaps a bar too high for Mitch McConnell to clear in July, even with his grab-bag of sweeteners for individual members.
SO – WHAT DOES THIS MEAN FOR TAX REFORM? It's all about time. After the July 4 break, Congress has scheduled a five-week late summer vacation (nice work if you can get it), and will return after Labor Day facing two enormous budget issues – raising the debt ceiling, a mine field that bitterly divides Republicans, and passing a fiscal 2018 budget, an issue that has Chuck Schumer salivating – either he gets his way on domestic spending or he threatens a government shutdown.
MAYBE TAX REFORM CAN MOVE in key committees this fall, but there's no bill yet – certainly not one from the White House, which is months away from producing a document. Paul Ryan might get a tax bill through the House this fall, but prospects for speedy action in the Senate are dim. So the bottom line looks pretty clear: tax reform may not be dead, but an effective date before Jan. 1, 2018 looks very unlikely; it could be well into next spring before a bill is enacted.
DONALD TRUMP IS SQUIRMING: Very few Republicans in Congress take him seriously; in fact, many Republicans outside of Tea Party territory think their popularity will increase if they oppose him (see: Susan Collins of Maine). Trump doesn't scare many Republicans, and his ham-handed effort to intimidate vulnerable GOP Sen. Dean Heller of Nevada has backfired. McConnell and other key Republicans were aghast, and told the White House to knock it off.
TRUMP HAS TWO PLUSSES: First, he has a new Supreme Court justice whose votes this week have thrilled the GOP base. "Neil Gorsuch is an Antonin Scalia 2.0, perhaps further to the right," the Washington Post says this morning. And eventually Trump will get to nominate a successor to Anthony Kennedy. Second, Trump enjoys a solid economy and a fat and happy stock market.
BUT PROSPECTS FOR HIS SIGNATURE ISSUE – tax reform and tax cuts – clearly took a hit this week. Could he shock the political world and offer to work with Democrats on bipartisan deals? That's the rumor du jour, but there's a better chance of the Potomac freezing over in July.

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EDITOR'S NOTE: Congress is going on vacation, and so are we – not for five weeks, but we'll be gone until late next week on our annual European bankruptcy tour. Happy Fourth, everyone !!

June 27, 2017

Let's Make a Deal!

THE GOP HEALTH CARE BILL may be on life support, but it's not dead yet. The press portrayed yesterday's Congressional Budget Office "score" as a devastating setback for the measure – but we disagree, because CBO threw Mitch McConnell a $200 billion lifeline.

THE HEADLINES WERE BLEAK because the projected increase in the uninsured was roughly the same as in the House measure, which President Trump called "mean." The White House and other CBO critics blasted the agency's forecasting abilities – which we would describe as mediocre at best – but there was one projection McConnell loved: the Senate version would reduce the deficit by about $200 billion more than the House version.

THIS MEANS THERE'S EXTRA MONEY to throw at wavering moderates like Susan Collins of Maine, who wants more funding for drug treatment and a slower phase out of Medicaid cuts. So the bazaar is open for bartering, and the wily McConnell has some money; he can offer specific deals to specific Senators.

WE STILL THINK A DEAL IS UNLIKELY before the end of this week, when the July 4 break begins; it's not even certain a motion to proceed can pass today or tomorrow. But McConnell now has an option – he can yank the bill this week, delaying a final vote until late July, giving him time for wheeling and dealing with individual members.

OUR ODDS HAVEN'T CHANGED: Chances are under 50% that a bill can pass by the end of this week but close to 50-50 that a bill can pass just before the five-week August break, which Sen. John Cornyn and others have always considered the true deadline. If there's no bill by then, the dance is over; even if there's a deal, the big wild card will be whether House conservatives will accept a patch-work package of special deals.

WHY ALL OF THIS IS IMPORTANT: Enactment of a health bill would be an enormous victory for President Trump, who's on a bit of a roll – a partial Supreme Court victory yesterday on immigration, the Georgia House vote, and – finally – a credible complaint against Barack Obama's timid response to evidence that Russia tried to disrupt the election. Even Democrats are uneasy on this one.

THE MAJOR REASON THE HEALTH BILL IS IMPORTANT, OF COURSE, is that a victory on Obamacare would improve prospects for tax cuts and tax reform. It won't be a pretty process – more backroom deals, mostly in secret – but the legislative sausage-making isn't supposed to be pretty. This is where McConnell excels, and now he has some money to spread around.

June 26, 2017

Health Bill Has a Time Problem; New Thinking at the Fed; Supreme Court Retirement Today?

IT'S A WASHINGTON TRADITION: Kick the can down the road. A handful of Senators aren't ready to vote yet on health reform – they actually want to read the bill – so it's looking less likely that Mitch McConnell can get his floor vote late this week, before the July 4 recess begins.

THIS DOESN'T MEAN THE BILL IS DEAD, in fact we still think several conservatives – Ted Cruz, Mike Lee, Ron Johnson – are "persuadables." But if the true drop-dead date is just before the five-week August break, as Texas Sen. John Cornyn has suggested, that would raise the very real risk that the deal will rot in the July sun, with furious opposition from groups like the AARP turning moderates against the bill.

THE WHITE HOUSE has launched an all-out TV ad assault against opponents of the bill, sending a harsh message to Nevada Sen. Dean Heller and others that their re-elections are at risk. But the pivotal moderates who may oppose this bill could gain support in their Northern states by defying Trump.

BOTTOM LINE: We haven't changed our odds – chances the bill will pass before the July 4 break are a little below 50%. It's still a winnable fight for McConnell, but he didn't seem to make any progress over the weekend and he surely must be thinking about kicking the can, moving on to tax reform.

NEW THINKING AT THE FED: One individual can sometimes change the status quo consensus, so hats off to Minneapolis Fed President Neel Kashkari, who has been arguing for months that inflation is tepid, not remotely sufficient for more Fed rate hikes. And with oil prices plunging and the economy growing only moderately, Kashkari appears to be vindicated.

but that hasn't ignited wage pressure. So why should the Fed hike rates any time soon with the risks seemingly now balanced – there aren't upside growth risks, which seemed likely a couple of months ago. The Fed is likely to begin trimming its balance sheet in the fourth quarter – that scenario hasn't changed – but the next rate hike now appears to be months away, maybe not until winter.

There will always be risks (Chinese bubbles, Italian banks, etc.) but it strikes us, once again, that Goldilocks is very much in place: full employment, decent GDP growth, low interest rates, modest inflation, solid corporate earnings, and now – a bonus – a boost to consumers' real disposable income from plunging gasoline prices. The fundamentals cannot get much better.

We had thought the drama this week would be in the Senate, but suddenly all eyes are on the Supreme Court, which finishes its term today. Anthony Kennedy, who turns 81 later this summer, has been dropping hints that he may retire – and what a gift that would be for Donald Trump, who could get a second conservative on the court by year-end.

June 23, 2017

Head Counts and Horse Trading on Health Bill

THIS IS DRAMA: The Senate's Obamacare replacement bill would fail if the vote were held today, but there's time for horse-trading. Forget about the phony-drama of whether Donald Trump ever had tapes of his conversations with James Comey; the Senate will provide real drama over the next week.

THE LOGICAL WAY TO ANALYZE THE SENATE is to look at head counts; Mitch McConnell can afford to lose only two votes. We think there may be a surprise: arch-conservatives Ted Cruz, Mike Lee and Ron Johnson are "persuadable" because at the end of the day they know failure would mean Obamacare wins. But some other Senators may not be persuadable...

RAND PAUL AND DEAN HELLER ARE LIKELY NO VOTES: Nothing apparently will satisfy Paul, and Heller is the most vulnerable GOP Senator in 2018; he's already trailing in Nevada and has been an outspoken opponent of the health changes. With those two no votes, McConnell would have to rely on Mike Pence to break a tie.

THAT LEAVES THE MODERATES, who may be more important than conservatives like Cruz, who is still fiercely ambitious. Susan Collins's popularity in Maine would surge if she votes no, and Lisa Murkowski in Alaska in on the fence. Throw in a handful of other shaky moderates like Rob Portman of Ohio, and McConnell is in trouble, with zero margin for error.

OTHER MOVING PARTS: The Democrats are winning the public relations battle, with protests labeling the GOP proposal as "cruel," etc. Polls support the opponents – and Barack Obama, still popular, will lead the charge. There are other wild cards: the CBO "score" early next week; strong opposition from the AARP, whose members vote; potential parliamentary objections; Planned Parenthood funding; and a lack of enthusiasm among House Republicans, who stuck out their necks only to have Trump call their bill "mean."

WHAT IF McCONNELL DECIDES TO PULL THE BILL by next Thursday? First of all, he still has six days to prevail, and betting against the wily Senate Majority Leader is risky. But failure to act by late next week would give opponents even more time to rally public opposition, and the GOP may simply decide to move on to tax reform – which looks easier to achieve than Obamacare replacement.

talked this week about the fallback if Obamacare fails – the fallback is speeding up a tax bill, which is do-able even if the health deal dies. But the health bill isn't dead yet; odds of enactment are still below below 50%, but the horse trading has just begun as this drama intensifies.

June 19, 2017

The Plot Thickens – as Focus Returns to Mike Pence

THE WORST-KEPT SECRET in Washington is that Robert Mueller and an all-star team of attorneys are going after Donald Trump and Jared Kushner. The only way they can be stopped is if they are fired, which surely would lead to a constitutional crisis; Justice Department officials would resign and Congressional Republicans would abandon Trump.

AT THE WHITE HOUSE, there's anger over leaks and more leaks, and Trump cannot stop digging a deeper hole, lashing out at the investigation. We wrote last week, naively, that Trump could employ a re-set after his statesman-like reaction to the baseball shootings. Wrong – he's gone in the other direction, doubling down on "the witch hunt."

WE TALKED WITH A GOP SOURCE this weekend who still believes there aren't enough votes in the House to impeach or in the Senate to indict, but he worries about the next six months because Mueller won't finish his probe until winter. "Trump won't shut up, he's incapable to keeping quiet," the source said. "He won't stop the self-inflicted wounds, no one can stop him from tweeting."

THREE DEVELOPMENTS TO WATCH: 1.) Could Trump's loyal base abandon him? Not yet, although there's been some slippage. 2.) Are Congressional Republicans turning against him? Not in major numbers. 3.) Is Mike Pence starting to put some distance between himself and Trump? Maybe, and that's raising eyebrows. We've said this before, and will reiterate: the markets would gladly live with Pence, who could get Trump's agenda enacted easier than Trump, with far less drama.

Last Friday's drop in the University of Michigan consumer confidence reading was partly attributed to the dysfunction in Washington, Michigan officials said. Consumers – and the markets – may begin to perceive a climate in which neither health reform nor tax cuts can get enacted. At the least, Trump's agenda has stalled.

WE'RE NOT EXAGGERATING THE SERIOUSNESS of this crisis, which has deepened in recent days. We understand that the markets have enjoyed good economic fundamentals, but they could become simply fair fundamentals if this crisis doesn't subside. Mueller isn't going away, and six more months of subpoenas and depositions will take a toll. Mike Pence, meanwhile, waits in the wings.


June 13, 2017

Let's Handicap the Trump Agenda

WE'RE SICK OF WRITING ABOUT RUSSIA AND LEAKS, so let's focus this morning on the Trump agenda – where it stands and where it's headed. The President has signed minor measures, and may win enactment of a Veterans Administration reform bill this summer, but the big stuff is stalled.

WE HANDICAP THE OUTLOOK BELOW, with one overriding theme – after a July 4 break and a FIVE WEEK vacation in August, Congress will only have a couple of dozen days left in session this fall – hardly enough to get everything done. And if Justice Anthony Kennedy announces his retirement this summer, that would gobble up even more time.


BUDGET – THIS CAN'T WAIT: Chances of a U.S. government default this fall – 2%. Trump and the Freedom Caucus may consider playing with fire, but his Goldman Sachs faction won't let it happen. Separately, chances a 2018 budget will get done by Oct. 1, when the fiscal year begins: 20%, which means there either will be a continuing resolution (60%) or a nasty government shutdown (20%).

OBAMACARE REPLACEMENT BILL: Chances the Senate will give up, hopelessly deadlocked: 60%. Chances the Senate will get a bill done: 40%. Chances hard-liners in the House will go along: 20%. On life support.

TAX REFORM: Chances of a bill late this year that simply cuts individual and corporate taxes, without much reform: 40%. Chances of tax cuts and reform together passing this year: 25%. Chances of simple tax cuts by next spring or summer: 70%. Chances of tax cuts as well as reform by next summer: 55%. If there’s no progress by the August break on taxes, we will lower these odds substantially.

INFRASTRUCTURE: Chances of a bill this year: 10%. Chances of a bill by the fall of 2018: 40%. Chances of a bill by 2019: 55%. Later rather than sooner on this one.

DODD FRANK REFORM: Chances the Senate will agree to anything close to the House-passed version: 5%. Chances the Senate might tinker with a few Dodd-Frank provisions: 30%. This is going nowhere.

SANCTIONS: Another time suck, as Congress seeks tougher sanctions on Iran, 80% chance, which the White House would accept, and on Russia, 60% chance, which Trump might resist.

THE WALL: Chances that Congress will appropriate funds for building a border wall: 20%. Chances that Congress will beef up spending on border security: 80%.

IMMIGRATION REFORM: Take the "under" on this one. Odds that a reform bill could emerge in the next year: 20%, and that's probably too optimistic.

FANNIE MAE AND FREDDIE MAC REFORM: Chances of some movement this year: 60%. Chances a bill can pass in 2017: 40%.This is a sleeper, the kind of provision that could sneak into a last-minute spending package in late December.

BOTTOM LINE: 'Who knew it would be this difficult?" Trump whined early this spring. Indeed, this is a city that moves glacially, with competing special interests lurking at every corner. Our advice for Trump: shoot for the moon on tax cuts this fall, with a goal of getting them enacted by spring. He could get that via reconciliation, and it might help the economy – and the GOP – just ahead of the mid-term elections.

A FINAL POINT: It strikes us, after reviewing this meager list of options, that fiscal policy uncertainty is about to intensify – for ordinary Americans, for businesses, and for the markets. So how can Janet Yellen confidently remove the punch bowl this fall when she has no idea where the Trump agenda is headed? Still another reason for Yellen to tread cautiously on monetary policy after tomorrow's rate hike.


June 9, 2017

Yesterday's Rorschach Test – Why Trump Supporters Won

SOMETHING FOR EVERYONE: The Rorschach inkblot that was the Comey hearings gave everyone a chance to believe their own narratives prevailed, but we have to conclude that Trump supporters have solid reasons to be relieved this morning...

1. President Trump said he "hoped" James Comey would drop the Michael Flynn probe. Basing an obstruction of justice case on "hope" is pretty thin gruel; neither the House nor the Senate is remotely closer to ousting Trump, based on what transpired yesterday.

2. Comey is a leaker. How ironic – this was the hearing's smoking gun, a revelation that gave Trump's supporters the ammunition they needed against the Washington swamp. Conservative talk radio got a bloody shirt to wave – Comey was the leaker, and the press, of course, accepts all leaks without questioning motives.

3. Trump wasn't under investigation after all, as Comey verified.

THE DEMOCRATS GOT LITTLE NEW, and now have to wait for months before Robert Mueller's findings will revive an argument about obstruction of justice. But the Russia scandal hardly will disappear; the focus will shift to Jared Kushner, Paul Manafort, Jeff Sessions, etc. And you can be sure there will be leaks and more leaks.

WHAT DOES THIS MEAN FOR TRUMP'S AGENDA? Assuming Trump can refrain from outrageous tweets, he has a chance to solidify his support within the GOP; most Republicans will stick with him, because they don't dare to repudiate the Trump base. And his base is invigorated by proof that Comey is a leaker with an agenda.

THE FIVE BIG AGENDA ITEMS: 1.) Tax reform is grinding forward; it's way too premature to write an obituary for this centerpiece issue. 2.) Health reform isn't dead but there's a new issue emerging – increasing federal subsidies to health insurers. 3.) Infrastructure is a story for 2018 or 2019. 4.) Dramatic Dodd-Frank reform passed in the House but has no chance to win 60 votes in the Senate. 5.) And then there are budget issues . . .

RAISING THE DEBT CEILING may not have the sizzle of a Comey hearing, but it's a very big deal, and will gobble up precious time later this summer. Conservative House Freedom Caucus members are adamant that they won't vote to raise the debt ceiling without fresh spending cuts and budget reform, while Trump’s Wall Street faction wants a clean bill.

TIRED OF COMEY OVERKILL? Well, get ready for debt ceiling overkill – it's good for ratings and it sells newspapers to warn that the U.S. could default on its debt. That won't happen, of course, but the deal to avoid it will give Nancy Pelosi an opening for more spending and will sorely test the Trump Administration's ability to govern. The jury is still out on whether Trump can govern – and the jury is definitely still out on what Robert Mueller may do months from now. He’s the wild card, not James Comey.


June 8, 2017

Four Angles We'll Be Watching Today

IT COULD HAVE BEEN WORSE: There were no bombshells in James Comey's statement yesterday, largely because everything had already been leaked in the Brave New World of leaks and more leaks. And there was something for everyone – President Trump seemingly was vindicated on the issue of whether he is personally under investigation, yet Trump opponents still can make a case for obstruction of justice.

WE'VE READ COUNTLESS ANALYSES on what constitutes obstruction of justice, but the legal arguments don't matter as much as the political climate in both houses. So we will reiterate – almost daily – that there are not sufficient votes in the House to indict or in the Senate to convict. The likelihood of impeachment is not remotely imminent; if it becomes a serious threat, it would involve action months from now by Robert Mueller, the special prosecutor.

NEVERTHELESS, THIS WILL BE A DRAMATIC DAY, with all sorts of angles. Here are four we'll be watching:

1. Will Trump tweet? We're hearing that Trump's attorneys and his inner circle are urging him not to tweet today – a point-by-point refutation of Comey's testimony could be used against the president in a future proceeding, his aides fear. If he tweets today, it will reinforce concerns about his temperament and it will be a sign that Trump listens to no one.

2. What will Republicans say? This is important. Many leading Republicans were relieved last night that the Comey statement wasn't even more damaging, but in private GOP lawmakers are exasperated with Trump. Paul Ryan, usually a Trump supporter, said last night that "obviously" it was inappropriate to ask Comey to drop the Michael Flynn investigation. Most of Ryan's colleagues agree.

3. How will the markets react? It depends on which markets. Stocks haven't reacted to this scandal, but the dollar (down) and bonds (up) have. We think stocks will hold up as long as tax reform still looks plausible, regardless of when. As for impeachment, that's not imminent – but if it was, we're convinced that the markets would welcome Mike Pence, who could get Trump's agenda enacted more quickly than Trump could, with far less drama.

4. Wild cards in Q&A: Since Comey's opening statement is public, the real action will come in Q&A. Some possible wild cards – why was Trump so obsessed with Flynn? Does anyone have anything on tape? Who were the leakers and what were their motives? Has anyone actually seen salacious tapes? Has anyone seen Trump's taxes? The possibilities in Q&A are endless.

LIFE GOES ON: After today's frenzy, there will be fresh stories to flog – the British election, changing policies from central bankers, the ground war against ISIS, North Korea's missile tests, etc. Trump will focus on his agenda and he may settle into a less bombastic path for the rest of the summer. But make no mistake: there's a growing concern among Trump's nervous allies about his ability to govern.


June 1, 2017

The Re-emergence of Steve Bannon; Head-Scratcher for the Fed; Joe Biden for President?

BIG WINNER IN POWER STRUGGLE: When Donald Trump is under siege, he doubles down. He won the presidency in places like Bethlehem, Pa., by preaching the fiercely populist message crafted by adviser Steve Bannon – and not only has Bannon survived amid White House power struggles, he's ascendant once again.

PULLING OUT OF THE PARIS CLIMATE ACCORD, which Congress never ratified and would not ratify today, will outrage the elites, but Trump needs to keep his base intact. The Trump/Bannon argument is simple – climate deals cost jobs, NATO has taken advantage of the U.S., free trade pacts have hurt blue collar America. Of course there's a push-back to all of these arguments, but here's the political calculation that Trump will embrace...

AS LONG AS TWO-THIRDS OF REPUBLICAN VOTERS support Trump (they do), Republicans in the House and Senate will not dare to defect, as they did in 1974, abandoning Richard Nixon during the Watergate scandal. Allegations of obstruction of justice are certain to intensify this month after James Comey testifies to Congress, yet we see virtually no chance that there are enough votes in the House and Senate to oust Trump.

HOW DOES TRUMP SURVIVE AMID NEW LEAKS AND ALLEGATIONS?Republicans in Congress will have to stick with him, and the only way Republicans will stick with Trump is if his base stays loyal. Bannon knows that the Trump base doesn't want Europeans to dictate to the U.S. on climate change; the base wants to revive coal and other industries that Trump has promised to help. It's all about the Electoral College map; all politics is local.

A rate hike is virtually certain on June 14, but suddenly the outlook beyond then looks quite uncertain. Inflation has softened, small business loans have dropped, and uncertainty over economic policies is rising as Washington looks dysfunctional. Janet Yellen's press conference on June 14 will be a must-watch; she will indicate that tapering of the balance sheet is still on schedule for the fourth quarter, but the timing of the next rate hike is very much up in the air.

JOE BIDEN FOR PRESIDENT? At least two dozen Democrats are considering a run for the presidency in 2020, and it sure looks like Joe Biden wants to get a jump on the rest. He held a campaign-style rally in New Hampshire last month, and he will announce the formation of a PAC today. Biden is personable and connects with blue collar workers, but really – Joe Biden, who would be 78 on inauguration day in 2020?

THE CUPBOARD IS BARE: The Democrats' early frontrunner for 2020 may be Bernie Sanders, who would be 79 on the next inauguration day. Elizabeth Warren would be 71. Hillary Clinton would be 73. Donald Trump would be 74, but the Republicans have a fairly deep bench and the Democrats don't. We think Kamala Harris, the new California senator, is someone to watch, but like all the party's young stars, most Americans have never heard of her. So Joe Biden sees one last opportunity...


May 31, 2017

"Plan B" on Tax Cuts Gains Support

TIME IS RUNNING OUT TO PASS MAJOR LEGISLATION as Congress eyes a five-week vacation later this summer, so for an Administration desperate for a high-profile victory, "Plan B" on tax reform is gaining support. A bill simply embracing tax cuts – not tax reform – has a chance, as long as a fight over the debt ceiling doesn't grind Washington to a halt later this summer.

FACING THE OBVIOUS: It's becoming clear that sweeping tax reform – killing wasteful tax breaks, replacing them with tax incentives – has encountered the usual obstacle: the details. Everyone wants tax reform, but no one can agree on the particulars, at least not quickly.

BUT SIMPLE TAX CUTS HAVE great appeal among many Republicans who are convinced that 3% GDP growth is achievable despite a growing shortage of workers. They think the economy could kick into a higher gear with three individual brackets of 35%, 25% and 15%, and a top tax on pass-through companies and corporations of 22-to-25% (President Trump's goal of a 15% top corporate tax is dead).

THE ADVANTAGE OF "PLAN B" is obvious – it could be done relatively quickly, by Washington standards. Lower tax rates, perhaps taking effect on Jan. 1, 2018, would be possible, while congressional committees spend most of next year working on thorny reform issues like the Border Adjustment Tax and the deductibility of debt.

THE OTHER ADVANTAGE is that this could give the staggering Trump administration a victory this fall, since an Obamacare replacement bill is on life support. (Actually, we think there was a victory yesterday that was worthy of some boasting – the successful shoot-down of a test missile over the Pacific, an important signal to North Korea. Why Trump isn't tweeting about that is a mystery.)

THE OBSTACLE TO "PLAN B" TAX CUTS is the growing risk of a crippling debt ceiling crisis either before or just after the August recess. The debt ceiling of just under $20 trillion was hit in March, and Treasury may run out emergency options by late summer, posing a risk that the government could default on its debt obligations.

DEFAULT IS UNLIKELY because a deal always materializes, but this will be tricky. Freedom Caucus House members will balk unless there are fresh spending cuts and budget reforms, and Treasury Secretary Steve Mnuchin is insisting on a clean bill. Just as John Boehner had to seek votes from Nancy Pelosi's Democrats, Paul Ryan may have to take a similar path – and you can bet on two things: Pelosi will seek major spending concessions, and the GOP base will howl.

THE DEBT CEILING FIGHT, and a fiscal 2018 budget brawl that could shut down the government when the fiscal year begins on Oct. 1 are two issues the markets will have to monitor. The Federal Reserve surely will, and it might complicate the central bankers' plans to hike rates in September, after the near-certain FOMC move on June 14.

SO EVEN A "PLAN B" package of simple tax cuts could run into obstacles, but it would be vastly easier to pass tax cuts rather than a complex set of reforms, with all the inevitable trade-offs. In any event, “Plan B” could produce a victory for the Trump administration, which faces months of leaks and hearings over the deepening Russia scandal.


May 25, 2017

Republicans Have a Serious Problem – No Health Compromise in Sight

THE EAGERLY-AWAITED "score" from the Congressional Budget Office yesterday didn't change much – the House-passed plan would result in 23 million fewer people covered, but it would save $119 billion and might lower premiums. Plenty of talking points for both parties – but not enough to rid the Republicans of a serious political problem.

regrets it – it's an albatross, no one is happy, everyone complains about it. Republicans think health care costs way too much, is inefficient, and gives government far too much power. Democrats think it's inadequate and requires more subsidies; in private they agree that a single payer system is their goal.

SO HOW CAN YOU GET A COMPROMISE? The logical answer is to seek a bipartisan deal, but that's out of the question in this bitterly divided city. There isn't even agreement among Republicans, who are increasingly worried about the 2018 election. They might squeak by in today's rowdy House election in Montana, but Georgia on June 20 is a race to watch; the Democrat leads in recent polls.

REPUBLICANS ARE SO DIVIDED ON HEALTH CARE that they are openly asking whether the Senate will ever find a compromise; Mitch McConnell has his doubts whether any plan can win 50 votes. And even if the Senate passed a bill, it's unlikely that conservatives in the House would accept it. In any event, getting a bill to President Trump's desk could take several more months.

THIS IS AN IRRITANT FOR THE MARKETS because the logical progression – health reform first, a budget deal, then tax reform – is bogged down and could stay bogged down. There's a strong temptation among many Republicans to shelve the health care bill, but it raises revenues that are needed for tax reform. They may have to simply pass a tax bill without the health revenues, while making the tax math work by assuming an economic boom and higher receipts.

ONE THING IS CERTAIN: Voters care about health reform. They may roll their eyes over what they consider "fake news" on Russia, but doctor and hospital bills generate real anxiety. The Republicans know this, yet they're caught in a Catch-22: they proclaim that Obamacare is failing, but they cannot come up with a replacement. And that poses a real risk to the GOP in the next election.


May 24, 2017

Trump Budget Generates an Avalanche of Criticism – Except from the Markets

IT HAPPENS EVERY YEAR: All the special interest groups in Washington rip the new budget as cruel and mathematically ignorant, and the press laps it up because simple sound bites make for good copy. But the verdict we focus on is from the markets – which yawned, as usual, at this latest budget controversy.

FOR NEARLY TWO DECADES, deficit Cassandras have warned that red ink would drive interest rates and inflation much higher – but that simply hasn't happened. Even with a tightening labor market and a national debt that exceeds $20 trillion, the Treasury 10-year bond yield is stuck at around 2-1/4 percent.

THE MAJOR REASON, IN OUR OPINION, is the insatiable demand – globally and domestically – for Treasury debt. We often encounter deficit hawks who claim that China, the largest external holder of U.S. debt, might suddenly stop buying Treasury paper – but why would China exit the largest and most stable debt market in the world, especially since the value of their own holdings would decrease if markets sensed a change in global demand?

SO FIRST AND FOREMOST, investors seem to view the U.S. debt market as the best house in a bad neighborhood, as long as American deficits are within normal parameters. And this year's U.S. red ink, which probably will be around $550 billion, should be just under 3% of GDP – traditionally a level the markets have easily lived with.

that similar deficits for the next couple of years will be an issue for the bond market, and that's important – voters need to see something bad, like significantly higher mortgage costs, before they will support harsh new spending reductions. So there's no catalyst from the markets to reduce deficits – the markets are fat and happy – and there's no catalyst from voters, who see no obvious manifestation of high deficits in their everyday lives.

OF COURSE, THERE'S A PUSH-BACK TO THIS COMPLACENCY: High deficits crowd out tax cuts or spending for more worthwhile causes than debt servicing costs, we get that. But in this city, high deficits not only have been accepted – but they they help each party with their narratives: the Democrats want to tax the wealthy (hardly a windfall of revenues there), while the Republicans want to fundamentally change the role of government spending.

THE AVALANCHE OF CRITICISM THIS WEEK: No one was happy – members of Congress from farm states are outraged over proposed agricultural cuts. Advocates of food stamps and other anti-poverty programs are enraged. John McCain and other defense hawks think a 10% Pentagon increase is stingy. And so on, it's a Washington tradition.

THE TOP BUDGET EXPERTS ON WALL STREET were nearly universal in their ridicule of the Trump budget math, and we agree – it doesn't seem to add up. But these experts surely know that the budget will be re-written from scratch by Congress, which will reject the hard right proposals from budget director Mick Mulvaney; even he expects a re-write.

SO THE KEY COMMITTEES WILL BEGIN WORK on a budget that will soften the rough edges; many Republicans, fearful of the 2018 election, will compromise with Democrats on spending levels. (Besides, they know if there's a stalemate, a continuing resolution when the new fiscal year starts on Oct. 1 would be an acceptable fall-back.) None of this in-fighting should upset investors, although we close with the one factor that could begin to worry the markets...

THE REAL SAVINGS won't come from food stamps or rosy scenarios – the real savings will come from Social Security and Medicare. Anyone who studies the budget knows that's where reforms eventually will become crucial. Trump won't go there – he has promised not to – and most politicians agree that major cuts to these two huge programs would be politically radioactive.

OUR BELIEF THAT THE MARKETS CAN LIVE with high deficits will be severely tested in the coming decade as Social Security and Medicare approach bankruptcy. But that's not an imminent challenge; the politicians and the markets only focus on the next few months, of course.


May 23, 2017

Tax Reform – Some Movement, Finally

FAR FROM THE GRUESOME TERRORISM in Manchester, life goes on. So we will focus today on tax reform, which is finally moving in Congress – a positive sign for financial markets, which are counting on a bill by next spring if not sooner. That timetable is still on track.

No one ever thought this would be easy, since there are two enormous differences that divide Republicans (the Democrats, who will unanimously oppose the Trump tax cuts, aren't the key factor – Republicans are). Their two major differences are on display this week:

1. The Border Adjustment Tax: Paul Ryan, who has waited for his entire career to pass a massive tax reform bill, is determined to include a 20% border adjustment tax (BAT) on imported goods. This is hotly opposed by firms like Target and Wal-Mart, and has only modest support among Republicans, many of whom consider it a de facto tax increase.

We think House Ways and Means Committee Chairman Kevin Brady, a Ryan ally, will pass a bill in his committee this summer that will include a BAT, which will not prevail in the Senate. But the key is getting a bill moving, and if nothing else, Ryan will get an airing for a BAT – and he just might win a much smaller, phased-in provision.

2. How to Pay for the Bill: 
This also divides Republicans. Ryan and fiscal conservatives are uneasy about assuming a huge revenue surge that would be generated by a GDP growth rate of close to 3%. Supply-siders respond: let’s go for it. "Economic growth is the mother of all pay-fors," Larry Kudlow says, and he's right.

Will rosy revenue scenarios pass muster with the Senate parliamentarian? Maybe not – but she could get overridden by Senate President Mike Pence. Plus there's always the option of simply passing a bill that loses tons of money – which, under terms of budget reconciliation rules, would "sunset" the tax cuts in ten years. So this Congress might take a gamble that the tax cuts would be re-authorized them.

THE TIMETABLE: Brady will begin markup of a tax reform bill when Congress returns on June 6 from the Memorial Day recess. He could have a bill finished in July, and passage by the full House is possible by the August recess or in September.

The Senate will move slowly this fall – hamstrung by health reform, the debt ceiling and other budget issues – and may not pass its bill until late this year. But we still think a House-Senate conference committee can finish a bill by early spring; an effective date of April 1, 2018 is possible. That would boost the economy, of course, heading into the mid-term elections.

A top rate for corporations and "pass through" companies in the low-20s. Repatriation of corporate profits stashed abroad, probably taxed at 7% or 8%. Immediate expensing. Three basic individual rates – 10%, 25% and 35% or 36%. A cap on deductions. Reform or abolition of the estate tax. Death of the hated Alternative Minimum tax. A dramatically higher standard deduction, which would make many tax breaks less attractive.

THIS IS TREMENDOUSLY EXCITING STUFF, likely to increase GDP growth to 2-1/2% and drive unemployment below 4% (yes, interest rates would rise, but to a level the markets could live with). Despite all the dysfunction and the Russian scandal, tax reform is do-able. Every journey of a thousand miles begins with a single step – and the tax reform journey has begun.


May 22, 2017

An Epic Battle Over Fiscal Policy Begins This Week

DONALD TRUMP WILL BE MAKING HEADLINES IN ISRAEL today and tomorrow, but there will be plenty of news in Washington, as his OMB director unveils the most ambitious budget since Ronald Reagan's days. Our major take-away: Trump can boast that he has produced a balanced budget with huge tax cuts, but he doesn't have the political clout in Congress to get all that he wants, not to mention the deep spending cuts that will be dead on arrival.

BUT WHAT A FIGHT THIS WILL BE:  This will divert attention away from the Russian story, as special counsel Robert Mueller digs methodically for more evidence. And make no mistake, this is will be an epic fiscal policy showdown that highlights a fundamental issue: concentrating spending power in Washington versus the states.  And it will pit the House, which is dominated by conservatives, against the Senate, which is dominated by moderates and liberals.

TRUMP'S BUDGET DIRECTOR, TEA PARTY CONSERVATIVE Mick Mulvaney, will roll out the budget tomorrow -- just a day before the Congressional Budget Office "score" of the House Obamacare replacement bill. Some highlights of the new budget:

A balanced budget within 10 years. You can get there by assuming low interest rates and 3% GDP growth, but the main flaw in that goal is becoming obvious -- not enough workers, as state after state reports unemployment rates of close to 3%.

Huge cuts in discretionary spending. This is the centerpiece of the spending proposal -- cuts of nearly $1 trillion over ten years in Medicaid, food stamps and other anti-poverty programs, with the states doing the heavy lifting. This will hit a brick wall in the Senate and Trump will get the worst of both worlds: scathing criticism from the left for these spending cuts, and the inability to get most of them enacted.

A renewed focus on "able-bodied" recipients of assistance. Trump's proposal to shift these programs to the states hinges on them rejecting aid for some recipients who are unwilling to work.  This gives Trump an issue to exploit with conservatives, but the left will focus on cuts to programs like school lunches and Habitat for Humanity.

Nothing, yet, to curb Social Security or Medicare. This is where the real money is, but neither party wants to go after these programs; even a modest change in the CPI component of the Cost of Living Adjustment is considered politically radioactive. A pity on the future president who eventually will have to take a meat ax to Social Security and Medicare in a few years.

Roughly 10% hike in defense spending. Democrats will go along, because this means jobs back home, and it gives them an opening to seek hikes in domestic spending as well. And the Trump budget will seek $200 billion for infrastructure, which Democrats may accept.

OUR BOTTOM LINE: Trump's foreign trip is off to a good start -- excellent photo ops, good speeches -- but the focus in this city will shift dramatically next week when James Comey testifies before Congress. As for Mueller, he may take a year to finish his work, and during that process it's difficult to envision Trump getting his way on his budget; Senate Republicans will be a major obstacle.

MARKET IMPACT: We still think a tax cut is likely next year, but the "scoring" will be a problem for Trump. Even using very rosy assumptions, his bill would lose trillions of dollars in the next ten years, so we have a hunch the tax bill will have to be scaled back. As for the spending cuts, there's no question Trump's proposals will be watered down. So if spending cuts are not realized and tax cuts aren't fully paid for, the major implication is obvious:  significantly higher deficits.


May 19, 2017

What Trump Will Leave Behind

A CITY REELING, WITH UNCERTAINTY GROWING: First of all, we highly recommend Peggy Noonan's weekend column, already posted on the Wall Street Journal web site, www.wsj.com. Her style is typically dramatic, but the substance is spot-on; if you want insight on what Donald Trump has wrought, start with Peggy's piece this morning.

EVERYONE HERE NEEDS A TIME-OUT, but there's the potential for more controversy in the week ahead as Trump visits key allies with plenty of uncertainties: how will he navigate a Saudi arms deal, his harsh criticism of NATO, the cooling U.S. relations with Israel, the simmering American antipathy toward Iran, etc. "He can't afford to screw up – there's little margin for error," a GOP Hill staffer told us yesterday.

TRUMP'S BELEAGUERED STAFF, bracing for a shake-up after the trip ends, will also have to focus on what's happening in Washington, where his departure won't mean a quiet week here. Early in the coming week, the Congressional Budget Office will issue its "score" of the House Obamacare replacement bill, which is likely to be a public relations disaster for Republicans, further jeopardizing passage any health bill. That, of course, would greatly complicate efforts to enact tax reform.

With Trump gone, he will leave the heavy lifting on the fiscal 2018 budget to OMB Chief Mick Mulvaney, who will get intense push-back (even from Republicans) on huge spending cuts for domestic spending programs – while both parties will scoff at economic assumptions of GDP growth of 3% or better – with virtually no increase in assumed interest rates. If ever a budget was dead on arrival, it will be next week's proposal from the White House.

THE STORY THAT WON'T DIE: Just because Trump will be abroad, that no longer is a reason to pipe down on criticism of the president; that tradition ended in the past decade. So the deepening criminal probe of Russian ties to the Trump inner circle will continue to intensify; former FBI director James Comey probably will testify during Trump's trip, which will dominate the news.

THE ONE STORY THAT MAY FADE, at least temporarily, is that impeachment is somehow imminent. It isn't. Even Democrats are urging a measured pace – they know that Robert Mueller's probe will take many months, and they are content to let Republicans squirm as the leaks continue. Comey and his allies seem to be leaking to the New York Times almost daily.

SO – WHAT DOES ALL OF THIS MEAN FOR INVESTORS? The Trump agenda has stalled, which is largely why the markets sold off this week. The dysfunction in this city is so intense that the idea of passing a tax reform bill this year is delusional, despite what Paul Ryan says. Tax reform can still pass next year (or later), but for now the fiscal policy outlook is a huge uncertainty for Wall Street.

THIS RAISES AN INTRIGUING MARKET ANGLE: How aggressive can Janet Yellen be in the face of fiscal policy uncertainty? A rate hike on June 14 is virtually certain, but she could hint in her press conference that additional moves in the second half will depend on whether there's any clarity on policy. With a tapering of the Fed's balance sheet still likely to begin in the fourth quarter, the pace of rate hikes could slow.

in times of uncertainty, and if anything is clear after the stunning last 10 days, uncertainty will persist – whether Trump is abroad or in Washington. Meanwhile, the long-shot drumbeat for Mike Pence will persist.


May 18, 2017

Time to Look at Mike Pence, the Anti-Trump

WE GOT SEVERAL EMAILS YESTERDAY from readers who wanted to follow up on our assertion that the markets would gladly live with Mike Pence as President. To reiterate: we don't think there are enough votes in the House to impeach Donald Trump, or in the Senate to convict -- but in this climate of a bombshell every day, it's not 100% certain that Trump will survive. So let's take a look at Michael Richard Pence . . .
THE ANTI-TRUMP: Pence, 57, is a devoutly religious born-again Christian, a former altar boy, unabashedly monogamous, well-liked among colleagues, not given to boasting or profanity.  In other words, the polar opposite of Donald J. Trump.
A TRADITIONAL REPUBLICAN: For Wall Street, what's not to like? Pence is an unapologetic free-trader, reliably pro-business, a former budget-cutting governor (in the mold of his predecessor, Mitch Daniels), and a tax-cutter. He's also a fierce social conservative; his positions on abortion, gays and education are adamantly opposed by Democrats. But in the Republican base, Pence checks all the boxes (unlike Trump).
A FEARLESS FORECAST: Pence is so comfortable on Capitol Hill (he served 12 years in the House) that he would be able to get Trump's agenda enacted more easily than Trump would be able to get the agenda enacted. Pence is close to Paul Ryan and Reince Priebus, and is comfortable with Senate Republicans as well. Even Democrats, who loathe his positions on social issues, have generally positive things to say about the man and his trustworthiness.Bottom line: he could get things done.
PENCE IS HUMAN and he must find it distasteful to defend Trump (he was harshly critical last fall after a tape surfaced showing Trump bragging about molesting women). Pence surely must have private moments in which he senses an opening if Trump cannot recover from his disastrous first four months. Pence has considered running for president in the past, and he must think that Trump, nearly 71, is not the picture of robust health and may only serve for one term (if that). 
SO IT'S TIME TO START THINKING about what Pence might be like as president. Our take is that Pence is a solid, boring, no-drama Midwesterner who is in total sync with Republican Party ideology. Incredibly, that is precisely the description of Gerald Ford, who took office in 1974 after Richard Nixon resigned.


May 17, 2017

Trump Has the Votes to Survive Impeachment – For Now

OBSTRUCTION OF JUSTICE could be an impeachable offense, but the allegations against Donald Trump are not legal issues per se; rather it's all about the number of votes he can muster in the House and Senate – where, we believe, he has enough support to prevail. But after yesterday's bombshells – with hints of more to come – it's not 100% certain that Trump will survive.

THIS STUNNING TURN OF EVENTS, which has rocked Washington and demoralized Republicans, now pits a badly wounded president against the man he mocked as a "showboater." Former FBI Director James Comey has more memos to reveal, his colleagues report, which could deepen this crisis.

A GREAT IRONY IS THAT TRUMP – who demands loyalty from his subordinates – does not give it in return, and a growing cast of Republicans may not be willing to fight for him. Do Paul Ryan, Mitch McConnell – or Mike Pence, for that matter – have any great loyalty for the president?

SO WE NOW HEAD INTO MURKY WATERS, with subpoenas and hearings and more bombshells from anonymous leakers. Can Trump hang on? Here's the math: A simple majority – 218 votes in the House – would be required to impeach; the Republicans have 238 seats, with four vacancies. To convict, it would take a two-thirds vote in the Senate, a very high bar to clear, since the Republicans have 52 seats.

AS OF THIS MORNING, WE THINK TRUMP CAN HANG ON, but who knows what comes next? Would a successful international trip next week help him? Possibly. Would a major White House staff reorganization make much of a difference? Nope. A speech to the nation? Maybe.

MONTHS OF TRENCH WARFARE – WHAT ARE THE IMPLICATIONS? On the domestic front, we still expect the beginnings of movement on a tax reform bill, but other issues will have to come first: the debt ceiling and the fiscal 2018 budget fight, plus the Senate's re-write of the House Obamacare replacement bill, which actually is advancing. With the White House transfixed by bigger issues, there may be minimal legislative interference from Trump aides, which might be a good thing.

ON THE INTERNATIONAL FRONT, the specter of a crippled American president can't be positive. In an effort to save his presidency, Trump could become unpredictable – there's nothing like a foreign adventure to divert attention. In this kind of a climate, the dollar could lose some of its recent luster.

WE'VE BEEN THINKING FOR THE PAST COUPLE OF DAYS about Vice President Pence, who could become a pivotal player if this crisis deepens. Is Pence fit to be president? Compared to Trump, absolutely. Pence would provide some stability and predictability – no drama. He's very conservative on social issues, so Democrats will fight with him, but on economic policies the markets could easily live with Pence's pro-business, pro-tax cut agenda.

BOTTOM LINE: Everyone, including us, has proclaimed that the economic fundamentals are so good that the markets can withstand a political crisis. But an impeachment fight is another story – it would be demoralizing, not good for consumer confidence, and an enormous source of uncertainty for investors, who hate uncertainty.

FOR NOW we'll say that Trump has a 70% chance of surviving – assuming, of course, there are no fresh bombshells or self-inflicted wounds. And, really – what are the chances that there won't be any more fresh bombshells or self-inflicted wounds? This is a deadly serious crisis.


May 16, 2017

Signs of Life on Taxes and Health Reform – But Still Another Controversy Grips Washington

DONALD TRUMP VERSUS THE INTELLIGENCE COMMUNITY: Washington is buzzing this morning about who leaked to the Washington Post and other news outlets about what President Trump allegedly told Russian envoys last week. This bombshell almost certainly comes from career U.S. intelligence officials, who are in a blood feud with Trump, who has mocked and marginalized them.

DID TRUMP EXPOSE U.S. ASSETS? The Post article was shocking – but was it true? White House advisers pushed back immediately, so here's another story that will be clouded by the fog of claims and counterclaims that have gripped this administration. Who knows, precisely, what Trump told the Russians? The journalist Bob Woodward invented a new form of reporting – creating quotes that summarize what people are thinking and saying, even though those quotes are not verbatim.

WHILE THE PRECISE WORDS MAY BE DEBATABLE, there's little doubt that White House officials scrambled to notify the CIA and the NSA immediately after the Russian meeting, telling them that agents and other assets may have been compromised. The reverberations from this will persist for many months – still another distraction that will take another two or three points off Trump's job approval rating.

THE POST BOMBSHELL elicited a telling response from Republicans – Trump's supporters cried "fake news," but within the Beltway, GOP lawmakers seemed willing to accept the worst. "The president is in a downward spiral," said highly regarded Sen. Bob Corker. The operative word on Capitol Hill this morning, from both parties, is "chaos" – and it seems that Republicans, who reluctantly backed Trump's firing of James Comey, are distancing themselves from the embattled president.

IRONICALLY, THIS WILL OBSCURE SOME PROGRESS ON TAX AND HEALTH REFORM: A bipartisan group of Senators has been making progress on a health reform compromise, which could be on the floor by summer. And tax reform is stirring – finally.

TRUMP'S ECONOMIC OFFICIALS – who have largely avoided the dysfunction that has gripped most of the White House – will travel to Capitol Hill today to meet with moderate Republican members of the so-called "Tuesday group." They will discuss tax reform ideas, and the first public hearing in this long process is scheduled for Thursday in the Ways and Means Committee.

A POSITIVE THOUGHT: Obviously the Russian allegations, if true, are a shocking breach of security. The resulting furor will allow negotiations on health and taxes to proceed in virtual anonymity. Washington will not obsess over the Border Adjustment Tax or the top corporate tax rate – there are bigger fish to fry.


May 15, 2017

What Could Derail the Markets? Probably Nothing

IT'S NOT A PRETTY PICTURE: An angry president, weighing mass firings, changing his narratives, embarrassing his vice president, inviting subpoenas from emboldened Democrats over potential tape recordings. It's a dysfunctional climate to be sure, but will this affect the markets? For now, probably no.

WE HAVE REITERATED FOR MONTHS that the fundamentals are quite good: an accelerating economy, a tightening labor market, modest inflation, solid corporate earnings, and a Federal Reserve that won't overdo the rate hikes.And the big policy story is positive – a takeover by the pro-business Goldman Sachs faction in the White House.

SO WHAT COULD SEND THE MARKETS INTO A TAILSPIN? Mass firings are probably coming soon, but that's background noise – just like President Trump's over-the-top tweets. The Democrats smell blood, but there are only two domestic scenarios that could upset the markets: clear proof of collusion between Russia and Trump aides, which would drive Republicans away from Trump and his agenda; or a sign that tax reform is dead. We aren't there yet on either threat (and we're not close to a serious impeachment threat).

COULD THERE BE A GEOPOLITICAL THREAT? The biggest global story, in our opinion, is an upbeat one – economic growth is rebounding. The cover page on this weekend's Barrons proclaimed "Buy Europe." We agree – the radical threat to the EU and the Euro may have peaked, and economies on the Continent appear poised to grow by about 2% this year.

PLENTY TO WORRY ABOUT – North Korea is getting closer to having an ICBM that could get close to Hawaii, with a scary payload; a U.S. pre-emptive strike is still on the table. And cybersecurity finally has emerged as serious threat (and an opportunity for companies such as Intercede, Inside Secure and F-Secure). Markets will have to worry about these issues, but they won't significantly affect interest rates or earnings.

THE ONE WILD CARD THAT MAKES US NERVOUS in this otherwise positive climate is, of course, Trump himself. Sources describe him as seething at enemies real and imagined, eager to fire, inattentive to his agenda, and prone to self-inflicted wounds. Could the markets eventually conclude that Trump's agenda is dead? Not yet – GOP congressional leaders will push ahead on tax reform and other issues, but it's not easy for them in this environment, with public opinion turning sharply against the party and the president.

TIMING IS EVERYTHING: For anyone wondering when (or whether) we might throw in the towel on Trump’s tax cuts, that wouldn’t come until fall, if at all. Tax reform will rev up in the next few weeks, with a bill starting to move in the House.


May 12, 2017

Key Tax Issue May be Resolved; An Encouraging Trade Deal With China; June Rate Hike Virtually Certain

AMID THE MEDIA FRENZY in Washington over the Comey firing and the contradictory White House explanations, it was easy to overlook this week's Donald Trump interview in the Economist magazine. He offered major clues on tax reform...
First, the President affirmed that the bill will lose revenues, apparently resolving a key question – will the measure be paid for? Nope, it will not be "revenue neutral." This will put supply siders like Treasury Secretary Steven Mnuchin and deficit hawks like House Speaker Paul Ryan on a collision course.
Second, Trump was quite candid about his support for "priming the pump," a phrase he claimed credit for inventing. Of course, it's a classic Keynesian mantra for tax and spending policies that temporarily raise deficits in exchange for boosting economic growth. It makes sense when the economy is slumping, but U.S. growth seems to be on an upward trajectory already.
CALM BEFORE THE STORM: This year's red ink is projected by the Congressional Budget Office at $559 billion, although April tax receipts were strong and the deficit forecast may be revised slightly downward. There's no question, however, that surging entitlement outlays and a lack of any spending discipline will send deficits higher within the next two or three years.
FOR NOW, VIRTUALLY NO ONE IN WASHINGTON – including Trump – seems to care about deficits; with the stock and bond markets fat and happy, politicians see no reason to jeopardize their careers by slashing entitlement growth. A decade from now, net borrowing costs may exceed all non-defense domestic outlays, but that isn't an immediate concern – the deficit has disappeared from Washington's radar.
GOOD NEWS ON TRADE: Trump has some hard-liners on trade in his inner circle, but we worry less about protectionism than a few months ago. First, the Goldman Sachs/Wall Street faction that dominates White House economic policies won't tolerate trade wars, because they know that could rattle the markets. Second, there's a desire for specific deals, as yesterday's agreement with China illustrates.
SOME REAL PROGRESS: Something must have been in the water in Mar-a-Lago when Trump met with Chinese President Xi. The two leaders set the stage for yesterday's deal, which increases U.S. exports of everything from beef to natural gas. Other clear winners include genetically modified U.S. seed companies and U.S. electronic payment firms such as Visa and Mastercard. U.S.-China relations "are hitting a new high," Commerce Secretary Wilbur Ross said.
FED RATE HIKE ALL BUT CERTAIN: Yesterday's Producer Price Index report raised eyebrows – a headline increase in April of 0.5% and a rise in core inflation of 0.7%. With inflation percolating and the labor market close to full employment, the Federal Reserve is clearly behind the curve. 
THE CENTRAL BANKERS undoubtedly have concerns about fiscal policy uncertainty, but they have to send a signal at the June 13-14 FOMC meeting – we'll get a rate hike, plus a statement that telegraphs another one or two more moves in the second half as the Fed scrambles to keep inflation contained.


May 11, 2017

Biggest Problem for Congress: Time is Running Out

INCREDIBLY, CONGRESS WILL BE IN SESSION for only about 50 more days this year, not nearly enough time to tackle its huge agenda. The vacation-happy lawmakers will have to prioritize, because there's no way they can address everything on their – or Donald Trump's – agenda. Here's our take:

Russia and more Russia: James Comey will go public soon, and Chuck Schumer thinks he has an issue that will return the Democrats to power (we're not convinced). So Schumer has begun a work slowdown that apparently will continue until a special prosecutor – or some type of independent panel – is appointed. Schumer wants Congress to grind to a halt, and that's not difficult to do.

Budget issues: None of the 12 appropriations bills for fiscal 2018 are close to passage, and they will require weeks of markups and debate before an inevitable continuing resolution as the fiscal year ends on Sept. 30. In the meantime, an enormous issue looms when Congress returns from its five-week August break: the debt ceiling has to be raised, and there aren't remotely enough Republican votes in the House to do that.

Obamacare reform: The Senate will re-write the House bill from scratch – but there's no consensus among GOP lawmakers. Perhaps they'll finish by the August break, setting the stage for lengthy conference committee deliberations this fall. Health reform will continue to suck up an enormous amount of time, with a decreasing likelihood that it will win public support.

Tax cuts: We still think the House will begin moving soon on a reform bill – a development that would be most welcome in the financial markets. But there are so many contentious issues – the bill's cost, a Border Adjustment Tax, curbs on deductions, etc. – that it would be quite an accomplishment for the House to produce a bill by August. Then the glacial Senate could take most of the fall to pass tax reform, and a final deal may not come until 2018. Could tax reform die? Not out of the question, but we still anticipate a bill.

Dodd Frank: There are lots of proposals that could win passage of a bill in the House, but abolition of Dodd-Frank would require 60 votes in the Senate to break a filibuster, and that's not going to happen.

Supreme Court: We keep hearing that Anthony Kennedy, who turns 81 this summer, would like to retire this year. And Ruth Bader Ginsburg, 84, is not in good health. Confirmation hearings would gobble up an enormous amount of time in the Senate.

BOTTOM LINE: We don't see any big victories for Trump this summer (in fact, he lost a Senate vote yesterday on rolling back methane regs). Something will have to fill the legislative vacuum, and we suspect Russia and other geopolitical issues will dominate. The markets can live with a plodding Congress – just as long as the tax reform process is alive, and it is.


May 10, 2017

The Comey Firing – and the Impact on the Markets

OVERVIEW: Washington is abuzz this morning with speculation about the real reasons for James Comey's firing, the possibility of appointing a special prosecutor – and, seriously, the potential for impeachment. This a political earthquake, and the aftershocks will persist for the rest of Trump's presidency.

The argument among career FBI and Justice Department officials is that Comey was out of control, violating protocol, and was so imperious that the Russian investigation was all about him. Highly respected Rod Rosenstein, the Deputy Attorney General, made a powerful case that Comey's erratic behavior warranted his dismissal.

THE OTHER NARRATIVE involves timing – Trump sensed that Comey was closing in on Michael Flynn, Paul Manafort, Carter Page and others (perhaps even including Trump) and that removing Comey would stall the investigation. That's the Chuck Schumer narrative, which the Democrats will flog relentlessly. They will make this all about Trump, noting that Comey recently implied that Trump himself was under investigation (which may have sealed Comey's fate).

WHAT HAPPENS NEXT? Three things to watch: Who does Trump nominate to head the FBI? Picking a political ally like Rudy Giuliani or Chris Christie would simply inflame this crisis. Second, will Rosenstein appoint a special prosecutor? Probably – and that will guarantee a deepening probe that would be far more than just a distraction for the White House. Third, how will Republicans react – will they start to abandon Trump? Several appeared to last night.

WHAT DOES THIS MEAN FOR THE MARKETS? Trump's agenda already had stalled; now there's the likelihood that issues like tax reform will get crowded out by this political crisis. Key congressional committees will begin marking up a tax bill, but there will be little appetite for working with the White House. Make no mistake – tax reform is dead for this year. But the fundamentals – moderate GDP growth, low inflation, low interest rates, good corporate earnings – will persist.

BOTTOM LINE: We think impeachment talk is grossly premature – even if there was evidence that Trump himself had contacts with the Russians, we would not bet that two-thirds of the Senate would convict him; "high crimes and misdemeanors" is a mighty tall bar to clear. But there's one analogy to Watergate that's inescapable: there's the smell of blood in the water, as the press scrambles for the next bombshell and Trump's political allies abandon him. The specter of a presidency in trouble is not a good story for the markets – or the country.


May 9, 2017

Could a Wave Election Sweep Republicans Out Next Year?

WE'RE NOT READY to join the Washington bandwagon that is clearly rooting for a "wave" election in 2018 that could give Democrats control of the House. It's way too premature to make that call, 18 months ahead of the election, just because angry constituents are disrupting town hall meetings over a health reform bill that will be entirely re-written in the Senate.

BUT 2018 HAS BECOME A TOUGHER CALL since the House Obamacare replacement vote and the "spike the ball" celebration among the mostly white men who passed a deeply flawed bill that they hadn't even read. The ultimate question is whether this is sufficient to flip 24 House seats to the Democrats, giving them control.

WHY IT'S STILL AN UPHILL FIGHT: The House districts are drawn (or gerrymandered) in a manner that will make winning 24 net seats a daunting task. There simply aren't that many competitive seats where Republicans look vulnerable – maybe 30 at the most – which means they would have to lose virtually all of them for the Democrats to gain control. Plus, 18 months is a lifetime in politics – if the economy is humming by election day, that would make all the difference.

WHY DEMOCRATS HAVE A CHANCE: They have a motivated base, plenty of money and energetic new candidates with little baggage. And suddenly many races have tightened – veteran political guru Charlie Cook has moved his ratings for 20 Republicans, shifting them to tossup, or just leaning Republican, or just likely Republican. But even his changes, after the emotional health care vote, are not sufficient to predict a House takeover.

OUR BOTTOM LINE: You have to respect history – first-term presidents usually fare poorly in their initial mid-term election, and Trump's job approval rating is dismal. Yet his base is rock-solid, and some of the Democrats' key constituencies don't turn out in large numbers in mid-term elections. So for now, we'll predict a net pickup for the Democrats of about 15 seats, with the potential to go a little higher, but not hitting the magic number of 24.

in all likelihood, because of the stunning breakdown of seats that are up for re-election: of the 33 seats in play, 25 are held by Democrats. Of those 25, ten are in states that Trump won last fall. Of the ten, five are in states that Trump won in a landslide. We still think the GOP will add seats in the Senate, maybe two or three, to their total of 52.

HOW THIS AFFECTS THE LEGISLATIVE DYNAMICS: It makes life difficult for the Republican leadership, which has to deal with Freedom Caucus hard-liners who are in safe districts. More moderate Republicans will face tough challenges in the election, so they will distance themselves from the right wing and Trump – they'll write their own tax and health bills, which may only widen the fissures within the party, jeopardizing the Trump agenda.

THE BIG MO: Politics often gets swept up into a momentum story, and there's no question that Republicans have lost momentum; they are stunned by the town hall meetings, and at least a dozen GOP House members reportedly are mulling retirement. But the big political issues in May of 2017 may not be the big political issues in May of 2018 – and the "wave" scenario, which is embraced by the Trump-hating Washington establishment – still strikes us as premature.


May 8, 2017

The Interest Rate Inflection Point

RARELY DO THREE EVENTS CONVERGE as dramatically as in the past four days, all pointing to the same market impact – significantly higher interest rates. On April 19 we wrote about the "interest rate fake-out" when the 10-year Treasury yield fell below 2.2%; today we reiterate: rates are headed higher, for the following three reasons:

1. The economy is re-accelerating: The jobless rate is now below the Federal Reserve's definition of full employment as still another fluky first quarter slump ends. GDP growth of 2-1/2% or better for the rest of the year seems likely; this quarter seems poised to grow by 3%. The recession fears of just a month ago are gone, a rate hike is certain next month – and now the debate is whether the Fed will need to raise rates once or twice more in the second half.

2. The safe-haven play is over: The European Union, for all its flaws, has prevailed and the center has held throughout most of Europe, where economic growth is accelerating. This will lead to tighter monetary policy from the European Central Bank. With the exception of North Korea, there don't seem to be any urgent "safe haven" plays in the world – still another reason why interest rates are headed higher.

3. The Trump spending boom: Last week's budget deal showed no fiscal restraint, and new calls for austerity from the White House have been shot down on Capitol Hill – by both parties. The massive tax cut legislation is still very much alive; Republicans will write their own tax bill, just as they are writing their own health reform measure in the Senate – no need for much White House input, thank you.

BE CAREFUL WHAT YOU WISH FOR: The mantra from politicians everywhere has been to seek higher economic growth and more jobs; thanks to stunningly accommodative monetary policy, that goal is within reach. A major implication is that the labor market will get so tight that a bidding war for skilled labor, already underway, will intensify – with a resulting spike in compensation costs.

BOTTOM LINE: There will be plenty of diversions in the coming days – endless ranting on health reform, new disclosures on Russia's involvement in last fall's campaign, and an uproar over the Kushner family's Chinese visa scheme. But financial markets have something more important to deal with – a dramatic inflection point on interest rates. We think the Treasury 10-year yield will be at 2.5% by summer and perhaps close to 2.75% by Labor Day.


May 5, 2017

Five Quick Points on Health Vote; Why We Don't Worry About the French Election; Jobs Report Today

YESTERDAY'S DRAMATIC HOUSE VOTE has several major implications. Our quick take on the five major points:

1. The key was simply getting something – anything – passed. The Senate probably will pass a bill this summer that doesn't look remotely like the measure the House agreed to. The goal, quite simply, is to get a bill to a conference committee later this year – that's when the real dealing will begin.

2. Can a House-Senate deal ultimately pass in both houses? Assuming the conference committee can produce an agreement, would the full House and Senate then agree to their product? Not out of the question, but unlikely.The most probable scenario is that a relatively moderate conference committee bill would be unacceptable to the House Freedom Caucus, sending this maddening process back to the drawing board late this year.

3. The Congressional score is important: Within a few days the Congressional Budget Office will assert that the House-passed bill would throw millions of people off health coverage, and that the measure would cost billions of dollars. This could make a difference in the Senate, where at least a dozen Republicans would never agree to anything close to the the House version.

4. Don't bet against Donald Trump: Sure, he's weak on the details but Trump is astonishingly persistent. He made life miserable for Paul Ryan and House GOP leaders – he demanded that they produce a bill, and then he got personally involved in the arm-twisting. Bet against Trump at your own peril.

5. Here is our major takeaway – This bodes well for tax reform. In just this week alone, Congress has agreed to a massive spending bill to keep the government open, and the House has voted for a health bill that – despite its many flaws – moves the process forward. The House will pass tax reform, probably by fall. The Senate will pass tax reform, probably by winter. It's way, way premature to write off tax reform; it can pass next year.

First of all, it's highly likely that establishment moderate Emmanuel Macron will win Sunday's election. But even if Macron loses in an epic upset, Marine Le Pen has virtually no chance to pull France out of the European Union – she has so few seats in Parliament that her victory would result in no policy changes. A win-win scenario for opponents of Frexit.

JOBS REPORT TODAY: At what point will it become clear that the U.S. has full employment? Perhaps today, if the jobless rate falls below 4.5%. In any event, it would take an awfully weak report to dissuade the Fed from hiking rates at the June 13-14 FOMC meeting. Consensus is for a nonfarm payroll jump of about 180,000; anything close to that would give the Fed an open path to a rate hike next month.


May 4, 2017

And They're Off – Democrats Are Running; Here's Our Top Ten List

TODAY'S BIG STORY IN WASHINGTON will be the House Obamacare replacement vote. Even though there's no official scoring on the cost – or the impact – of the bill, Republicans are on the verge of a very important win. But there's little enthusiasm in the Senate, which may not consider a health bill until July.

BENEATH THE SURFACE, there's another story that has suddenly heated up: several Democrats have put out feelers to fundraisers and party leaders – they're seriously thinking about running for the presidency in 2020. Every visit to Iowa or New Hampshire will be scrutinized, so let's join in the fun with our first (and earliest) Top Ten list...

10. Oprah Winfrey: She's worth $3 billion and has an enormous following. Everyone asks us whether a true outsider like her or Jeff Bezos (worth an astonishing $80 billion) might run. Can't rule it out – but Donald Trump has proved that having no experience has its downsides.

9. Martin O'Malley: He's running and probably will be the first to announce. He's has a reservoir of goodwill in the party but he's boring – a plausible vice presidential nominee, at best.

8. Someone from New York: Bright and personable, Kirsten Gillebrand has been the insiders' favorite for nearly a decade; it's time for the New York senator to make a move – yet she appears to be reluctant to run. Gov. Andrew Cuomo is starting to look like his father – always the bridesmaid but never the bride – but he could raise a ton of money.

7. Joe Biden or Hillary Clinton: We have to put them on the list, but...Despite the warm feelings toward Biden within the party, we think he's among the most overrated politicians in America, a windbag who has no new ideas. Clinton is unelectable, period.

6. Someone from Minnesota: Amy Klobuchar isn't well known but is well-regarded in the Senate – and she's headed for Iowa this weekend. Al Franken, a scathing Trump critic, is toying with a run.

5. An Hispanic dark-horse: Julian Castro has star power and probably will run. Nevada Sen. Catherine Cortez Masto is a fresh face with huge upside potential; she would make an ideal running mate.

4. Kamala Harris: The California senator isn't shy about going for it – she will embrace the Barack Obama template, running for president after only a brief stint in the Senate. Half African-American and half Indian-American, Harris may be a serious candidate, well funded and ambitious. Haven't heard of her? You soon will, she's got California star power.

3. Cory Booker: He's an intriguing guy – a relentless self-promoter but also a personable and bright problem-solver who is not reflexively liberal. The New Jersey senator almost certainly will run, and will have plenty of money. Booker is calculating and ambitious, and has a chance to finish in the top tier in a crowded field.

2. Bernie Sanders: He's 75, with socialist ideas that put him well outside of the mainstream. We hear that Sanders is still seething over an apparent conspiracy by Debbie Wasserman Schultz the Democratic National Committee to deny him the nomination – and he tells friends that he would have far exceeded Hillary Clinton's vote total in places like Bethlehem, Pa. Sanders has the highest favorability rating of any active politician, and he may run despite his age.

1. Elizabeth Warren: Don't shoot the messenger; this doesn't mean we support her. Warren is an electrifying demagogue who would be a disaster for our industry, which she vilifies as corrupt and greedy. We make Warren the early favorite largely because if Sanders doesn't run, she will inherit his massive army of young supporters. Can Warren win a general election? She can win the Northeast and the West Coast, but her Electoral College total could look remarkably similar to Hillary Clinton's – not enough.

BOTTOM LINE: This is a very weak field – a major reason why Trump may run again. He tells associates that he would love to run against Warren, who he mocks very effectively. The Democrats desperately need a fresh face, someone like Sen. Chris Murphy of Connecticut, someone to inspire young voters. Sanders can, but he will be 79 in the fall of 2020.


May 3, 2017

Donald Trump is Angry

LIKE SO MANY PRESIDENTS BEFORE HIM, Donald Trump is stunned to discover that he cannot get his way with Congress – which will be a major narrative, we suspect, in his second hundred days. To compound matters, most of Washington now accepts our view that Trump got taken to the cleaners in the recent budget negotiations, and that kind of criticism makes him angry.

SO IF HE CAN'T FIRE PEOPLE or bulldoze his way through Congress, Trump wants to change the rules. But leading Republicans said no yesterday – Mitch McConnell will not even entertain changes to Senate filibuster rules; no one wants to radically change the scoring process for tax cuts; and Trump's suggestion that a government shutdown might help was greeted with scorn in both parties.

WELCOME TO WASHINGTON, where still another long recess is about to begin, without progress on a health bill (the current one is on life support), with still another budget crisis looming this summer as Treasury scrambles to avoid a U.S. default. Trump seemingly is incredulous that Washington is this difficult, and he's especially angry that Republicans have defected from him – but the estrangement will only intensify.

MUCH OF THE WHITE HOUSE IRE is directed at Paul Ryan, who is loathed by the GOP grassroots base and faces a potential crisis over the debt ceiling this summer. But in private, House Republicans are angry over getting repeatedly blindsided by Trump over issues that have no chance of enactment – resurrecting Glass-Steagall, building a border wall, raising gasoline taxes, etc.

WE TALKED WITH A SAVVY REPUBLICAN YESTERDAY who believes a major problem is managing expectations. Trump proclaims that a terrific health bill will pass, that tax cuts will get finished quickly, that Dodd-Frank soon will be killed. None of those things will happen this year, which simply makes the GOP base frustrated over promises made and never kept.

WE SUSPECT TRUMP WILL THROW UP HIS HANDS and change the subject to issues where he can have a major impact – campaigning for Republicans ahead of the 2018 Senate election, where the GOP has a chance to pick up three or four seats; bringing specific trade cases, like the U.S. lumber tariffs imposed on Canada; and foreign policy, as he and Vladimir Putin attempt to seek a cease-fire in Syria.

TRUMP ABHORS A VACUUM that keeps him out of the news, so while he will maintain his anger toward Congress, he now may focus on the Middle East, Iran, China and North Korea. Foreign policy is the next big story to watch, an area where Trump could enjoy some success, unlike his dealings with Congress. There's upside potential with Russia and China, but we worry that even the slightest provocation from Iran will invite a strong reaction from Washington.


May 2, 2017

Donald Trump Gets Taken to the Cleaners

THE DUST IS SETTLING AFTER SUNDAY NIGHT'S BUDGET DEAL – which is looking like a capitulation by President Trump, who caved on almost every issue. GOP conservatives in this town are aghast; Trump's base is wondering if he really can negotiate. Democrats, in the minority in both houses, are chortling about repeating this success on the 2018 budget.

WE WROTE YESTERDAY MORNING that both sides got something in the deal, but a closer inspection reveals that Democrats got everything they wanted, while Trump got virtually nothing. Consider: there will be no cuts in domestic spending, as Trump demanded; there will be no money for a wall with Mexico; Planned Parenthood will be fully funded; there will be no crackdown on sanctuary cities; EPA funding will not be cut be by one-third, it will be cut by 1%. The White House got more money for the Pentagon, but not as much as the President wanted.

TRUMP ADVISERS said they wanted to get the government shutdown threat out of the way so they could focus on an Obamacare replacement bill this week, but that measure seems to be on life support – there's not quite enough support for it in the House, and nowhere close to enough support in the Senate, where moderate Republicans are hearing from constituents who don't want any change in coverage of pre-existing medical conditions.

THIS IS A PRESIDENT who doesn't like to lose, and his debacle on the budget has prompted him to suggest that the Senate filibuster rules are "archaic" and "unfair." But there aren't enough Republicans to change the rules. Likewise, supporters of tax reform floated a trial balloon yesterday to widen the budget window to 15 or 20 years, which theoretically would allow for a tax bill that would lose trillions in the first few years. That won't fly with GOP deficit hawks.

SO WHAT ARE THE LESSONS FOR THE MARKETS? One very clear one: there is no stomach for any spending cuts, especially among Democrats, who have just enough votes to prevail. This is the strongest evidence thus far that the budget deficit is headed much higher, beginning within a year. As for tax cuts, Trump can get one if he wants to negotiate with Democrats – which they relish.

TRUMP'S VERY ROCKY STRETCH: In addition to getting fleeced on the budget deal, Trump has said the following in the past 48 hours: it would be an "honor" to meet with Kim Jong-un. Glass-Steagall should be resurrected. Andrew Jackson, who died 16 years before the Civil War began, could have prevented it. He seemed to praise Philippine thug Rodrigo Duterte. Trump showed a total misunderstanding of what's in the GOP health bill. He suggested raising the federal gasoline tax without consulting with Republicans in Congress, who hate the idea.

IT'S GOING TO BE LIKE THIS for the next three years and nine months, get used to it. Corporate earnings can soar, the economy can improve, tax reform can pass, the markets can surge. But take it from the Republicans we talk with – the President is a loose cannon, easily capable of going off message with an outrageous remark; generating headlines is his specialty. And, Republicans are saying in private, Trump isn't a very good negotiator – Chuck Schumer took him to the cleaners on Sunday night.


May 1, 2017

Why Last Night's Budget Deal is Important; Guess Who's Running for President?

ONE SMALL STEP: Those of us who still think a tax reform bill can pass (not until winter) got a bit of positive news late last night: a budget deal, keeping the government open through Sept. 30, was reached on Capitol Hill – a sign that both parties actually can work together.

BOTH SIDES GOT THINGS THEY WANTED: The Republicans got a $12.5 billion hike for the Pentagon and an extra $1.5 billion for border security, while the Democrats got $2 billion extra for the National Institutes of Health, with no cuts for Planned Parenthood and no money for a border wall. Chuck Schumer and Nancy Pelosi were crowing last night, which surely will inflame the GOP's conservative base.

THE THREAT OF A CRISIS motivated this deal, and this threat could return by mid-summer when the debt ceiling has to be raised, and as the 2018 budget comes into focus. But the major message was clear: despite his bombast, Donald Trump will compromise when necessary with the Democrats.

SO – IS A HEALTH DEAL IMMINENT? House Republicans are hinting that a vote could come later this week to pass an Obamacare replacement bill, but our optimism over the budget deal has its limits. Even if the House moves, we don't see this health bill passing in the Senate; too many moderate Republicans consider the bill radioactive.

BUT THE TAX BILL IS NOT DEAD: House hearings begin this week, and Treasury Secretary Steven Mnuchin will begin a barnstorming campaign to drum up support for what promises to be the dominant domestic issue of Trump's presidency. Changes are inevitable – Trump will have to scale back his proposal to kill the state and local tax deduction, for example. But we still think both houses could pass a tax bill by year-end, setting up a conference committee debate in early 2018.

JOE BIDEN FOR PRESIDENT? We're not making this up – he was in New Hampshire last night for a campaign-style event amid signs that Biden will run in 2020. He's enormously popular with the Democrats' base, but he's 74 and has had two brain aneurysms. But Biden feels a need to move soon – Bernie Sanders, 75, looks like he's running, as is Elizabeth Warren, 67. No word yet on whether Mike Dukakis, 83, or Walter Mondale, 89, might run as well.


April 28, 2017

Timing of Trump Tax Cuts – Why There's No Rush; Who's the Most Likely Yellen Successor?

TIMING OF TRUMP TAX CUTS: There's a widespread misconception that delaying passage of tax reform until next winter would somehow be a disaster for the White House. Au contraire – even if enactment is delayed until a year from now, there's a crucial upside angle for the White House:

YOU WANT THE ECONOMY HUMMING ahead of mid-term elections, and if tax cuts don't take effect until, say, next April 1, there would be a huge dose of stimulus injected into the economy to boost second and third quarter GDP growth just in time for the Nov. 6 elections. This actually could become the White House goal.

WE THINK THE EFFECTIVE DATE of any tax cuts would not come before Jan. 1, 2018, because ironing out all of the differences will take at least 8 or 9 more months; perhaps passage could occur before the holiday recess in late December, but it probably will take longer than that. In any event, the GDP impact won't come until next year, perhaps in time to jump-start an economy that seems mired in a 2% growth rut (this morning's first quarter GDP report will be dismal).

IF THE ECONOMY IS ROARING, with the labor market tightening and wages rising in mid-2018, that could provide quite a surprise for the Republicans in the elections. Based on our take on vulnerable Senators, we think the GOP could gain an additional 3-to-5 seats; they currently have 52. The Democrats might gain 12-to-18 seats in the House, but they would need a net of 24 to take control.

THE DEMOCRATS STILL HAVE SOME CLOUT, OF COURSE, because filibuster rules can tie up Trump's agenda – as we'll see in the next 24 hours. A government shutdown probably will be avoided with a one-week extension, but the Democrats agreed to a stop-gap bill only after Trump made remarkable concessions – no cuts to Planned Parenthood, no money for a wall with Mexico, no cuts in federal subsidies to health insurers.

ASTONISHINGLY, Democrats apparently have prevailed with their demand that the House not even vote on an Obamacare replacement bill, which will stay in limbo for months to come. So the Democrats will maintain some clout, but a Senate with a few more Republicans after the 2018 election will make a difference – especially as two or three Supreme Court justices prepare to leave.

JANET YELLEN'S SUCCESSOR: Washington seemingly has settled on the clear frontrunner to replace Janet Yellen – Trump economic adviser Gary Cohn, the former President and co-Chief Operating Officer at Goldman Sachs. We agree that he's the favorite, but the White House might not want him to leave until the tax bill is finished, and that fight might still be raging on next Feb. 3, when Yellen's term as chair expires.

WHAT ABOUT YELLEN STAYING? As part of his transformation, Trump now speaks highly of her and has even indicated that he might keep her. But what about the flip side of this equation? What if Yellen, who turns 71 this summer, decides that retirement is preferable than working at a Fed filled with Trump appointees? Winding down the Fed's balance sheet doesn't sound as enjoyable as retirement...


April 27, 2017

The Goldman Sachs Takeover of the Trump Administration

WHAT WE SUSPECTED ALL SPRING became virtually certain yesterday – the pro-market, pro-business Goldman Sachs faction in the White House has won and is calling all the shots on economic policy. It's not just on taxes, it's on numerous fronts:

A POTENTIAL LAST-MINUTE SNAG on a fiscal 2017 budget deal was avoided last night, and a government shutdown looks unlikely. President Trump, who already caved on funding for a border wall, agreed to keep paying subsidies to health insurers. A one-week extension is still possible tomorrow night but this crisis – which could have rattled the markets – has been avoided. A clear victory for the Goldman Sachs faction.

A POTENTIAL U.S. DEPARTURE FROM NAFTA was avoided at the last minute. The President is still looking for action in his first 100 days, but he backed away from a NAFTA exit; surely his Goldman Sachs advisers told him that such a radical move could have worried the markets. There will be individual trade spats, such as the U.S. fight with Canada over its lumber subsidies, but all-out protectionism looks unlikely.

RELATIONS WITH CONGRESS HAVE A DIFFERENT TONE: Trump has been advised to abandon his "my way or the highway" stance with Congress. So yesterday he invited the entire Senate to the White House for a briefing on the threat from North Korea. Even though little was revealed, the symbolism was important: Trump wants Congress on board. Likewise, he is subtly encouraging – not demanding – that Congress resurrect the Obamacare replacement bill.

AND THEN THERE'S THE TAX PROPOSAL: The President's most visible Goldman Sachs advisers rolled out a rough outline yesterday that was a Wall Street dream – pro-growth tax cuts that focus on boosting perplexingly weak business fixed investment; individual cuts that should stimulate GDP; and no protectionism like a Border Adjustment Tax. This is great for equities, although the implications for fixed income investors are less bullish.

IT'S NOT JUST GOLDMAN: Many Wall Streeters have Trump's ear, including Blackstone's Stephen Schwarzman, and Trump relies heavily on Wilbur Ross, the Commerce Secretary. These advisers have routed the Stephen Bannon faction that takes a populist – almost hostile – view toward crony capitalism and Wall Street.

THIS BATTLE HAS BEEN WON: After eight years of generally adversarial relations between the Obama Administration and Corporate America, there's a new pro-business climate in Washington. And a Reaganesque supply side tax policy is firmly in place (which of course has no support among Democrats on Capitol Hill and quite a few detractors among Republicans who worry about budget deficits).

THE MANTRA IS CLEAR: Avoid protectionism, shutdowns, tax hikes, criticism of Janet Yellen and other negatives for business – keep the markets happy and the gains will flow down to investors and consumers, which will boost the overall economy and lead to more jobs.

THERE'S A LONG SLOG AHEAD on tax reform, which could be a year away, but for a White House known for deep divisions there's surprising unanimity on the direction of economic policy – Wall Street will call the shots. Is there any wonder why the stock market is close to record highs this morning?


April 26, 2017

Three Ways to Look at Trump's Tax Reform Rollout

AMID THE AVALANCHE of leaks and trial balloons, how should we analyze today's unveiling of President Trump’s tax goals? There are three ways to look at it:

1. A campaign-style stunt, designed to keep the stock market rally roaring, with few specifics. President Trump apparently will not attend the 1:30 p.m. rollout; Steven Mnuchin and Gary Cohn, who aren't ready to get deep into the weeds, will attempt to explain the rough outlines.

2. The beginning of a protracted fight with Congress, where lawmakers are lukewarm at best at the likelihood of a budget-busting bill that will be difficult to pass under budget reconciliation rules. We keep harping on the increasingly sour relationship between Paul Ryan and the White House; mutual suspicion is growing as Ryan seeks a revenue-neutral bill while the White House aims higher – the deficit be damned.

3. Let the bargaining begin, as the White House starts a negotiating process on dozens of key issues. The top corporate and pass-through rates may not be as low as Trump wants; details on the repatriation of foreign earnings have to be hammered out. For the financial markets, all that counts – for now – is that the tax reform process is alive, and it most certainly will be alive after today's announcement.

THE UNIFYING GOAL: As Republicans prepare to fight among themselves – a central theme in 2017 – one key goal will dominate: boosting U.S. GDP growth,by a lot. To understand how the White House views this goal, we highly recommend a column in this morning's Wall Street Journal by supply-sider Stephen Moore, who believes the best way to reduce deficits is to focus in much stronger revenue growth.

THE BOTTOM LINE: We have rarely seen so many moving parts on a key issue, but our base case is unchanged:

  • Significant rate cuts are coming for for corporations, individuals and pass-throughs;
  • There will be no Border Adjustment Tax;
  • Repatriation of profits stashed abroad is nearly certain – a huge plus for U.S. drug and tech companies;
  • There will be a much higher standard deduction with curbs on individual tax breaks.
  • The much-hated Alternative Minimum Tax will die, and the estate tax could die as well.

TRUMP WILL GET MUCH OF WHAT HE WANTS but his opening bid will get scaled back because Congress simply cannot afford all that he wants. This still looks like a great story for stocks, but fixed income investors have to ask – will the final measure be credibly paid for? No way.

TRADE WAR WITH CANADA? Perhaps overlooked amid this week's furious debates is the Trump Administration's assault on Canadian lumber and dairy policies. Going after a key U.S. ally and trading partner will play well with Trump's base, and besides – Canada doesn't have the weapons to retaliate like China has. But this does not bode well for negotiations on a revised NAFTA, and it makes us worry that we were too hasty in dismissing the threat of trade protectionism.


April 24, 2017

Big Week Ahead as Showdown Looms Between Donald Trump and Paul Ryan

IT'S THE BIGGEST WEEK in Donald Trump's young presidency, and he faces a serious obstacle: he's not on the same page as many Congressional Republicans, who believe Trump has over-promised – and doesn't have the votes to prevail on a border wall or an Obamacare replacement. As for a tax reform tease, apparently coming on Wednesday, a consensus may be months away.

TRUMP NEEDLESSLY UPPED THE ANTE this weekend, making fresh demands on funding for the wall, which raises the possibility of a shutdown on Friday at midnight. He wants victories to coincide with his first 100 days, so he will issue several executive orders this week – but legislative progress, which looked possible last week, still seems elusive.

THIS WEEK'S CONFUSING SIGNALS and potential setbacks requires a scapegoat, and the obvious candidate is House Speaker Paul Ryan, who is increasingly exasperated with the White House, where the feeling is mutual. Ryan and his skittish troops face three issues:

1. Government shutdown: We still think there's a 40% chance of a shutdown; many Democrats, in private, are itching for one. Ryan and his allies were closing in on a deal, whereby funding would be increased for immigration enforcement, but funding for a wall is a non-starter with Democrats. We envision an ultimate deal that will fund border security and boost outlays for the Pentagon, but a White House attempt to kill federal payments to health insurers would be a deal-breaker.

Trump probably will maintain a hard line until Friday, then compromise. But as we have stressed, Washington is far different from New York; you can't turn on a switch and get a quick deal, not when legislative language is involved. So we think there will be a last-minute extension, perhaps for a week, that would keep the government open. There simply may not be enough time to finish a deal by Friday night, because Ryan needs votes from Democrats, who are in no rush.

2. Obamacare replacement: Ryan made it clear this weekend that there isn't enough time this week to move quickly on a health reform bill. He has nearly enough votes in the House, but this measure is unlikely to move in the Senate. The sooner the GOP puts this albatross on the back burner, the better.

3. Tax reform: Trump's boast that a tax proposal will be released on Wednesday stunned Ryan and many of the President's advisers; there's no consensus in the White House on key elements of a bill. In fact, there's not even a consensus on whether there should simply be a big tax cut now or a tax cut combined with fundamental reform of the tax code, which would require up to a year to complete; we think the White House leans toward the latter option.

Tax cuts have real sizzle and Trump knows this, so the promises will be lavish on Wednesday. But the details won't come into focus until summer, when House passage of a bill is possible. Once again, Speaker Ryan has big differences with the White House – should there be a Border Adjustment Tax, and how would the bill be paid for? Treasury Secretary Steven Mnuchin seems to think the cuts will pay for themselves – still another potential source of friction with Ryan.

THE BOTTOM LINE: The big story this morning obviously is in Europe, where the center is holding and the EU is still intact. Eventually the center-right will hold in the U.S., but this could get messy for the next week as Trump grapples with a glaring weakness: an inability to get along with his own party.


April 21, 2017

Don't Get Fooled Again – Trump and Health Reform

ENOUGH ALREADY – LET IT GO!! With geopolitics heating up, with a government shutdown looming, with tax reform entering a crucial phase, President Trump is still obsessed with a losing cause: getting Congress to agree on an Obamacare replacement bill. We've said it before and will reiterate – health care is an albatross for the party in power, a waste of time and political capital for a new president who probably doesn't have enough votes in his own party to pass a bill.

BUT TRUMP WANTS A SIGNATURE ACCOMPLISHMENT in his first 100 days, other than the Neil Gorsuch confirmation. So he and his aides have been applying extreme pressure on House Speaker Paul Ryan to pass the Obamacare replacement. One problem: there still aren't enough votes for the bill in the House and almost certainly not enough in the Senate.

SHELL-SHOCKED REPUBLICANS will return to Washington on Monday after a battering in town halls, where activists and ordinary citizens ripped into the health reform package that failed in March. In private, many GOP lawmakers say health reform is radioactive; they want to move on to other issues. In any event, a House vote next week looks very unlikely; there simply isn't enough time to whip votes for the bill until the week of May 1.

HEALTH BILL BOTTOM LINE: Only three scenarios, none of them to Trump's liking: 1. The latest bill fails to win enough support in the House; 2. It narrowly squeaks through in the House only to die in May in the Senate; 3. Different bills pass in both houses, leading to long and ultimately fruitless conference committee deliberations. No quick win for Trump with those scenarios, just a high-risk/low reward quagmire.

THE NEXT ISSUE: IT'S TIME FOR TRIAGE ON THE BUDGET, that's the real issue that Trump needs to focus on in the coming week. Incredibly, Democrats – in the minority in both houses – have real leverage as a government shutdown looms next Friday. They will not agree to fund a wall with Mexico and they will block deep spending cuts.

WE THINK A BUDGET DEAL will come into focus within a week – including more money for the Pentagon and infrastructure – but this deal probably can't be finished in time to meet the Friday deadline, so a temporary extension is likely. Kicking the can down the road is a Washington specialty.

TRUMP VERSUS CONGRESS: He can prevail with regulatory reform and executive orders, he can show U.S. resolve militarily, but he cannot bulldoze his way through Congress. The new president doesn't get it – Congress is glacial and maddening, not willing to negotiate like New York City developers. So there must be someone to blame, and the increasingly unpopular Ryan is a convenient target.

EVENTUALLY TRUMP WILL FIGURE OUT how to deal with Congress; Mike Pence and other insiders will steer him in the right direction, so we continue to believe it's premature to give up on tax reform – it may be a year away, but there's strong support for the concept of reform, if not the details. In the meantime, Trump won't get health reform any time soon and he's headed for a draw, at best, in the budget fight.

RECOMMENDED READING: Check out this morning's Wall Street Journal editorial on steel tariffs, a politically seductive concept that brings nothing good – higher inflation, lost jobs, the threat of retaliation. The key issue – is Trump's bark worse than his bite on trade? Is his recent bombast against Canada simply hot air? Probably, but trade protectionism suddenly has returned as an issue to watch.


April 20, 2017

You Want Tax Cuts? Two Huge Clues Are Coming Next Week

THE FINANCIAL MARKETS are getting impatient; investors want to see progress on a tax reform bill that slashes rates. The markets can handle a delay – but if there are clear signs that the bill is in trouble, that would be a major negative. So we have two important clues – perhaps market-moving – coming next week as Congress returns from the long spring recess:
1. Obamacare reform: We're hearing that House Freedom Caucus rebels are close to a deal that could jump-start the stalled Obamacare replacement bill. House passage doesn't mean that the Senate would go along; many moderate Republicans think the new measure is radioactive. But any kind of movement, after last month's debacle, would be a sign that the dysfunctional House is starting to coalesce – which would be a positive signal for tax reform.
2. Government shutdown: This will be closely watched for signs of whether Congress and the White House can work together for the rest of the year. Democrats will never agree to a bill that kills Planned Parenthood or funds a border wall, and advisers to President Trump are prepared to dig in for major new defense outlays and new spending for immigration enforcement. A shutdown next Friday looms if there's no agreement.
To be blunt, if there's a shutdown it will so poison the climate that prospects for tax reform will slip well below 50%. On the other hand, if there's a deal between the two parties, that could bode well for progress in other areas. Our guess is that there will be a budget extension for a week or two, keeping the government open until there's a new crisis in early May. But an ultimate deal is still the best bet.
ONCE THERE'S A BUDGET DEAL, the focus will shift to the complicated tax issues – whether the bill should be revenue-neutral, whether a Border Adjustment Tax will be included, etc. But it's still premature to write off a tax bill – Gary Cohn and Paul Ryan can get a measure passed in the House by July, in our opinion. It's still a long slog in the Senate, but if Congress can avoid a shutdown next week there will be hope for a tax bill.
STEEL IMPORT CURBS COMING? Trump wants to add to his modest list of accomplishments in his first 100 days; his assertion that this is the most productive first three months in the history of the presidency is absurd, especially when compared to FDR's breathtaking first 100 days in 1933. But give Trump credit – he's methodically checking the boxes on his campaign promises, and will pledge today to crack down on steel imports.
TRUMP REPORTEDLY WILL SIGN AN EXECUTIVE ORDER today that will direct the Commerce Department to investigate whether the U.S. should curb or block steel shipments into this country. This is a key promise he made in Pennsylvania and elsewhere; we recall meeting people in Bethlehem, Pa. last spring who swore that Trump would revive the U.S. steel industry – a long-shot, in our opinion, but it's a promise that he's determined to keep, even if it smacks of trade protectionism.


April 19, 2017

The Interest Rate Plunge – A Fake Out?

SOMETHING ODD HAPPENED on the way to a 3% yield on the Treasury 10-year bond. After surging to about 2.6% a few weeks ago, yields have plunged, and now are below 2.2%. We fully agree that you don't fight the tape, but this move looks like a fake out; the three major reasons why interest rates have dropped seem transitory.

1. The economy is soft? Not really. For the fourth successive year, first quarter GDP growth will be tepid, probably no better than 1% – something is clearly wrong with the seasonal adjustments. Will slow growth persist into the second quarter? Maybe, but we'd bet on GDP growth of roughly 2% for the rest of 2017 – a slight disappointment, but there's still no recession in sight, not with unemployment at 4.5%.

The bigger economic story is that this soft patch has not significantly changed attitudes at the Federal Reserve, where officials are committed to gradually raising rates and reducing the Fed's balance sheet. With inflation close to the Fed's target and the labor market in very good shape, we still expect two second half rate hikes – but the Treasury market seemingly is dismissing that likelihood.

2. Geopolitical tensions? They may subside: Kim Jong-un may be unstable but he's not stupid; he is not prepared to endure 21,000 pound U.S. bombs. So this crisis may subside a bit. The next crisis – French elections this Sunday – could intensify fears over a breakup of the European Union, but even if one of the two Euro-skeptics make it to the runoff on May 7, they do not have enough support in the French parliament to pull out of the EU. In any event, we think Emmanuel Macron, a moderate, is likely to prevail in the end.

3. Trump is imploding? We don't see it: As we suspected, last night's Georgia House results failed to produce a 50% total for a young Democrat insurgent, who now faces a more difficult runoff in June. So – two special House elections this spring, and two failures by the Democrats. We don't see an anti-Trump wave developing, although Democrats clearly are angry and well-funded. (Of course, their biggest draw, Bernie Sanders, proclaimed yesterday that he isn't a Democrat.)

As for Trump's agenda hitting a wall, there's no doubt that it will take longer to enact than he – or the markets – anticipated. But his agenda is not dead; hearings begin next week in the House on a tax reform package. As long as tax cuts still look likely – even if it takes another year – the markets will be patient.

BOTTOM LINE: By early summer, economic growth will be well above the lame first quarter pace. The labor market will be tight, with wages moving higher. The threat of geopolitical crises may have subsided. President Trump, still controversial, will continue to benefit from a weak opposition. And the long slog toward tax reform will be underway. Is this a prescription for rock-bottom interest rates? We don't think so.


April 18, 2017

Go Figure – Trump Shows Promise on Geopolitics, Stumbles on Domestic Issues

AS DONALD TRUMP approaches his first 100 days, it's becoming clear that he won't back down on geopolitics – a strike on Syria, a 21,000 pound bomb in Afghanistan, and an unyielding stance against North Korea that may force Kim Jung-un to back down. This is not what Trump's supporters expected; they were looking for legislative victories from a Republican Congress.

NORTH KOREA MYSTERY: Perhaps a tell-all book years from now will spill the beans on why North Korea's missile test fizzled last weekend. We would not be surprised if there was a U.S. cyberattack that planted a virus in Kim's weapons, and there undoubtedly are back-channel threats from China, probably at Trump's urging, that are giving North Korea a reason to back off.

THIS COULD BE A PLUS FOR THE MARKETS, but the sorry state of Trump's domestic agenda may begin to worry investors. We've argued for weeks that tax reform won't win enactment in 2017, and now Treasury Secretary Steven Mnuchin has dialed back his widely-panned forecast of passage by the August break. He tells the FT it will take much longer, and he conceded that there are stumbling blocks: there's no consensus – even within the White House – on whether the bill should be revenue-neutral or whether there should be a Border Adjustment Tax.

WE STILL THINK A TAX BILL can come into focus by late fall, with Gary Cohn making a big difference, and it might win enactment a year from now – but this enormous task has encountered two fresh obstacles: the growing call for Trump to release his taxes, and the public opposition to the GOP Obamacare replacement bill, which is increasingly radioactive; Republican lawmakers are sprinting away from the measure. Without the revenues from this health bill, tax cuts are less likely.

IT'S BEEN A ROUGH SPRING for Republicans, who aren't feeling the love back home, but we think there's a reasonable chance that an upstart Democrat in Georgia will fall just short of 50% tonight, thus setting up a one-on-one with a GOP candidate who would be favored in the June 20 runoff. We don't see a tidal wave threatening Republicans, but tonight's vote will be significant and a nasty budget fight – with 40% chance of a government shutdown – looms as another GOP distraction by late next week.

ARE REPUBLICANS SUDDENLY LESS POPULAR? Yes, largely because of the Obamacare fiasco, but Trump's numbers among his base are surprisingly solid; his core supporters are still willing to give him time. The least popular GOP lawmaker, by far, is Paul Ryan – who has a 29% approval rating among all voters as he fails to win anything in the House. Who's the most popular politician in America? Bernie Sanders, with a 61% approval rating.

SO IT'S DOMESTIC ISSUES that Trump has to worry about – including the likelihood that the economy has lost momentum, a major reason why interest rates have slipped. Trump needs another victory; Neil Gorsuch wasn't enough. It appears, at least for now, that Trump's emergence as a global tough guy may bring him more successes than his sputtering legislative agenda.


April 13, 2017

Two Skunks at the Picnic; Why Donald Trump Needs Janet Yellen

ON MONDAY WE WROTE ABOUT "THE TRANSFORMATION OF DONALD J. TRUMP," and sure enough, there have been breathtaking reversals this week by Trump on NATO, Janet Yellen, trade deals, etc. We continue to believe that the Goldman Sachs faction in his administration has won, reinforcing a pro-business climate that the markets will continue to enjoy. But there are two skunks at this picnic that could threaten an otherwise bullish climate:
1. A NORTH KOREAN NUCLEAR TEST appears to be imminent, perhaps coming this weekend, amid an escalating war of words with the U.S. This is the greatest threat to world stability; we continue to believe a U.S. strike at North Korean missile sites is on the table. Can China really exert pressure on Kim Jong-un to dial it back? Trump seems to think so, but we're not sure. The most likely outcome is even tougher U.S. sanctions, but this is an increasingly serious wild card.
2. A GOVERNMENT SHUTDOWN at midnight on April 28 just got more likely, as the Trump Administration threatens to kill subsidies to health insurers in an effort to drive Democrats to the bargaining table on an Obamacare replacement. The Republicans will capitulate on other issues like Planned Parenthood funding and deep spending cuts, but the sudden emergence of the health subsidy issue makes a shutdown a 40% probability, which would further delay progress on tax reform. Stay tuned.
JANET YELLEN, RECONSIDERED: Everything Trump said in the campaign about the economy – the real unemployment rate is 40%, U.S. has to get tough on trade, crony capitalism has to end, etc. – apparently was for show (and it worked, he won). He has changed his tune on all of these issues, and the most startling reversal is Trump's suggestion yesterday that he might re-appoint Janet Yellen as Fed Chairman.
WHO KNOWS IF YELLEN, who turns 71 in August, would want to stay as Chairman when her term expires next Feb. 3? We'd guess she might want to stay and preserve her legacy by gently letting the air out of the balloon as the Fed's $4.5 trillion balance sheet is trimmed. It could be a marriage made in heaven: a president who needs easy money and low rates to pay for his ambitious spending plans also needs a dovish Fed, and most of the alternatives to Yellen on the right wing would hike rates more aggressively than she will.
SOME HISTORICAL PERSPECTIVE, PLEASE: Politicians and pundits are proclaiming that U.S.-Russia relations are at an "all time low." Really? What about the Berlin blockade and airlift in 1948-49? What about Moscow’s brutal suppression of the Hungarian Revolution in 1956? What about the Cuban missile crisis in 1962, when a nuclear war was not unthinkable? Yes, relations are rocky now, but to claim they're at an all-time low ignores history.
EDITOR'S NOTE: We're off for the long Easter-Passover weekend, such a glorious holiday, rich with the promise of renewal. We'll be back on Tuesday.

April 12, 2017

A Head-Scratcher from Trump on Taxes; French Election Wild Card; Can the GOP Keep to the House?

HEAD-SCRATCHER: In an interview to be aired later this morning, President Trump tells Fox anchor Maria Bartiromo that he wants to pass Obamacare reform before moving on to tax legislation. We don't get it – what a waste of time and political capital to return to the quagmire of health reform.

HOUSE REPUBLICANS have made the measure more palatable to the unyielding Freedom Caucus – and even less appealing to the public – by seeking to abolish popular provisions like those dealing with pre-existing conditions. There's virtually no chance the new measure could pass in the Senate. Health reform is clearly a no-win issue for the Republicans; tax cuts and infrastructure have some sizzle. Most Republicans we talk with on Capitol Hill view another health bill as radioactive, and Trump eventually will agree.

FRENCH ELECTION WILD CARD: Perhaps the markets have been worrying about the wrong candidate in France. The fear, for supporters of the Euro, was that hard-liner Marine Le Pen would finish first or second in a crowded field on April 23 and squeak to a win in the finals on May 7. But here comes a dark horse from the far left, a Bernie Sanders-type populist, Jean-Luc Melenchon. He's gaining against centrist Emmanuel Macron, who was the frontrunner until recently.

WHAT A CHOICE: A runoff on May 7 could pit Le Pen against Melenchon, almost unthinkable for the markets, since both favor a referendum on exiting the European Union. Melenchon also favors huge tax hikes on the wealthy, more confiscatory than anything in recent decades in France, which is saying a lot. We think the moderate Macron or conservative Francois Fillon will emerge to run against Le Pen, and either would beat her. That's what the markets want, but in light of recent polling debacles and voter volatility, this election suddenly looks like a nail-biter.

A VERY OVER-HYPED U.S. POLITICAL STORY is that Democrats are on a path to reclaim the House in 2018 – wishful thinking, in our opinion. Last night's special House race in Kansas, a GOP victory, was no great surprise. Another special election, on April 18 in Georgia, has been super-hyped as a race "to make Trump furious." The Democrats have a well-funded young challenger who needs 50% of the vote in a field crowded by Republicans, but we think he will fall just short – and then lose a one-on-one race on June 20 to the GOP winner.

TO BE FAIR, the Democrats – angry and organized – and should score significant House wins in 2018. They will need a gain of about two dozen seats, net, and have a decent chance of winning 15. But odds are only about 40% that the GOP will lose the House, because the districts are drawn (or gerrymandered) in a way that keeps incumbents very safe. As for the Senate, that's an easy call in 2018 – Republicans will add a seat or two to their majority; there simply are too many vulnerable Democrats in states that Trump won last fall.


April 11, 2017

Business Confidence is Back

THE STOCK MARKET GETS IT: Why is the market so strong, with geopolitical tensions rising, the Fed taking away the punch bowl, and President Trump having trouble with his own party? A key factor is business confidence – solidly higher as regulations are relaxed, as the White House aggressively lays the groundwork for tax and infrastructure legislation.

A GAGGLE OF TOP BUSINESS LEADERS will meet with Trump today at the White House, and he'll ask them, as he always does: what do you need? Trump seemingly has abandoned his populist attacks on business; still another new player is Kevin Hassett, the new head of the Council of Economic Advisers – a highly regarded pro-business economist, an advocate of tax reform, and an outspoken critic of trade protectionism.

HASSETT WILL JOIN A TEAM dominated by Goldman Sachs veterans who know that business confidence is crucial. That's why they immediately went for regulatory reform early in the Trump Administration. "People overlook the importance of these regulatory reforms," a source told us yesterday. "They give business a sense of optimism after eight years of an adversarial relationship with Washington."

SO THIS IS A MAJOR REASON WHY THE STOCK MARKET IS HAPPY, in addition to decent corporate earnings, plus the expectation of stronger GDP growth after still another soft first quarter. What could derail this market? Other than a geopolitical crisis, the only negative that could make a difference would be a clear signal that tax reform is in trouble; the markets are counting on it, even if it doesn't come until early next year.

UNLIKE THE OBAMACARE REPLACEMENT FIASCO, which was mismanaged by House Republicans, the White House will play a much more aggressive role on tax reform. Gary Cohn, Steve Mnuchin, Hassett and others will push hard for a top corporate rate of around 20%, with repatriation of earnings from abroad – still another huge positive for U.S. business.

MEANWHILE, TRADE PROTECTIONISM has faded as a fear; perhaps there will be some new tariffs on China and others, but it's not like Smoot-Hawley is returning. Crony capitalism is back in vogue; even the Export-Import bank – hated by populists – may survive. But the key for now is an exceptional change by the regulators; just watch M&A activity, sure to surge as antitrust policy is relaxed.


April 10, 2017

The Transformation of Donald J. Trump

WAKE-UP CALL: Heading for decidedly mixed reviews when he hits his first 100 days on April 29, Donald Trump has come to a startling conclusion: he needs votes from Democrats on several issues, because he cannot rely on his Republican troops.

TRUMP WON SOME BADLY NEEDED SUPPORT from mainstream Republicans and many Democrats for his strikes against Syria, and we expect polls later this week will give him a bump. But Democrats – in the minority in both houses – are on the offensive. They will seek major concessions for cooperating with him; follow the money – that's where things get interesting later this month.

HARD-LINE CONSERVATIVES in the House will not provide the votes Paul Ryan needs to pass a budget deal, keeping the government open, by April 28. So Ryan and Trump will have no choice – they have to lure Democrats with promises to fund Planned Parenthood, reject money for a wall with Mexico, and abandon the idea of deep spending cuts for domestic programs. (Defense is still headed for a big raise.)

CHECKMATE: Mitch McConnell said late last week that Democrats will have to be part of a budget deal, raising this issue: where else will the mainstream in both parties strike deals? Infrastructure is still the low-hanging fruit, and Democrats are already making demands for urban spending, higher worker wages, etc. Even on taxes, Democrats are talking about what they want: no big tax cuts for the wealthy, revenue neutrality, etc.

THE NEW TRUMP: What a turnaround – three dozen House Freedom Caucus rebels, who don't believe in compromise – have forced Trump into dealing with Democrats. There are no alternatives – seek Ryan's ouster? There's no logical successor. Shake up the White House staff? Maybe, but that will just hasten Trump's move to the center.

A SOBERING REALITY FOR TRUMP'S BASE: It's sinking in – he's willing to get involved in a Mideast civil war; he can't build a wall; his bark was worse than his bite on trade; he can't fix Obamacare; the impact of tax reform is a year away; and he needs Democrats to get anything done.

WHAT THIS MEANS FOR THE MARKETS: This is starting to look like a center-right administration; the Goldman Sachs faction has won, and a pro-business climate is a good thing for the markets. But the sizzle Trump brought to the office – radical change, unabashed populism, massive tax cuts, no foreign wars – has faded, as he realizes how daunting it is to deal with Congress and geopolitics. He never, ever knew it would be this difficult...


April 7, 2017

New Sheriff in Town – A Defining Moment for Donald Trump

A FRESH START FOR DONALD TRUMP: We think public opinion will sharply pivot; polls this weekend will show overwhelming support for U.S. air strikes against Bashir al-Assad. There are enormous ongoing issues about what comes next, but the political implications are clear: this is a huge win for President Trump.

THE AIR STRIKES WON OVERWHELMING BIPARTISAN SUPPORT last night, with only a handful of critics, mostly on the far right. Rand Paul gets far more media ink than he deserves; he's an outlier. Democrats who were bashing the Supreme Court "nuclear option" just 24 hours ago were praising the air strikes last night.

A MESSAGE TO THE WORLD: One clear signal was to North Korea; in effect, Trump said "you're next." There are risks, obviously, to playing policeman to the world, but Kin Jong-un has to think twice before lobbing more missiles toward Japan. After eight years of relative passivity, the U.S. suddenly is a force to be reckoned with.

THIS COULD LEAD TO A COOLING OF RELATIONS WITH RUSSIA, but even this has upsides for Trump. It sends a message to Russia's allies that the U.S. is prepared to counter Vladimir Putin in the Mideast. And it sends a message to Americans that Trump is not Putin's lapdog, as Democrats have alleged. Putin respects strength, and he did not respect Barack Obama; all that has suddenly changed.

SO – WHAT DOES THIS MEAN FOR THE MARKETS? Geopolitical risk is impossible to quantify, and it can't be dismissed if the U.S. gets sucked into other global hot-spots. But a bigger story is that Trump just won some badly-needed political capital; his job approval numbers will rise in the next week, and this has positive implications for his agenda.

TRUMP'S WINNING STREAK: We wrote earlier this week that he was headed for an upswing: a Supreme Court victory, a convenient new foil in Susan Rice, and the beginnings of some movement on tax and infrastructure legislation. Perhaps most importantly, he may be growing into the job; foreign crises will do that to a president.

TRUMP IS MOVING TO THE MAINSTREAM: His infatuation with Steve Bannon may be over, and the pragmatist conservatives like Mike Pence and Reince Priebus have won. And the Goldman Sachs faction will call the shots on economic policy. The losers are the alt-right and the House Freedom Caucus; Trump is evolving into a center-right hawk, not an angry isolationist populist.

THE SYRIAN AIRSTRIKES have transformed the Trump presidency; previous mis-steps will be forgiven as rookie mistakes. The U.S. will re-emerge as a force to be reckoned with, so here's the key issue: can Trump take advantage of this turnaround? He finally has some bipartisan support, and if he can capitalize on it there could be a re-set for his entire presidency.


April 6, 2017

Markets Can Handle Janet Yellen – But Maybe Not Paul Ryan

THE FED'S BALANCE SHEET, A WORK IN PROGRESS: The Federal Reserve has sent signals that it probably will begin winding down its $4.5 trillion balance sheet later this year, so the FOMC minutes yesterday shouldn't have been a big surprise. There's more internal debate to come, since the central bankers have not resolved key details of the program, but they seem to be adroitly communicating their goals.

NOTHING IN CONCRETE: We enjoyed an exchange yesterday with old friend Don Kohn, the brilliant former Fed Vice Chairman. Don wasn't surprised by the Fed announcement, but he added: "it's important to keep in mind that the Fed will always be very data/forecast dependent. If the labor market and inflation don't follow the Fed's expectations, they will adjust. They emphasized that their expectation for all aspects of policy were derived from their forecasts; if the forecasts change, so will they."

SO THE MARKETS DIDN'T OVER-REACT YESTERDAY to a policy change that may be eight months away, with key details unresolved. A nice stock rally was snuffed out, but the Dow Jones Industrials fell by only 41 points, hardly a rout. Moreover, while the Fed announcement was expected, comments from House Speaker Paul Ryan caught some investors by surprise.

JANET YELLEN CAN CONTROL HER TROOPS, RYAN CANNOT: While the Fed cautiously moves on the balance sheet, Ryan has been a huge disappointment this year, generating more confusion than clarity. He proclaimed yesterday that the tax reform bill may take even longer than getting an Obamacare replacement (that process took seven years, and failed). The White House, Senate and House "aren't on the page on taxes," he conceded.

THE MARKETS CAN HANDLE a couple more rate hikes this year and a gradual reduction of the balance sheet, because it will be accompanied by a strengthening economy. But the markets cannot handle any hint from a top player that tax reform is in jeopardy. A lengthy delay, which we anticipate, would be grudgingly accepted on Wall Street as long as tax cuts look likely within a year or so.

SO WE THINK THE MARKET HICCUP YESTERDAY was based on anxiety that Ryan – who's always optimistic – may see trouble ahead on taxes. He surely knows that there are huge issues, including the likely death of his pet idea, a 20% border tariff that has become politically radioactive. Ryan has already proved that he can't unify his GOP troops, and his relations with President Trump have cooled.

WE STILL THINK TAX REFORM IS COMING, but comments like Ryan's inject an element of doubt. At the least, this will be a much longer process than the markets anticipated, probably dragging well into 2018. And if uncertainty over fiscal policy persists, it's possible that Yellen will go slow on rate hikes, waiting until the second half to move again. Do we worry about Yellen? Not really. Do we worry about Republicans like Ryan who can't get their act together? Yes indeed.


April 5, 2017

Raising Our Odds of a North Korean Strike; Susan Rice Controversy; Tax Reform Trial Balloon Shot Down

DOES NORTH KOREA WANT AN ATTACK? Firing a ballistic missile just two days before U.S.-China talks seems unusually provocative, even for the erratic Kim Jong-un – unless China, in the ultimate spy novel double-cross, urged North Korea to fire the missile, thus giving Beijing negotiating leverage with Donald Trump, who wants China to curb Kim.

IN ANY EVENT, the U.S. essentially said this was the last straw – and at some point words have to be backed up by action. The U.S. is furiously injecting "worms" and other computer viruses into the North Korean missile sites, and has placed hundreds of THAAD missiles in South Korea; Lockheed Martin is the prime contractor. But these moves may not be enough – and we think odds have risen to at least one-in-three that the U.S. will launch pre-emptive strikes; Trump may state as much to Xi Jinping later this week.

AS FOREIGN CRISES PERCOLATE in the Korean Peninsula and in Syria, Trump faces his greatest challenge as president. His generals are opposed to the military option against North Korea, but Trump sees the world in personal terms – he loathes being humiliated – and we suspect Kim (and Bashir al-Assad) may have gone too far.

THE SUSAN RICE DIVERSION: We got some push-back yesterday from readers who think Susan Rice did nothing illegal, or even provable. But that's not the point. Trump now has a diversion from the Russia probe; he can claim that he and his advisers were targeted for surveillance for political purposes. Whether that's true is largely beside the point; there's some plausibility in the claim, which is all he needs to rally his supporters.

TAX TRIAL BALLOON SHOT DOWN: How to pay for tax cuts? That's a dominant issue without a clear answer. Trump aides floated a trial balloon yesterday – perhaps a value added tax or a carbon tax could pay for lower individual and corporate rates. This trial balloon was almost immediately shot down by House Republicans, who absolutely, positively will not accept either idea.

THIS HAS TWO IMPLICATIONS: First, the need for revenues to pay for tax cuts is acute, especially as the unpopular border adjustment tax continues to lose support (it would raise about $1 trillion over ten years). What are the other options? Find new sources of revenue like a VAT tax; kill tax breaks and use very optimistic assumptions to make the bill revenue-neutral; or pass a bill that loses a ton of money. We'd bet on the latter.

THE OTHER IMPLICATION is that Trump aides are scrambling to come up with their own bill, not one written in the House. Speaker Paul Ryan continues to lose support in the White House; his attempt to resurrect an Obamacare reform bill has virtually no chance of winning moderate GOP support, especially in the Senate. "Ryan would support a health bill that would kill the pre-existing conditions provision?" an incredulous Trump ally asked us yesterday, adding: "Does he want us to lose the House next year?"


April 4, 2017

A Reversal of Fortune for Donald Trump – Thanks to Susan Rice

IN A DEEP SLUMP since his Feb. 28 speech to Congress, Donald Trump suddenly is on the verge of a turnaround – perhaps reversing market anxiety that his presidency had stalled.

SUSAN RICE, BACK IN THE NEWS: The key player, incredibly, in this Trump turnaround may be the former Obama national security adviser, Susan Rice. Was there surveillance of Trump advisers during the election? Yes. Were Trump officials "unmasked" by Rice? Possibly. This is the hot new story – and it so muddies the water on the Russian probe that the President can persist with his narrative that he was the victim of surveillance.

WE'RE NOT SURE RICE DID ANYTHING ILLEGAL, but as the Wall Street Journal argues in a scathing editorial this morning, her testimony under oath could be illuminating. Of all people – the fiercely partisan Susan Rice, the right wing bete noir, whose initial reaction to Benghazi was disingenuous at best.

TRUMP NOW HAS HIS FOIL, and the public may lose interest amid an eye-glazing "he said, she said," on surveillance. Even partial vindication for Trump is a big deal; it could let him off the hook – assuming, of course, he can refrain from any more self-inflicted wounds. Actually, he's on the verge of more positive developments.

NEIL GORSUCH WILL WIN CONFIRMATION SOON, and that unifies the entire Republican Party, which is thrilled with him. Trump is close to a House breakthrough on an Obamacare replacement (the Senate is another issue). And there are signs of movement on tax reform and infrastructure.

WHY THIS MATTERS FOR THE MARKETS: As one of our regular readers said a couple of weeks ago, it was starting to look like Trump was in over his head after the Obamacare vote. Investors were beginning to wonder if any of his proposals could pass. As we said then and reiterate now – it's premature to conclude that Trump's agenda is dead; it simply will take longer than expected to prevail.

THE PRESS WILL NOT RELENT, there's a new story in this morning's Washington Post about a Seychelles meeting between a Trump ally and Russians seeking a back-channel arrangement. There will be more stories, but Trump has been handed a gift from Susan Rice – and there's no question he will exploit it.


April 1, 2017

Five Huge Stories This Week

DESPERATELY IN NEED OF A VICTORY, President Trump is likely to get one this week, but the Neil Gorsuch nomination isn't the only high-stakes development. There are five big ones:

1. Trump and Xi Jinping: The Chinese President's visit on Thursday to Mar-a-Lago has two enormous implications – first, are the countries headed toward a trade war? Perhaps, but not now. The two leaders will make their case; tariffs and other action would come later.

Second, the big issue is North Korea, as whispering grows louder in Washington that the U.S. is preparing a strategic strike. That may be posturing, designed to pressure China, but Xi has little influence over the erratic Kim Jong-un. There's a minority view that the U.S. and China could reach a "grand compromise" on trade and Korea, but we'd put odds at no better than 25%.

2. Supreme Court Win for Trump: One way or another, it looks like the Gorsuch nomination will prevail on Friday. Changing filibuster rules is a huge issue in Washington, but most Americans will view this as a Trump win. A sidebar is the crude threats by left wing activists to defeat moderate Democrats who vote for Gorsuch – a strategy that makes no sense. If Joe Manchin, a Gorsuch supporter, loses the Democrats' primary in West Virginia, his Senate seat almost certainly would go to a Republican.

3. Obamacare Bill Revived: Trump stated the obvious this weekend – he hates to lose – so he has resurrected efforts to pass an Obamacare replacement. And it just might pass in the House – only to be rejected by the Senate. Why Trump would spend time fighting for a hugely unpopular bill is a mystery; he needs to move on, this bill can't pass – it simply highlights GOP divisions, including opposition by Paul Ryan to any compromise that involves Democrats.

4. Tax Reform is Percolating: Get ready for a leak a day on how the tax bill is shaping up. The New York Times, weeks behind the curve, reported on Sunday that the border adjustment tax is in trouble. No kidding. There's a more fundamental issue – the White House doesn't trust Congress on a tax bill after the Obamacare fiasco, so Trump aides are preparing their own tax bill. Congressional tax writers want their version – still another example of distrust between the two branches. Nevertheless, a bill will begin to move this spring, a positive story.

5. Unemployment Friday: A March blizzard, and a typically soft first quarter (blame the seasonal adjustments), could produce a so-so jobs report on Friday; consensus is 177,000 nonfarm payroll jobs. But the longer-term outlook is good, and the Fed has finally hit its 2% inflation target. We still think Janet Yellen is in no rush and will wait until the second half to raise rates twice; talk of winding down the balance sheet is still in the trial balloon phase.

THE TWO ONGOING STORIES: Democrats are determined to get their way on the budget (no money for a wall, no cuts to Planned Parenthood), and they will prevail because the divided Republicans need their votes, or else a government shutdown on April 28 is possible. And there's no end to the Russian scandal; watch the Senate Intelligence Committee – members are convinced there was collusion between the Trump campaign and Moscow, and the focus soon may shift to the Russian mob.


March 31, 2017

What We Learned in the First Quarter

The first quarter ends today, and what a quarter it's been. Several major themes have emerged – themes that may persist for the year or longer. Here's our take on the key first quarter themes:

No one can crack the Washington gridlock: Donald Trump thought he could, and maybe he can. But the No. 1 theme of the first quarter is that it will take twice as long as Trump thought to get his agenda enacted. Washington is glacial, always has been and always will be.

Trump will stay outside the box: Starting with his bleak Inaugural address, Trump has defied the consensus – he's well outside the box – he's an angry populist who's not afraid to break some furniture. You don't like his tweets, or his threats to conservatives, or hints that he may seek tougher libel laws? Get used to it – Trump is 70, he's not gonna change.

Democrats in the wilderness: They cheered when the Obamacare bill failed but they had nothing to do with it. Democrats may overplay their hand on Neil Gorsuch and perhaps a government shutdown, but Chuck Schumer has little choice – he's on a very short leash, his base is furious.

No one cares about the deficit: Not only is no one in Washington talking about deficit reduction, the trend is tilting toward more spending and higher deficits – and both parties are equally complicit. Only one clear winner in this profligate climate: defense stocks.

Worst first quarter: Paul Ryan, in the penalty box because he misled Trump about the extent of House support for the Obamacare bill. Best first quarter:Gary Cohn, the new power player in the White House – and he's a nominal Democrat!

Biggest first quarter surprise: It now appears that the 2018 mid-term elections may actually be exciting. The Democrats have an outside chance of taking the House, and the GOP's hopes of adding several seats in the Senate have slipped.

Least surprising first quarter themes: Bipartisanship is a dead end, it's sounds nice but won't happen. And the least surprising story by far – the party that owns health care always regrets it; health care is a policy albatross.

Russia – a cloud over everything: The House Intelligence Committee is bogged down in a partisan farce, but the Senate panel – serious and bipartisan – will be worth watching this year. How blatant was Russian involvement with the Trump team? The Senate committee will find out.

Europe back from the brink: The most strident candidates may have peaked, and the Euro may survive after all. And the economy there has gone from terrible to mediocre – that's real progress.

The Fed is still dovish: Another couple of rate hikes are likely in 2017 – later rather than sooner, perhaps in response to an economic pickup in the second half. Janet Yellen will go slow, even though the "Taylor Rule" would require a fed funds rate of about 2-½% now. We might not get there for another two or three years.

And in the real world: Consumers and businesses are increasingly confident, the labor market is booming, the public is not concerned about the House Intelligence Committee or North Carolina bathrooms. The swamp hasn't been drained? Well, most people don't seem to care.

Has Trump been a disappointment? Of course, but 70 days is not a true test. He's got 40% of the public behind him, and no other politician or party is close to that level of support. Can Trump figure out how to use his political capital? The jury is out – he faces a steep learning curve with no margin for any more unforced errors.


March 30, 2017

Shifting Our Odds on the Border Adjustment Tax

SHIFTING ODDS: We've been too cautious on the Border Adjustment Tax, a proposed 20% tariff on goods imported into the U.S. For the past few weeks, we had thought odds were 60-40 against the tax; now we're raising the odds to 70-30 against as opposition stiffens in the Senate. Death of the border tax would be a major plus for retailers like Target and Wal-Mart, which have led industry opposition to the bill.

SUPPORTERS OF THE BAT TAX are led by Paul Ryan, who needs the roughly $1 trillion in revenues that it apparently would produce over ten years; that obviously would make it easier for a tax reform bill to be revenue-neutral. Ryan and others want also want to reward exporters and punish importers in an effort to address the U.S. trade imbalance.

BUT OPPOSITION IS GROWING IN THE SENATE: Respected GOP Sen. Rob Portman told CNBC yesterday that he opposes the tax; he joins several Republican opponents, including Tom Cotton of Arkansas (home of Wal-Mart) and John Cornyn of Texas. The Senate Finance Committee Chairman, Orrin Hatch, hasn't taken a position but sounds lukewarm at best. Some of these Senators oppose the idea because it would hurt companies in their home states, some are ardent free-traders, and some view the BAT as a de-facto tax hike.

PERHAPS RYAN CAN DEVISE AN ARTFUL COMPROMISE to phase in the tax or water down its impact, but for now we envision a bill that may include the BAT in the House, but not in the Senate. That raises an enormous issue in a House-Senate conference committee – scale back the tax to reflect $1 trillion less in revenues, or pass a bill that isn't fully paid for, which would produce howls from deficit hawks. This is still another complicated issue for a tax bill that could take a year to pass.

WHAT POLLS OVERLOOK: Controversy over Donald Trump's job approval rating will persist for his entire presidency; do you believe Gallup or Rasmussen? It all depends on methodology; we could write several paragraphs on this but most eyes would glaze over (including ours). Here's what's overlooked as Trump's numbers slide – his job approval rating, around 40% positive, is more than twice the job approval for Congress, which is mired below 20%.

THE SHRINKING LABOR MARKET: Highly recommended reading this morning – the lead editorial in the Wall Street Journal, which addresses an issue that many Americans don't appreciate: the labor market is shrinking dramatically as companies scramble to find skilled labor. It's a problem that could intensify if there are curbs on immigration – and eventually this will produce inflationary wage pressure. The U.S. needs more, not fewer, foreign workers.

GEORGE W. BUSH, COMEDIAN: People who spend time with George W. Bush report that he is scathingly funny, and he was in good form after Trump's inaugural address, which lamented "American carnage" as our best days "disappear over the horizon." According to a piece in New York magazine, Bush told colleagues afterwards: "That's some weird sh-t."


March 29, 2017

Why Bipartisanship is a Total Fake-Out

MAYBE THERE'S SOMETHING IN THE WATER this week in Washington, but suddenly Donald Trump is talking about bipartisanship with Democrats. Members of both parties met with him last night at the White House, where Trump pledged to work on a new bipartisan deal to fix Obamacare. "That's such an easy one," he declared, "there's no doubt that's going to happen very quickly." Seriously?

THERE'S ONE MISSING INGREDIENT in the bipartisan calculation – Democrats. They have no intention of cooperating with Trump on anything other than infrastructure, where they would love to spend $1 trillion to begin fixing crumbling bridges and highways. They see no reason to cooperate on health reform, tax cuts, Neil Gorsuch or the big April issue – a potential government shutdown.

DEMOCRATS ARE ITCHING FOR A SHOWDOWN over spending priorities, and Republicans – fearful of losing the spin battle over a government shutdown – are backpedaling furiously. They won't force the issue of a wall with Mexico in the budget resolution that has to pass by April 28, and the only way Republicans will get a huge increase in Pentagon funding will be if they relent on deep spending cuts for popular domestic programs like the National Institutes of Health. They will relent. Thus the Democrats, in the minority in both houses, will use the threat of a shutdown to prevail on most budget issues.

THIS WILL SIMPLY EMBOLDEN THE LEFT, which is still crowing over last Friday's Obamacare vote. Compromise? They're furious over the gutting of environmental regulations and the likely filibuster change that will elevate Gorsuch to the Supreme Court. The message from the angry left to Chuck Schumer is clear – don't you dare to compromise, and he won't.

THIS PUTS TRUMP IN A BIND, because – incredibly – he can't get his own party on the same page and eventually will need votes from Democrats on the debt ceiling. He faces a cacophony of GOP dissent, with defense hawks fighting with deficit scolds, with free trade advocates leery of protectionists, with those who want to try again on health reform fighting with Republicans who view the issue as radioactive. With Republicans seemingly in disarray, why would Democrats want to help Trump?

WHY THIS MATTERS: We believe there are two major implications for the markets: First, uncertainty over the agenda will continue to lessen the chances of major tax reform, for this year and perhaps longer; Second, confusion over fiscal policy is so overwhelming that it may force Janet Yellen to go slow on the next rate hike – she'll pull the trigger eventually, but she may have to wait for several more months before there's any clarity from the deeply divided politicians.


March 28, 2017

Our Advice to President Trump: Go For the Low-Hanging Fruit–Infrastructure

WHAT A SPRINGTIME MESS: We're preparing for a "nuclear option" to break a filibuster over Neil Gorsuch in the Senate; Democrats are threatening a showdown over paying for a wall with Mexico; an April 28 government shut-down, while unlikely, is not impossible; and tax reform, while doable, already is dividing Republicans. Yet there's one potential feel-good victory the Trump Administration can achieve this year–infrastructure.

WE'RE PUZZLED, FRANKLY, why the White House has not shot down reports that infrastructure reform is a year away–or longer. And with Paul Ryan under withering fire from Trump's base, why wouldn't he go for an issue he feels passionate about; we have heard Ryan in private meetings rhapsodize over the hugely successful Dwight Eisenhower national highway system in the 1950s. "Why can't we do that?" Ryan asks.

WE DON'T UNDERSTAND THE MENTALITY that says it's crucial to do the tough stuff first. Obamacare reform has badly wounded Trump and the Republicans; now they want to plunge into a one-year brawl on tax reform? Infrastructure reform–highways, bridges, sewer systems, etc.–would win support from Democrats, and all but the hard-core fiscal hawks in Congress. A bipartisan deal–what a concept!!

WE'RE HEARING THAT TRUMP could be persuaded to move sooner rather than later on infrastructure–despite his bravado about fake polls, he surely knows that he desperately needs a legislative victory this year, and by default infrastructure is a no-brainer. And it could help jump-start the mediocre economy, mired in still another lousy first quarter, seemingly an annual event.

TRUMP IS A BUILDER, he loves spectacular projects and is not particularly worried that debt issues could derail those projects. This might cost $1 trillion? Well, now is the time to do it–have you seen the Treasury ten-year bond yield lately? And Trump is absolutely correct that infrastructure in much of the U.S. is crumbling; don't even think about the condition of aged U.S. bridges while you're driving on them; at least half need major repairs.

SO IF TRUMP WANTS AN ISSUE that will unite his Goldman Sachs faction, his Steve Bannon faction, and his flailing congressional relations staff, he has one. Why fight over a wall with Mexico or a border adjustment tax when there's a sexy issue that could produce a Congressional victory by fall?

SO HERE'S OUR FEARLESS FORECAST–infrastructure will jump ahead in the queue, it will get moved up on the priority list because it's an idea that can move quickly, at least by Washington standards.


March 24, 2017

Now What?

THERE ARE ONLY TWO SCENARIOS for the Obamacare replacement bill: either it dies today or soon thereafter on the floor of the House or it eventually squeaks through after more fixes – only to die on the floor of the Senate later this spring. Either way, this is shaping up as a time-consuming fiasco that will rob President Trump of valuable political capital.

GIVE TRUMP CREDIT for rolling up his sleeves and seeking to satisfy the Freedom Caucus, hard-liners who don't care if they're vilified by GOP colleagues (who will seek their ouster in the 2018 mid-term elections). As we wrote earlier this week, these House rebels don't care if they lose their seats – their demands keep escalating; they want to get government out of health care.

IN A PERFECT WORLD, TRUMP AND PAUL RYAN would say to hell with the Freedom Caucus, we'll seek a truly bipartisan bill, we'll work with Democrats to reform Obamacare. But this isn't a perfect world, and the Democrats are veering into a hyper-partisan dead end by threatening to filibuster the nomination of a highly qualified Supreme Court nominee. This strikes us as tone deaf, a move designed to appease the party's furious left wing.

DEMOCRATS ARE GLEEFUL THIS MORNING, as less than three dozen House radicals threaten to derail Trump's agenda. He faces still another showdown with the Freedom Caucus when the debt ceiling has to be raised this summer. Then he almost certainly will have to seek votes from Nancy Pelosi's Democrats. Why? Because if there aren't enough GOP House votes to kill Obamacare, there surely won't be enough GOP House votes to raise the debt ceiling, which was hit earlier this month and has to be extended once the Treasury runs out of accounting tricks, probably in July.

HOW WILL TRUMP REACT TO A DEFEAT TODAY? He won't blame himself, you can be sure of that. The obvious scapegoat would be Ryan, who's brilliant on details but weak on strategy. If their relationship cools, what does that say about a tax bill?

IT'S STILL WAY TOO EARLY TO WRITE AN OBITUARY for tax reform, which has overwhelming support among House Republicans. But so does Obamacare abolition, and look what happened – lawmakers couldn't agree on the details, and the details on taxes are nearly as daunting: revenue neutrality, the border tax, caps on deductions, etc. It will take months – maybe a year – to iron out those differences, but tax reform eventually will pass.

OUR BOTTOM LINE: The differences between dealmaking in New York City and dealmaking in Washington DC have never been more apparent; Trump is like a fish out of water. He will have to change the subject, quickly, but soon he will face bruising budget battles. "Who knew how difficult this would be?" Trump said earlier this month. Indeed, it's very difficult – just ask John Boehner, now in retirement largely because of the Freedom Caucus.


March 22, 2017

What the Markets are Missing on the Obamacare Debate

WE'VE BEEN WARNING for weeks that President Trump's agenda would bog down – not die, but succumb to the glacial pace that afflicts Washington. And so it has. The markets, accustomed to the fast pace of earnings reports and economic data, assumed that Trump would cruise this spring – but that assumption hit a brick wall yesterday. So what is it about Washington that the markets don't get?

1. THERE'S A DEPRESSING MENTALITY in this town that rejects compromises. Ted Cruz and Rand Paul in the Senate, and the uber-conservative Freedom Caucus in the House, essentially demand 95% of what they want, and would rather obstruct if they don't get it. Adroit presidents like Ronald Reagan and Bill Clinton were willing to compromise, but the Freedom Caucus is not. Neither, we would add, was Harry Reid.

2. THREATS DON'T WORK: Donald Trump is an impatient real estate developer – my way or the highway. But he cannot threaten Rep. Mark Meadows and his Freedom Caucus members. John Boehner was tormented by this group of 25-30 rebels, and now Paul Ryan has to deal with them. They won't cave, and threats are counter-productive. Threaten that they'll lose their seats? They don't care.

3. THERE WILL BE NO VOTE ON THURSDAY if it appears that Ryan can't win. His vote counters will know by this evening if they can prevail – and if it looks unlikely, Ryan probably won't even bring the bill to a floor vote; why suffer the humiliation? Instead, he would proclaim that the GOP is still fine-tuning the bill, making additional changes. And that might work – he only needs an extra two or three votes to pass the bill.

4. IF RYAN AND TRUMP WIN ON THURSDAY, which is still a plausible outcome, if won't mean much. That's because the House bill has absolutely, positively no chance of passing in the Senate without major changes to appeal to moderates. Wily Mitch McConnell could get a bill passed in the Senate, but it wouldn't look like the House version.

5. THE REAL ACTION IS IN CONFERENCE COMMITTEES: In the arcane world of legislative sausage-making, the trick sometimes is to simply get two bills to a House-Senate conference, where the horse-trading begins. Trump will play a major role in that process, and he has a chance of prevailing. The final chapter will be tricky also: a House-Senate Conference Committee agreement would have to be sent back to each house, and we have difficulty imagining the House Freedom Caucus approving a final deal that has been altered to appeal to Senate moderates.

6. SO – IS THE TRUMP AGENDA DEAD? The markets seemingly turned on a dime yesterday, concluding that his agenda is in jeopardy. If the Obamacare replacement fails, that obviously would be humiliating for the Republicans, but it's WAY too premature to proclaim that Trump's agenda is dead. For now, we'll conclude that it's delayed – tax reform is very unlikely in 2018. But Neil Gorsuch could break Trump's slump and the tax committees could start moving by summer, giving Trump some new narratives.

OUR BOTTOM LINE: Trump still has a chance to win on Thursday, but even if the bill is pulled or killed, Ryan will simply go back to the drawing board. The more disturbing story is the amount of time and political capital that will be expended on health reform. History may repeat: eight years ago we saw Barack Obama win a pyrrhic health care victory that cost dozens of House and Senate seats and did nothing to jump-start the economy – which should be any new president's top priority.

March 21, 2017

Biggest Washington Story for the Markets Comes on Thursday

THE SENSATIONAL JAMES COMEY hearing yesterday guaranteed that alleged Russian collusion with the Trump campaign will dominate the headlines for months to come. But this has had virtually no impact on the U.S. stock market, which is anticipating another decent earnings season in April with only two major concerns:

1. THE MOST PRESSING CONCERN involves President Trump's agenda – which is why Thursday's House vote on an Obamacare replacement is crucial. Despite Trump's personal involvement in the issue, he still appears to be a vote or two short this morning. Make no mistake: a defeat in Thursday's vote would send a clear signal that the rest of Trump's agenda – taxes, the budget, infrastructure, etc. – is in trouble.

THE PRESIDENT TRAVELS TO CAPITOL HILL today to personally fight for the bill; we suspect this is part of an orchestrated process that will give him a victory on Thursday, showing that he still has some clout after yesterday's disastrous Comey hearing. Then comes the really heavy lifting in the Senate, where the goal is to get any bill passed, which would set up a back-and-forth with a House-Senate conference committee. That process could drag into the summer.

2. THE ONLY OTHER THING THAT COULD SHATTER THE STOCK MARKET’S COMPLACENCY would be a geopolitical event, which can't be ruled out as the U.S. prepares major new sanctions against North Korea, according to a Reuters exclusive this morning. New sanctions could provoke North Korea's unstable leadership.

THE ONLY MARKET STORY THAT HAS CAUGHT OUR ATTENTION is the weaker dollar, perhaps because growth is beginning to percolate in Europe, where ultra-nationalism and opposition to the Euro seemingly have peaked. Chances of Marine Le Pen winning the French Presidency always were slim; lately they look even slimmer. With the Federal Reserve in no great rush for its next rate hike, the dollar has softened a bit – clearly a good story for export-reliant U.S. multinationals.

SO – SHOULD THE MARKETS CARE about the Comey hearings? A steady drumbeat of more leaks and more Trump tweets could damage him so badly that his presidency might appear crippled – but we're not at that point yet; in two months Neil Gorsuch could be on the Supreme Court and Obamacare reform could be very much alive. Even though Trump's approval rating is below 40% positive, his base has not wavered. (Democrats are starting to whisper about impeachment, which makes Trump's base even more adamant.)

REPUBLICANS IN THIS TOWN are horrified by the Russia story and Trump's tweeting ("when you're in a hole, stop digging," is a popular refrain). But will the GOP jump ship? Not yet – but they acknowledge that Thursday's vote could be a game-changer.


March 20, 2017

What We're Hearing on Capitol Hill – Some Surprises

We spent time with some trusted sources in the past few days, ahead of this drama-filled week. As usual, what people in this town say in private is not necessarily what they say in public:

TRUMP ROLLS UP HIS SLEEVES: Even President Trump's detractors have been impressed by his hands-on lobbying for an Obamacare replacement. He has used the White House setting adroitly, where he twists arms, cajoles, horse-trades, etc. He's not a policy wonk, "but I'd give him a B-plus for effort," one source says. The risk: if Trump takes ownership of issues, he'd better win.

CONSTITUENTS DON'T CARE ABOUT RUSSIA: Washington will be riveted by the James Comey testimony today, but lawmakers report there's little interest among most constituents. We think Comey will totally reject Trump's claims that Barack Obama wiretapped him, but the FBI Director may hedge on how blatantly Russia tried to influence the election. It's a dramatic story that has generated surprisingly little public concern. One exception: the voters back home overwhelmingly wish Trump would stop tweeting.

NEIL GORSUCH, ELUSIVE TARGET: Everyone we talk with – in both parties – proclaims that Supreme Court nominee Neil Gorsuch is superbly qualified and is likely to sail through hearings that begin today. "This guy doesn't have any major baggage, and he's very likable," says a Democratic staffer. On the hot seat: Chuck Schumer, who is likely to lose this fight, further provoking the furious left wing.

PAUL RYAN DOESN'T HAVE AN ENDGAME: The House Speaker can see the trees – his knowledge of legislative details in un-matched – but can he see the forest? He has a decent chance of winning House approval of his Obamacare replacement bill on Thursday, but even Republicans say there's no clear end-game in the Senate, where the bill simply doesn't have enough votes. "We can't satisfy the moderates and the conservatives all at once," says one GOP staffer.

NEW POWER PLAYER: In the constant power struggle that envelops the White House, the new behind-the-scenes star is chief economic policymaker Gary Cohn, who is carving out a major role on infrastructure and tax reform. He's a moderate, which is a liability, but Cohn has sharp elbows – and thus far has eclipsed Treasury Secretary Steven Mnuchin, who "may be in over his head," more than one source has told us.

NO RUSH ON TAX REFORM: The markets are frustrated – they want progress now – but there's a near-unanimous consensus on Capitol Hill that a major tax bill will eventually pass (probably not this year). Huge battles loom on issues like revenue neutrality and border tariffs – but if this process takes a year to resolve, Republicans won't care. "All we have to do is get it done a few months before the midterm elections, what a great time to inject some stimulus into the economy," says a GOP staffer.

HIGHER INTEREST RATES? SO WHAT? Republicans on Capitol Hill have plenty of complaints about the Federal Reserve, which is viewed by many on the right and left as too powerful – but Janet Yellen gets uniformly high grades. As we often point out, higher interest rates are welcomed by a large portion of the population – especially senior citizens – who are looking for more attractive yields.

THE BIG CONCERN: In private, members of Congress have one over-riding concern – not the economy or taxes or Obamacare. It's geopolitics in general and North Korea in particular. "Trump has alienated Germany, the U.K., Mexico, China and others," says a foreign policy expert, "but my greatest worry is a U.S. overreaction against North Korea that could spin out of control."



March 17, 2017

Why the Controversy Over Wiretapping Is Important For the Markets

PRESIDENT TRUMP'S INSISTENCE that he was wiretapped has been roundly rejected by Republicans, and that's important. GOP lawmakers are criticizing him with impunity – and that makes it easier for them to oppose him on Obamacare, his budget, tax policies, etc. Trump is squandering political capital, which he needs to win enactment of his agenda.

WE WERE SURPRISED, FRANKLY, BY THE REACTION TO TRUMP'S BUDGET: Republicans were astonishingly dismissive; they basically said Trump's proposal will be ignored and re-written. This reinforces a major late-winter trend: Republicans, not Democrats, are Trump's big headache.

GIVE TRUMP CREDIT, he's fulfilling a campaign promise to slash domestic discretionary spending and boost defense; no one should be surprised. And he has angered GOP budget hawks by keeping Social Security and Medicare off-limits, still another controversial promise he's keeping.

FOR THE FINANCIAL MARKETS, THERE ARE TWO MAJOR BUDGET THEMES: The big macro theme is that there will be no deficit reduction (eliminating the National Endowment for the Arts doesn't even quality as a rounding error), while the big micro theme for specific stocks will be a rejection of huge cuts for agencies like the National Institutes of Health. Shares of labs and other health providers were hit yesterday, but Trump's cuts won't stand.

IT'S BEEN A ROUGH WEEK: The Congressional Budget Office scoring on the Obamacare replacement, the ongoing wiretap controversy, and now a Trump budget that has a new metaphor – cuts to Meals on Wheels. You can be certain the media and Democrats will flog the narrative of cutting food for old people.Trump is a genius at public relations, or is he?

HOW LUCKY ARE THE DEMOCRATS? They have no new ideas but they can sit back and watch bright young Republicans who actually have new ideas – Paul Ryan and Tom Cotton – rip into each other. The party has splintered into factions, as we wrote earlier this week, so all the Democrats have to do is avoid doing something stupid, like call for a government shutdown in late April.

MEANWHILE, ANOTHER WEEK HAS PASSED with no action on tax reform...



March 16, 2017

Lightning Round – A Dozen Mid-March Themes

1. Story of the month: we're nowhere close to the point where Fed rate hikes will derail this market.

2. Here we go again – still another weak first quarter, but sluggish GDP will be temporary.

3. Europe is growing – and the anti-immigrant, anti-Euro movement may have peaked. Dollar also?

4. Trump budget cuts will be softened by GOP, they won't take a meat-ax to the State Department or NIH.

5. But shipbuilding and other big defense spending hikes will occur – without offsets from other programs.

6. Paul Ryan's Obamacare plan is getting a re-write and might pass in the House; Senate is another story.

7. Voters and markets don't care about Trump wiretapping claims but this will dominate the news next week.

8. Ditto for charges of Russian influence – Congress wants answers, Republicans sprint away from Trump.

9. Chuck Schumer doesn't want to shut the government down on April 28, but his base is demanding it.

10. Trump tax release was a "nothingburger," the Washington Post said; is this the best Rachel Maddow can do?

11. Assault on regulations continues – a huge story, under-publicized, too wonky for the evening news.

12. Billionaire egomaniacs hear a calling – are Oprah Winfrey and Mark Cuban running in 2020? Good Lord...


March 15, 2017

The Improbable Emergence of THREE Republican Parties

WE WROTE REGULARLY LAST YEAR about the potential breakup of the Republican Party, but that seemed moot after Donald Trump's stunning upset. Surely Trump would unify a party looking for leadership – but it hasn't happened, and now there are three distinct Republican factions, with major implications for policy.

THE CHAMBER OF COMMERCE FACTION: Paul Ryan is admired by Republicans who like free trade, business tax breaks and entitlement reform – but he's loathed by the hard-core GOP base, which dismisses his "Obamacare lite" proposal. The Breitbart alt-right regularly mocks him, as do many party activists. Once considered the party's rising star, a good-guy brainiac and future president, Ryan and his faction are headed under the bus if the Obamacare replacement dies.

THE TEA PARTY REBELS: They made John Boehner's life a living hell, and now they're after Ryan. They don't want federally subsidized health care, period. Many in the base love them, but at some point these House rebels have a responsibility to govern – and if you think they're obstructionist now, just wait until the looming debt ceiling fight, which begins today. Default on federal debt? They'd love to !!

THE STEVE BANNON POPULISTS: This is the newest and most intriguing faction – fiercely populist and devoted to the white blue collar workers that Hillary Clinton ignored. This faction hates free trade, doesn't care much about the deficit, and wants to spend on highways, defense, job training, etc. This faction has no stomach for Ryan, to put it mildly, because he would curb entitlements and they would like to expand them.

FROSTING ON THE CAKE is the stumbling, predictable Democrats, still without much of a strategy other than obstructing. Democrats would like to work with Trump on infrastructure – and they don't have a major beef with Supreme Court nominee Neil Gorsuch, who is headed for confirmation. This infuriates the Democrats' base, which wants red meat and already is dreaming about Elizabeth Warren.

THIS BIZARRE MIX NEEDS A DYNAMIC LEADER, and there's one in the White House. But aside from one excellent speech to Congress, Trump has seemed tentative. He's the greatest self-promoter in the history of American politics, but it's starting to look like he cannot grasp the intricacies of policies like health reform, and he has a staff that has ties to all three GOP factions, which gives the impression that no one is in charge.

THE MARKETS HAVE TO PAY ATTENTION because Trump may have picked the wrong horse (Ryan) on health reform, and he's losing allies – not just John McCain and Lindsey Graham, they were gone from the get-go. But when Trump starts losing respected Senators like Rob Portman, that's a big deal; it does not bode well for other legislative priorities.

THE KEY QUESTION: Is this just a rough patch for the Republicans, or is this a party that's incapable of governing and compromising? Trump has to step up and take charge – and as usual he may have to change the subject: Somali pirates, Iranian speedboats, or Kim Jong-un?


March 14, 2017

Back to the Drawing Board on Health Reform?

REPUBLICANS HAVE SUFFERED a stinging public relations defeat, and while they could still get their Obamacare replacement bill through the House, they now have virtually no chance that the Paul Ryan plan could prevail in the Senate – and they risk losing support from President Trump, who only wants to associate with winners.

THE TIME MAY BE NEAR, we believe, for the GOP to go back to the drawing board on health care while focusing instead on tax reform.

WE HAVE BEEN CONSISTENT CRITICS OF the Congressional Budget Office, which for much of the past decade overestimated the size of budget deficits; they never could get the revenue component right. And besides, long-term forecasts are only good for two or three years, then are nothing more than an educated guess. So we understand the GOP frustration with the CBO, but the party has suffered a public relations thrashing from an agency run by a conservative Republican.

WE SUSPECT TRUMP IS FURIOUS AT CBO AND NOT REAL PLEASED WITH RYAN for producing an Obamacare replacement that makes the president looks bad, unable to keep his campaign promise to insure everyone. Trump surely must understand one of the oldest adages in Washington – the party that owns the health issue always regrets it. This issue is an albatross for the party in power.

A MAJOR TAKE-AWAY OF THE CBO REPORT is that there's virtually no chance that Senate Republicans will provide the necessary votes for the Ryan plan. It's not just the sharp drop in people covered – it's the enormous cuts in Medicaid coverage, which is a non-starter for nearly a dozen Senate Republicans. "We can do better," was a common refrain last night from the Senate GOP.

SO WITH THIS STARTING TO LOOK LIKE A DEBACLE, we're hearing Republicans echo Sen. Tom Cotton of Arkansas, a certain GOP presidential candidate in the next decade. Cotton wants the process to slow down, and we agree that perhaps Ryan and his allies should go back to the drawing board. Much of Obamacare was already slated to be phased out slowly, so they could go slow while devising something that covers more people.

A TIME-OUT ON HEALTH REFORM would allow Republicans to go to their sweet spot: tax reform. The House could move quickly on this issue, showing the markets that pro-growth reform is coming. The GOP desire to show Wall Street some movement has generated support for splitting tax reform into two bills – business first, then individual – as we reported yesterday.

A PROTRACTED GOP FIGHT over Obamacare, lasting into the summer, could rob Trump of political capital and send a signal of gridlock to the markets. The alternative is to promise to keep working on Obamacare reform while focusing on other issues. This is a no-brainer for a president who runs a risk of getting bogged down, like so many of his predecessors, on the health reform albatross.


March 13, 2017

Tax Reform Prospects Slip as Health and Budget Issues Swirl

QUICKSAND ALERT: Two enormously controversial issues – Obamacare replacement and a radical new budget – promise to throw Washington into gridlock, further jeopardizing chances for tax reform this year.

IN FACT, PROPONENTS OF TAX REFORM are seriously considering breaking the process into two parts – first, business tax cuts, then individual tax reform. But there would be two complications: which bill would address "pass through" firms like LLCs and S corps – and then there’s the political risk of going for business tax reform first with individuals not getting their tax cuts until well into 2018.

TAX REFORM PROPONENTS INSIST that all the reforms can pass by year-end; it's possible, but the timetable has been scrambled as Republicans fight among themselves over two enormous issues:

1. Obamacare replacement: The Paul Ryan bill may squeak through the House in April, but obstacles are increasing – including a "scoring" from the Congressional Budget Office early this week that could make the proposal even more controversial. The major issue dividing Republicans is curbs on Medicaid coverage – a deal-breaker for many moderate Republicans in the Senate, who have the votes to kill the entire bill.

We have argued that proponents of the Ryan bill simply have to get a bill – any bill – passed in each house, which would send the measure to a House-Senate conference committee, which would then cut deals and produce a final measure. But that will be a long slog, taking months before any kind of a compromise is ironed out. Meanwhile, Democrats are ecstatic – they have a potent issue for 2018; the Ryan proposal is increasingly unpopular.

2. Budget issues: Trump's budget, due late this week, will include massive cuts to the federal workforce and deep reductions in spending for housing, the environment, foreign aid, etc. Once again, the key issue will be opposition from Republicans – some want to include Social Security and Medicare in the budget cutting, while many GOP Senators are likely to oppose the magnitude of the cuts.

THIS BUDGET FIGHT will exceed anything seen since the Reagan Administration. Huge increases for defense have widespread support, but the spending cuts do not. The federal debt ceiling will hit this Wednesday and funding to keep the government operating will expire on April 28. These deadlines can be extended, but a budget deal might not come into focus until summer.

IF THESE TWO ISSUES AREN'T ENOUGH to hog the timetable, several other issues will intrude – the Supreme Court nomination, the wall with Mexico, and increasing GOP opposition to trade restrictions. And there will be three major recesses between now and the five-week August break.

BOTTOM LINE: The good stuff – corporate and individual tax reform, and infrastructure spending – eventually should win enactment, but this week's fireworks over Obamacare and budget cuts will greatly delay the timetable. And perhaps as importantly, it will further embolden Republicans who oppose Donald Trump's policies.


March 10, 2017

The Case for a 50 Bp Move by the Fed Next Week

SHOULD THE FED CONSIDER SOMETHING BOLD NEXT WEEK? We have no idea what the jobs data will show at 8:30 this morning, but our guess is that it will confirm that the labor market has healed dramatically. As we travel around America, we hear the same refrain – there's an increasingly acute shortage of skilled labor.

GOOD NEWS EVERYWHERE: The likelihood of further improvement in the labor market will boost wages, which means real disposable income will rise at a level that will support solid consumer spending. After what seems to be an annual mediocre first quarter, GDP could grow by close to 3% for the rest of the year. Recession? There isn't one in sight.

OFFICIALS AT THE FEDERAL RESERVE SHOULD BE ECSTATIC: Their twin goals of labor market healing and inflation of close to 2% have been met. And there's still a high likelihood of more stimulus coming in 2018 as taxes are cut dramatically. Even Western Europe is starting to grow!

TOO MUCH OF A GOOD THING IS WONDERFUL, Mae West once joked, but the Fed surely must worry that it's far behind the curve on interest rates. The so-called Taylor rule, created by Stanford professor John Taylor, would have the federal funds rate at 3% now, maybe higher. By his reckoning, the Fed is WAY behind the curve.

MONETARY POLICY IS STILL VERY ACCOMMODATIVE, and history shows that bubbles can quickly slam the economy in this climate; 2001 and 2007 are sobering examples. The worry isn't inflation per se; the worry is that the markets may be getting frothy, fueled by extraordinarily cheap money for nearly a decade.

IN A PROVOCATIVE PIECE in the March 7 Washington Post, highly regarded economist Sebastian Mallaby wrote that the Fed should shake the markets out of their exuberance with a 50 basis point hike next week – not the 25 bp move that is virtually certain. Moving aggressively now could prevent even more bitter medicine later, he wrote.

SO LET'S SUPPOSE THIS MORNING'S JOBS REPORT shows nonfarm payrolls rose last month by something like the 227,000 increase in January. Won't someone at next week's FOMC meeting suggest that a quarter point move is too timid? Janet Yellen hasn't prepared the markets for 50 basis points, so it won't happen – but we would guess that a hawk or two might suggest stronger action.

THE LIKELIHOOD OF A GRADUALIST FED, probably hiking rates only a couple more times this year, contributes to the markets' exuberance – and why not, the fundamentals are fabulous: a healing labor market, modest inflation, solid corporate earnings, etc. In this Goldilocks climate, the Fed certainly has to lighten up the punch bowl; after all – even Donald Trump worries about a bubble.


March 9, 2017

Trump's Top Legislative Priorities – A Status Report

LAWS ARE LIKE SAUSAGES – it's best not to see them being made, Otto von Bismarck proclaimed (he was surprisingly witty, but we digress). We're in the early stages of sausage making on Capitol Hill, so let's take a look this morning at the status of Donald Trump's top legislative priorities.

1. Obamacare replacement: The press is focusing on opposition to the Paul Ryan bill, but it's moving. The House Ways and Means Committee approved it early this morning, and the full House will pass it by the end of April. It has generated intense opposition from a handful of conservatives – but President Trump told many of them last night that he's willing to deal.

The Senate will pass a kinder and gentler bill and then the real action will begin in a House-Senate conference committee. The bill lacks the votes to pass now – and a Congressional Budget Office scoring of the costs, due next week, could be an obstacle – but it's too early to bury this bill; it will go through several re-writes and lots of horse-trading. The problem is time – it could take until late July to get a deal, which means the rest of Trump's agenda faces a logjam.

2. Killing Dodd Frank: This was supposed to be a slam dunk this spring, but it has stalled because of the Obamacare fight and the realization that opponents of Dodd-Frank don't have 60 votes in the Senate to break a filibuster. Some tinkering of the law – easing the impact on small community banks, for example – is possible, but the major features, including the "Volcker rule," may stay.

3. Major Budget Changes: Trump will get a massive defense spending hike, but his proposed cuts to domestic spending will encounter opposition from Republicans. A decent economy will keep the deficit from exploding in the next couple of years, but there's a ticking time bomb coming in the next decade on entitlements, which no one wants to touch.

Two big budget issues to watch are 1. The debt ceiling, which expires next week; that will be a huge irritant for Trump and the GOP this spring because no one wants to raise it. And 2. Keeping the government operating when a "continuing resolution" expires in late April. Both of these issues will generate lots of headlines and predictions of doom from Cassandras like David Stockman, but Trump will cut deals.

4. Tax reform: Ryan and Treasury Secretary Steven Mnuchin think a deal will win enactment before the August recess – but we have to ask: do they mean August of 2017 or August of 2018? There's no consensus yet on huge issues: border tariffs; revenue neutrality; whether to cap deductions, etc. We'll eventually get massive cuts and reforms, but that's now looking like a year away.

5. Infrastructure spending: Behind the scenes, this is making some progress. The Washington Post reports that National Economic Council Director Gary Cohn – a player to watch – is methodically putting together a battle plan for major infrastructure investments. The price tag will be an issue, but this is coming in 2018.

Miscellaneous: Some new tariffs are likely, but a trade war looks increasingly unlikely . . . The Neil Gorsuch nomination to the Supreme Court will be a huge issue, and we think he will squeak through . . . There's little enthusiasm for building a wall, and no credible way to pay for it . . . Reform of Fannie Mae and Freddie Mac is coming, eventually . . . And watch for the populist Trump to maintain his drumbeat against drug pricing.

BOTTOM LINE: It's too early to write off Trump's agenda. He has the votes in both houses, and his solid base has not wavered. Yes, the GOP is divided on some issues, but perhaps not as much as the press portrays. There's only one certainty: this sausage-making will take far longer than Trump – and the markets – were hoping for.


March 8, 2017

A Republican "Bloodbath" in 2018? We Don't Think So

NOT KNOWN FOR HIS SUBTLETY, President Trump warned Republican lawmakers yesterday that they face a "bloodbath" in 2018 if they reject the Obamacare replacement that he supports. So – let's take a look at the midterm elections.

FIRST OF ALL, THE HARSH REACTION from conservatives yesterday against "Obamacare lite" did not surprise us. This venting is part of a process – it's largely designed to extract concessions as the horse-trading heats up. We still think the House will pass a bill this spring; the Senate is a much closer call.

FOR TRUMP, THE STAKES ARE HUGE: The Obamacare replacement bill will be the first major test of his famed negotiating skills, but in a totally different arena; this ain't New York City real estate. So he has to go after right-wing Republicans who blasted the bill yesterday; he has to warn of dire consequences in 2018.

EXCEPT 2018 STILL LOOKS LIKE A GOOD YEAR FOR REPUBLICANS, who are almost certain to retain control of the Senate; the Democrats have at least a half dozen vulnerable seats, so the Senate could shift from 52-48 Republican to something like 55-45 Republican. The House, once thought to be a GOP lock, could be in play, but we don't see a net gain of 24 seats, which the Democrats need to take control (they could win a net of 15).

THE 2018 OUTLOOK IS SO BENIGN FOR REPUBLICANS that they will continue to flex their muscles with impunity; they're not afraid to oppose Trump on infrastructure or taxes or health reform, and they are almost unanimous in their derision of Trump's claim that Barack Obama had him wiretapped. They won't publicly rip Trump because his base remains firm, but in private they mock him.

IF YOU TALK WITH REPUBLICANS ON CAPITOL HILL, they roll their eyes over Trump's tweets and unsubstantiated allegations, but that's not his biggest weakness. Rather, it's his lack of detailed knowledge on complex issues like Obamacare. ("Who knew it was this complicated?" he said earlier this winter).

THE REAL LEGISLATIVE POWER lies with Paul Ryan and Mitch McConnell – both far more conservative and pro-business than Trump – and they will call the shots. They will not cower as Trump threatens a bloodbath in 2018; they will cut their own deals, with Trump forced to play cheerleader. And if the Obamacare replacement fails, Trump will get blamed for a lack of leadership.

WELCOME TO THE SHARK-FILLED WATERS of Washington, Mr. President; this year will be a learning experience. He'll get a dramatic tax bill within a year, but the Obamacare fight will rob him of some political capital – just as it did to Barack Obama eight years ago.


March 7, 2017

Donald Trump's First Real Crisis; Finally – Some Movement on Capitol Hill

A SERIOUS CRISIS LOOMS: The absurdist theater over wiretapping pales in comparison to Donald Trump's first real crisis – the dramatic escalation of tensions between the U.S. and North Korea, with a military confrontation not totally out of the question.

THAAD MISSILES ON THE WAY: The U.S. has scrambled to install a Terminal High Altitude Area Defense (THAAD) system; the prime contractor is Lockheed Martin. Most, but not all, incoming missiles can be knocked out by this system, and South Korea has reluctantly accepted THAAD as tensions have rapidly escalated. China is adamantly opposed to the presence of THAAD missiles.

COULD KIM JONG UN OVERPLAY HIS HAND? The erratic North Korean dictator seems to be itching for a confrontation – with Malaysia, South Korea, Japan and of course the United States. With Donald Trump unlikely to back down, this now represents a genuine market threat – far greater than interest rate hikes, legislative gridlock or Iranian harassment of U.S. ships in the Persian Gulf.

AN EXTRAORDINARY ARTICLE in Sunday's New York Times – seemingly obscured by the Trump wiretapping allegations – detailed covert action by the Obama Administration against North Korea. The focus has been on cyber warfare directed at the country's military infrastructure, not dissimilar to Israel's use of computer viruses ("worms") that were deployed against Iran.

BUT THERE ARE OTHER OPTIONS, the article contended, including U.S. surgical strikes against North Korea's nuclear and missile sites. We're not predicting that the Trump Administration will strike, but sanctions don't work and Beijing is reluctant to take action that could lead to a flood of refugees into China. Our bottom line: if Kim Jong Un continues to lob missiles toward Japan, he will force Trump's hand.

FOR TRUMP, A SURGICAL STRIKE could bring some plusses – it could deflect attention away from his rocky start, it could galvanize U.S. public opinion, it would send a signal to the world of renewed U.S. muscularity, and it would reinforce the argument to spend more on defense. The downside, of course, is huge: it could spark a wider conflict on the Korean peninsula.

SOME GOOD NEWS: The press is focusing on noisy GOP critics of the Obamacare replacement bill, but that's not the real story. The squawking will continue, but here's the key – there's finally movement on Capitol Hill, which is what the markets want to see.

DESPITE MYRIAD CRITICISMS OF THE PROPOSAL – It's Obamacare lite, it costs too much, it reduces overall coverage, etc. – this mammoth locomotive has begun to move. The key House committees should pass a bill before the spring break begins on April 7, and full House passage – after intense arm-twisting from the White House and Paul Ryan – could come in May.

THE TOUGHER FIGHT will be in the Senate, where a handful of Republicans are prepared to block any measure that slashes Medicaid funding for the states. And a few conservatives, who hate the idea of a new entitlement program, also aren't on board. The Democrats, not surprisingly, will unanimously oppose any final GOP bill.

PROSPECTS FOR ULTIMATE ENACTMENT, sometime this summer, are slightly better than 50-50 but several moving parts – including an estimate of the price tag by Congressional bean-counters – still have to fall into place. Now the negotiations and horse-trading will begin, which reminds us of the old Chinese adage that "every journey of a thousand miles begins with a single step."


March 6, 2017

The Latest Trump Controversy: Should the Markets Care?

NEVER SEEN A WEEKEND QUITE LIKE THIS PAST ONE: 1. Unsubstantiated allegations that Barack Obama ordered wiretaps of Donald Trump's residence (Obama is a "sick guy," Trump tweeted). 2. The intelligence community, which loathes Trump, continuing its drumbeat against him. 3. Rumors swirling about who will leave the White House first – Reince Priebus or Sean Spicer?

IT'S A MESS, COMPOUNDED BY A PRESIDENT WHO IS FURIOUS that his well-deserved glow after last Tuesday's speech lasted no more than 24 hours. Trump is mad at Jeff Sessions, his staff and Congressional Republicans, so he blindsided them all with his allegations of wiretapping. Trump has accepted the Breitbart narrative that Obama allies are determined to destroy his presidency.

THERE MAY NOT BE CONCLUSIVE EVIDENCE but how can you know for sure when the shadowy Foreign Intelligence Surveillance Court, totally unaccountable, can wiretap with virtual impunity? Trump is paranoid to begin with, and this court plays into his suspicion that he has been targeted.

THE ISSUE FOR OUR READERS IS SIMPLE: Could this astonishing intrigue and chaos affect the financial markets? For now, perhaps not. Janet Yellen and the accelerating economy are more important for investors. But there are three threats that could begin to concern the markets:

1. The Trump agenda stalls. Exhibit A is the Obamacare replacement bill, now in serious trouble in the House. Paul Ryan has a bill ready for committee markup, but conservatives are balking over refundable tax credits, which they view as a new entitlement program. Lawmakers are looking for leadership from Trump, who is distracted. Maybe a replacement bill can pass in the House later in the spring – but until it does, tax reform will stay on the back burner.

2. Republicans begin to defect. This is the political issue to watch; the Democrats, still divided and relentlessly negative, aren't much of an opposition. But there's a GOP insurrection brewing in the Senate; nearly a dozen Republicans are essentially anti-Trump and virtually no one supports his allegation that Obama wiretapped him.

3. The U.S. loses international prestige. An image of Washington in disarray sends a signal to U.S. allies and adversaries, and a geopolitical crisis is inevitable; one is brewing with North Korea. Our take is that many countries – led by Germany – will go their own way on trade and defense rather than deal with Trump.

BOTTOM LINE: The fundamentals still look fine – an improving economy, a strong labor market, modest inflation, low interest rates and decent corporate earnings. But political instability could become a wild card; it's not enough to say that President Trump is off to a rocky start – his temperament is becoming a serious issue.


March 2, 2017

Exuberance Alert – Three Clouds On the Horizon

"A WEEK IS A LIFETIME IN POLITICS," British Prime Minister Harold Wilson once quipped, but we might suggest that a day is a lifetime in politics. The glow from Donald Trump's outstanding speech has faded quickly, as three troublesome issues come into focus . . .
1. HOW SERIOUS ARE THE SESSIONS ALLEGATIONS? The Democrats desperately need issues, and Attorney General Jeff Sessions has given them a whopper. He either lied under oath or was disingenuous under oath about his meetings with Russian ambassador Sergey Kislyak, and at the least Sessions will have to recuse himself from any probe of Russian influence on last fall's election.
THE RUSSIAN STORY WON'T DIE: It will be an endless annoyance for the White House, with hearings that will drag on and on. This will become the Republicans' Benghazi, or worse. We don't think the Russians played a major role in Hillary Clinton's defeat, but that allegation will not die – and neither will speculation about who knew what, and when.
2. BICKERING ON OBAMACARE: House Republicans are still arguing among themselves over health tax credits, and many complain that Trump hasn't shown enough leadership, other than boasting that Obamacare will be abolished. Republicans in the Senate don't necessarily agree with the measure that's coming into focus in the House. We reiterate: until an Obamacare replacement is clear, tax reform will stay on the back burner.
3. THE BIG STORY FOR THE MARKETS is the growing likelihood of a Fed rate hike at the March 14-15 FOMC meeting. To frame it simply – a nonfarm payroll number next Friday that's close to 200,000 jobs will prompt the central bankers to move; last month's rise was 227,000. And now the stock market is showing signs of an exuberant "melt up," prompting Fed officials to scramble as they seek to manage market expectations.
JANET YELLEN AND STAN FISCHER will speak tomorrow, and we'd guess that they will echo comments by Bill Dudley, the normally dovish New York Fed President, who indicated this week that a rate hike may be imminent. With fiscal stimulus very much on the table, these officials know the Fed has to stay ahead of the curve. Can the markets live with a 25 bp hike? Sure, the fundamentals will remain positive – but a rate hike will prompt immediate speculation about dollar-Euro parity; that's good for European exports but a negative for U.S. multinationals.
BOTTOM LINE: We're still bullish – these three developments aren't powerful enough to derail the surging economy – but it strikes us that the stock market's exuberance is getting frothy. A modest pullback would actually be healthy, as Fed officials undoubtedly have concluded.


March 1, 2017

Donald Trump's Excellent Night – Six Takeaways

THE RESET: Reeling from a rocky start and plunging job approval ratings, Donald Trump reset his presidency last night with the greatest speech of his career. It was a stylistic and substantive tour de force, an eye-opener that left even his detractors impressed. Make no mistake – the Trump Comeback, which we predicted last week, is
well underway. Six takeaways:
Mission One – accomplished: Trump put Congressional Republicans on notice – get to work, produce some bills. He will always have his loyal base, and he will never win the left, so the for him the key is quelling dissent from Republicans. How can they defy him after last night? GOP lawmakers were put on notice that resistance – at least for now – is futile.
The pragmatists won: There were a few Steve Bannon-inspired lines about trade and immigration, but the speech moved away from the scorched earth, dystopian rhetoric in Trump’s inaugural address. Pragmatists like Vice President Pence and Chief of Staff Reince Priebus – alarmed by recent polls – clearly prevailed.
What he didn't say: No mention of Russia, abortion, deep spending cuts and a dozen other controversial issues that won't go away. But there was no fierce partisanship, no media-bashing, no mention of voter fraud. Is this the new Trump? Let's see what his tweets look like in the next few days.
The agenda: He didn't put much meat on the bones, and that was a disappointment. He spent less than a minute on tax reform and didn't offer much leadership on an Obamacare replacement. Congressional Republicans can't agree among themselves on a replacement, and health reform threatens to rob Trump of political capital – just as it did to Barack Obama in 2009.
An olive branch to Democrats: We don't anticipate much bipartisanship, but Trump at least threw a few bones – he won't back away from massive infrastructure spending, and he's determined to lower drug prices. And in an astonishing olive branch earlier in the day, Trump indicated he could support a plan to grant citizenship for 11 million undocumented immigrants. Democrats seemed stunned by late last night.
Just enough for the markets: He could have talked more about taxes, and he indicated once again that deficit reduction is not a priority, but he said enough for the markets, which were worrying about a stumbling administration. He looked like a strong president, and that’s what the markets needed to see.
BOTTOM LINE: All of the great presidents, and most of the good ones, evolved dramatically in office; things look different once a campaign ends. Last night was just one speech, but if it truly represented a transformation of Trump to a more inclusive and conciliatory president, he will transform the country like no one since Ronald Reagan.


February 28, 2017

Time Waits for No One: Key Budget Deadlines Loom

THE TRUMP BUDGET PROPOSALS LANDED WITH A THUD on Capitol Hill yesterday; opposition from Democrats was expected, but Republicans seemed to have three major objections: Trump's deep domestic spending cuts are too ambitious; he failed to look at where the real money is – entitlements; and the $54 billion Pentagon spending hike was derided as too little by GOP defense hawks. These comments came from Trump’s allies.

TRUMP IS DISCOVERING, IN A HURRY, THAT CEO TACTICS don't necessarily work with legislative minutiae and the huge egos in Congress; we detected a near-rebellion yesterday on the right wing to his Obamacare replacement plan, which may languish for months. But Trump doesn't have time to focus on just one issue – not with two key budget deadlines looming.

HERE COMES THE DEBT CEILING: Perma-bears like David Stockman have been warning for months that a crisis is looming when the debt ceiling expires on March 15. He's wong, as usual, but this will become another huge distraction for the White House, because there may not be enough Republicans to extend the ceiling. Treasury Department officials can juggle the books and find extra cash for a few months, but this will hang over the Trump Administration and could become a genuine crisis by summer, when the ceiling eventually will have to be raised.

ONE SOURCE SAYS TRUMP would love to “restructure” U.S. debt – he hasn't abandoned that real estate developer's dream – but Treasury Secretary Steven Mnuchin has firmly told him that the debt ceiling has to be raised. Whether there are enough GOP votes to raise it this summer is a cliffhanger; the hawks they may demand more fiscal austerity (including the beginnings of Social Security COLA reform) as part of a deal.

THEN THERE'S THE GOVERNMENT SHUT-DOWN THREAT on April 28, when a so-called "continuing resolution" that passed last December will expire. Congress needs to wrap up its budget for this fiscal year, which is nearly half over. As with everything in Congress, this is complicated: Republicans want to tie the 2017 budget bill to the reconciliation process that would allow an Obamacare replacement to pass in the Senate with only 50 votes. The problem, of course, is that an Obamacare replacement probably won't be ready by April 28.

SO THERE MAY BE STILL ANOTHER CONTINUING RESOLUTION for fiscal 2017, but when "must pass" bills like this have to win enactment, they often get weighted down by other provisions. So it's entirely possible that confusion will reign on the 2017 budget, the 2018 budget and the debt ceiling – still another reason to worry that tax reform won't be on the front burner until fall.

WHO KNEW? The mind-numbing complexity of getting bills through Congress has finally dawned on Trump, who will be mercilessly mocked for complaining that "nobody knew" how complicated health reform is. It was, essentially, a concession that he's in over his head on Obamacare and – perhaps – other issues as well.

NOW THAT TRUMP REALIZES HOW DIFFICULT THIS STUFF IS, he needs a blockbuster speech tonight. He's still enormously popular among Republicans, while Democrats still look lost in the wilderness. It's way too early to write off Trump – he can still get a lot done – but the deadlines are closing in, with no major legislative accomplishments in sight.


February 27, 2017

Trump Wants Massive New Spending – Which Cost-Cutting Won't Offset

THE TRUMP ADMINISTRATION HAS GOTTEN PUSH-BACK from Congressional Republicans who were displeased in recent days to hear that the President's address Tuesday night would focus on big, sweeping themes. No, they told the White House – it's time to start talking about details. So let's focus on spending.
FORGET ABOUT TAX REFORM AND INFRASTRUCTURE SPENDING for a minute – those issues won't get to the front burner until Obamacare replacement and hugely controversial spending issues are resolved. There were glimmers of hope at a White House dinner last night with governors, who sense that some type of deal on Obamacare may come into focus in the next few days (it will take weeks or months to enact). Not surprisingly, this is about money – how much will the hard-pressed states get for "high-risk pools" and cost-sharing subsidies?
IT'S DAWNING ON REPUBLICANS that not only will they have to delay the timetable for abolishing much of Obamacare, while retaining popular Obamacare features – such as pre-existing conditions – but they may have to spend billions more on the replacement. Will GOP fiscal hawks go along with this? Probably, but that's only one battle in what's shaping up as an epic war over huge spending hikes for defense and enormous spending cuts for domestic discretionary outlays.
THE PRESS IS ABLAZE this morning with accounts of what Trump calls "one of the greatest military buildups in American history." Regular readers know we consistently preach that the defense sector is the purest investment play in Washington. The current annual Pentagon budget of about $600 billion could surge to nearly $1 trillion within a few years, with a dramatic increase of shipbuilding for the Navy.
BUT THERE'S A CRITICAL SNAG: The Budget Control Act of 2011 set strict sequester "caps" for defense and domestic spending, and if Trump wants his defense spike, he might have to agree to lift the caps on domestic spending as well. There was talk last week from budget experts that the new administration might simply go for the defense hikes while instructing the Office of Management and Budget to ignore the Budget Act – which has no enforcement mechanism – while pushing for domestic spending cuts.
BUT YOU SIMPLY CANNOT OFFSET THE MAGNITUDE OF NEW SPENDING THAT TRUMP WANTS by gutting the Environmental Protection Agency. We think Trump can prevail on a big defense build-up because he has the votes (and current Iranian military exercises in the Persian Gulf provide a perfect backdrop for a Pentagon spending surge). But we suspect the domestic cuts he wants may get watered down, since it would take 60 votes to get them through the Senate, where there are 52 Republicans.
SO SPENDING IS THE NAME OF THE GAME – More spending for defense, border security, the Veterans Administration, infrastructure and of course tax cuts. Even an Obamacare replacement may cost more than the current program. With Social Security and Medicare off the table, Trump's speech on Tuesday night will set the stage for a remarkable increase in federal outlays, while domestic spending is flat, with modest or illusory cuts.
MAYBE THIS IS JUST WHAT THE COUNTRY NEEDS – A massive shot of stimulus, a classic Keynesian prescription for jump-starting a weak economy. The problem, of course, is that the Federal Reserve does not think the economy is weak – and the Fed may hit the brakes frequently if Trump gets the massive tax cuts and spending hikes that he will discuss tomorrow night.


February 23, 2017

The Target Audience in President Trump's Address Next Week

TRUMP'S TARGET: His base still loves him, the Democrats don't have much of a strategy, and the press is a convenient foil. So who will President Trump target in his address to the nation next Tuesday night? That's easy – the divided Republican Congress.

THE SPEECH will finally get into policy, with Trump urging speedy action on Obamacare reform, tax cuts, infrastructure spending, border security etc. His budget – sure to be the most controversial since Ronald Reagan's in the early-1980s – will not be released until mid-March.

THE NEW MANTRA: "I inherited a mess," is Trump's go-to line, but most presidents say that. The next Trump zinger may be: "Congress won't move quickly." The heat is on, with Treasury Secretary Steven Mnuchin asserting yesterday that tax reform can be completed before the August recess (it cannot). So the scapegoat will be clear – the GOP Congress, which is generating anger in the conservative base, which has always considered Paul Ryan and Mitch McConnell inept and timid.

THE DIVIDED REPUBLICANS: On issue after issue, the GOP can't agree – border adjustability in the tax bill, a higher price tag for an Obamacare replacement, whether the deficit matters, trade policy, how to pay for infrastructure,etc. We're convinced that Trump and his advisers don't appreciate the extent of the divisions and how much time it will take to resolve these issues.

SO TRUMP WILL THROW DOWN THE GAUNTLET next Tuesday to McConnell and Ryan, with a clear implication – if things bog down it's your fault, not mine. Within hours of the speech, Trump will begin campaign-style rallies around the country to gin up support for speedy action.

THE FINANCIAL MARKETS just want to see two things: some signs of progress on tax reform – and that's coming by spring; and signs that the Goldman Sachs twins, Mnuchin and Gary Cohn, are steering fiscal policy toward a stronger GDP glide path. The markets should hear what they need to hear, and the Republicans will get a kick in the pants. The Democrats are planning a petulant response during the speech, hoping to provoke Trump. What a ratings bonanza next Tuesday, just what Trump wants.


February 22, 2017

The Trump Comeback

NOTHING GOES STRAIGHT UP OR STRAIGHT DOWN – the investors who read us every morning surely get that. For Donald Trump, battered in his first rocky month in office, the downward spiral may bottoming. We're not ready to put him on Mount Rushmore, but an objective look at the past week shows that Trump may be righting the ship. Consider:

First and foremost, his passionate base shows no sign of defecting. They roll their eyes over his Tweeting, but on key issues – immigration, trade, the press etc. – they're solidly behind him. Despite numerous mis-steps, Trump’s political capital is solid..

The Gorsuch turning point: Trump's free-fall ended around the time Judge Neil Gorsuch was rolled out in a glitzy prime-time event. And subsequently, Gorsuch has impressed everyone who meets him on Capitol Hill. Sen. Kirsten Gillibrand (D-N.Y.) said yesterday what many Democrats are saying in private:one way or another, Gorsuch is likely to win confirmation.

Congress finally is moving: They're on vacation this week, of course, but the key committees are about to gear up on tax reform and a replacement for Obamacare. This will be a glacial process, filled with controversy, but investors who wanted to see some signs of life – any signs of life – on Capitol Hill will finally get their wish.

No trade war: We jumped off that bandwagon a couple of months ago, because it's clear that Trump's bark is worse than his bite on trade. The template will be Canada and the U.K. – two countries that eventually will sign bilateral trade deals with the U.S. Relations with China and Mexico may stay rocky, but this won't cause a market sell-off.

A brilliant Cabinet pick: Lt. Gen H.R. McMaster is highly regarded in both parties, a first-rate pick as National Security Adviser. It may take a couple more weeks to confirm all 21 Cabinet-level nominees, but we said in early January that all but one would win confirmation, and that still looks likely.

Mike Pence, the good cop: The vice president won the biggest political turf war thus far – ejecting Gen. Mike Flynn. And Pence had a solid trip to Europe last week, staying out of controversies. Pence's role in this administration continues to grow because he knows how to get things done.

Meet and Greet: Trump has met with more CEOs in his first month than some presidents saw in a year. He’s deeply unpopular in Silicon Valley, but most CEOs leave the White House proclaiming that Trump is on their side, eager to ease regulatory and tax burdens. In just one month, he has U.S. business on his side, a notable achievement.

Democrats in the wilderness: They can delay and obstruct, but they simply don't have the votes. And ten of their Senate seats are up next year in states that Trump won, a huge factor that will tone down their rhetoric. Yet the furious base wants impeachment – try spending a few days in San Francisco, people there want him out NOW. But talk like will keep Democrats on the fringe.

The economy and the markets are cooperating: Trump gets some credit for the Goldilocks fundamentals, providing a feel-good assurance that market-friendly policies eventually will win enactment. As long as stocks and the economy stay strong, Trump will have the wind at his back.

BOTTOM LINE: A president as far outside the box as Trump will certainly face controversy. He has over-promised. His Tweets are childish. His inner circle isn't always on the same page. John McCain and other Republicans loathe him. So there's plenty of room for improvement – but Trump appears to be off the mat, poised for some victories, as an early spring comes to Washington.


February 21, 2017

Rosy Scenario is Coming – Deficits be Damned

AN EXCEPTIONALLY STIMULATIVE FISCAL POLICY now seems likely in the wake of leaks on the Trump Administration's GDP projections. A tip of the hat to Nick Timiraos, who broke the story in this past weekend's Wall Street Journal, which detailed plans to open up still another controversy: Trump will rely on economic forecasts that are far, far above mainstream projections.

THE TRUMP ADMINISTRATION reportedly will project GDP growth of 3-to-3.5% over the next decade; it grew by a little under 2% in the past decade. The Congressional Budget Office and the Federal Reserve are predicting growth in the next decade of a little less than 2%, largely because of mediocre productivity gains and sluggish growth of the work force.

WE THINK CBO AND THE FED are too pessimistic; a pro-growth agenda with huge tax cuts and major new infrastructure spending could produce a growth spurt to something like 2.5% the next decade, but WOW – the Trump forecast of 3-to-3.5% GDP strains credulity, as does its projection of only modest inflation and interest rate hikes. If the Trump GDP forecast is correct, inflation and interest rates would soar.

A NEW VILLAIN: Trump doesn't like economists, he considers them virtually useless and has yet to name any members to the Council of Economic Advisers. He reflects New York's disdain for Washington bean counters, who have argued against massive fiscal stimulus. He will mock them as only Donald Trump can mock.

HIS GOAL, OF COURSE, is to pass a budget with major new spending and huge tax cuts. The CBO will score these proposals as adding dramatically to the deficit, but Trump will reject those projections. This will set the stage for a titanic struggle with Congressional Republicans over the size of tax cuts – he will have to convince deficit hawks that with his projections (which surely will show receipts surging), deficits can be controlled, at least as a percentage of GDP.

SO WHAT DO YOU WANT? Broccoli or an ice cream sundae? The new tax cuts and spending can't possibly be paid for if CBO projections are used, so Trump will say "use my forecast, I can make the numbers work." Good luck to whoever will be Fed Chairman next year, arguing against fiscal rocket fuel that would be poured on what looks like a reasonably good economy now.

WHAT DOES THIS MEAN FOR THE MARKETS? If Trump can push the country toward an aggressively pro-growth fiscal policy, the impact on GDP and earnings could be dramatically positive. And it could help lift global economies. But make no mistake: interest rates would head sharply higher as labor markets tighten and wage pressure percolates. Incredibly, financial markets may have to start worrying about an overheating economy by the end of this decade.


February 17, 2017

Key Provision in GOP Tax Cut May be Dead – Jeopardizing Entire Bill

STORY OF THE WEEK: Well, there are plenty of candidates – the firing of Michael Flynn, out-of-control leaks on Russian involvement in the election, the mind-boggling Donald Trump press conference yesterday. But we think the story of the week is the near-death of a key provision in the GOP tax reform bill, which will greatly complicate efforts to pass any tax measure.

NO TO THE BORDER TAX: The CEOs of several major retailers came to Washington this week with a strong message: a "border adjustment" tax would be a disaster, surely passed on to consumers in the form of higher prices. The execs seemed to persuade President Trump, and they exposed deep divisions among Republicans on Capitol Hill. Our sources believe the border tax is close to dead.

THAT'S A BIG POSITIVE FOR RETAILERS like Target and Walmart, who import low-priced goods from abroad. But it's a huge setback for Paul Ryan, who's attempting to pass a reform bill that's "revenue neutral." The border adjustability provision would raise $1 trillion over ten years, and there simply isn't another revenue source to make the numbers add up to revenue neutrality in the overall reform bill.

SO RYAN NOW FACES TWO UNPALATABLE CHOICES: Make the tax cut far less generous; maybe the top corporate tax rate would fall from 35% now to something like 25% – far above the 15% that Trump wants and the 20% in Ryan's bill. And maybe the top individual rate could not drop to 33%; perhaps it would be 35% for the very wealthy. Ryan's first option would be to scale back the bill; the second option would be to simply ignore the pricetag.

UNDER THE BUDGET RECONCILIATION PROCESS that almost certainly will be used to push the tax bill through Congress, the measure would "sunset" in ten years if it isn't revenue neutral. But does anyone in the Trump White House care about deficits ten years from now? Doubtful. So here comes a very big fight pitting deficit doves versus deficit hawks, and we think there’s a growing chance that Trump's tax bill – which will be rolled out soon – may simply ignore the deficit implications.

THAT WOULD PUT RYAN IN A DIFFICULT SPOT with his hawkish House troops, who already are itching for a fight when the debt ceiling has to be raised this spring. Battle lines are forming over raising the budget sequester spending limits that apply to defense – but if defense gets a raise, domestic spending probably will as well. The big fiscal story is that opposition to deficits is only rhetorical; in practice, the path of least resistance is toward sharply higher red ink.

IN ADDITION TO THE BORDER TAX, other big issues persist – potential snags over curbs on individual deductions, tax breaks for debt, the estate tax, carried interest, etc. And it's important to note that we're just talking about issues that could snag the measure in the House – the glacial Senate will take many more months to finish its bill. The bottom line: tax reform could take 10 to 18 months to pass, with a growing risk that it won't be as dramatic as advertised two months ago.


February 16, 2017

Let's Talk About Leaking

LEAKS AND MORE LEAKS: There are garden-variety leaks – like the leaks that will come before President Trump's Feb. 28 address to the nation; they will offer some hints on tax reform, spending cuts, etc. Every Administration does this, and they also plant leaks on things like potential Cabinet nominees; it's essentially trial balloons. More serious leaks were employed with a devastating impact on Hillary Clinton last fall.

THEN THERE ARE THIS WEEK'S NATIONAL SECURITY LEAKS: This is serious stuff, still another issue that has divided the country between right and left. We're heard the arguments from both sides: the left believes the media has a responsibility to expose every secret from whistleblowers, even if the leakers are members the national security apparatus. The right senses an attempt by the intelligence community, in cahoots with the media, to sabotage Donald Trump.

ONE THING SEEMS CERTAIN: The intelligence community has a big, big problem with Trump and his inner circle. In a nutshell, they believe Trump aides conspired blatantly with Russia to influence the outcome of the election, and they worry this will embolden Russia. Everyone tells us that there's more leaks to come, from government officials who are willing to violate the law in an attempt to ramp up investigations of Trump's inner circle. This has huge implications.

TRUMP HAS A THREE-FRONT CHALLENGE: He has to deal with invisible leakers in the intelligence community; the press, which is lapping up these leaks; and members of Congress – all the Democrats and some Republicans – who will spend the next few months probing the leakers' allegations. As a result, the Trump legislative agenda – already bogging down – could stall.

WE'RE NOT MAKING A CASE FOR FLYNN or other Trump insiders who may have conspired with Russia to affect the presidential election; an investigation is warranted. And, to be fair, the Trump inner circle leaks like a sieve and Trump had no problem with Wikileaks last fall. But the deep antipathy between the intelligence community and Trump has become toxic; can Trump's appointees weed out all of the leakers? Probably not – a stealth army of anti-Trump leakers is likely to persist.

THIS COULD HAVE GEOPOLITICAL CONSEQUENCES: Intelligence officials may uncover a serious threat that Trump ignores. Or Trump may act on a perceived threat that intelligence officials dismiss. In any event, the leaking will continue – it's a Washington tradition, as everyone spins their own self-serving story. The major takeaway: Trump's team has serious distraction – an intelligence community that's seemingly at war with the new administration.


February 15, 2017

President Trump's Four Major Legislative Priorities – All Bogged Down

ALL THE FOCUS IS ON MICHAEL FLYNN'S RESIGNATION – the flood of leaks, rumors of more disclosures to come, the prospect of hearings lasting into the summer – but we'll shift gears this morning and look at an issue that's been overlooked amid the furor: Donald Trump's four major legislative priorities.

1. Abolition of Dodd-Frank: Even opponents of the law concede that chances are slim that it will be abolished, because this is a measure that would require 60 votes in the Senate. Trump signed, with great fanfare, an order to speed up abolition, but this is not eligible for the budget reconciliation process, which would require only 50 votes.There could be some trimming of unpopular provisions that have hurt small community banks, but the big stuff – like the Volcker rule – is likely to prevail.

2. Repeal and Replace Obamacare: Republicans have credibility at stake on this issue, which is danger of stalling. In the House, GOP conservatives want an immediate repeal, whether or not there's a replacement ready – and there isn't. New HHS Secretary Tom Price may have a plan ready by spring – heavy on tax incentives – but support is lukewarm in the Senate, where some Republicans are resigned to retaining most of Obamacare.

This issue is politically radioactive for the GOP; the party in power always owns the health care issue – and regrets it. This issue drained Barack Obama of precious political capital early in his first term, so Trump is wise to declare that reform may not come quickly; he can see the angry town hall protests. There's still a chance that Price and Paul Ryan can push a bill through Congress by autumn, but those chances have slipped.

3. Infrastructure spending: Virtually no one we talk with thinks there will be much progress on this issue in 2017. Trump will pitch his plan, with private sector involvement, in his Feb. 28 address to the nation, but the pricetag – $1 trillion over ten years – is a deal-killer in the fiscally hawkish House. A month ago it appeared that some Democrats, including Chuck Schumer, would support an infrastructure compromise – but the party's furious left wing will punish anyone who compromises on anything.

4. Tax cuts and reform: This is the Big One, yet suddenly there's a threat that could dramatically scale back the scope of Trump's bill – support for "border adjustability" has diminished, as lawmakers listen to U.S. importers like Target and Walmart, who would be hurt badly by the provision. Without border adjustability, Ryan and his bean counters would have a $1 trillion revenue shortfall, which would require scaling back Trump's proposal – unless, of course, Trump rejects revenue neutrality.

This issue of border adjustability is just one of several controversial elements that have divided the GOP; Democrats aren't particularly relevant since they will vote, nearly unanimously, against any Republican tax bill. But there are thorny issues like caps on deductions, the details on repatriation, the deductibility of debt, whether to totally abolish the estate tax, and the old standby issue – carried interest.

Resolving these tax issues, amid Supreme Court battles and the ongoing Russian furor, will take many months. As we have written, don't expect an effective date on tax cuts before Jan. 1, 2018 – if then. Tax reform will pass, eventually, via reconciliation, but the markets can't count on the macro and micro benefits to show up for another year and a half.

ALL OF THESE ISSUES are bogged down by three major factors: internal GOP divisions, especially between the two houses; the prospect of bitter spending battles this spring, including a time-consuming fight over the debt ceiling; and the ongoing furor over Russian ties to Trump advisers..

THIS SLOWDOWN ON LEGISLATION IS A WARNING SIGNAL FOR THE MARKETS: We wrote yesterday that the infighting and dysfunction in the White House is background noise for the markets, which are focusing on decent earnings, low interest rates, moderate economic growth, etc. But one of the reasons the stock market rallied in recent months was the prospect of action in Washington on these four major bills – and suddenly they seem bogged down.


February 14, 2017

The Noise Versus the News – What Really Matters for Investors

THE GREATEST CHALLENGE IN ANALYZING WASHINGTON is to filter out the noise and focus on developments that really matter, which brings us to the extraordinary developments in the past 24 hours. Michael Flynn went rogue, was long known as erratic and obviously was a terrible pick for national security director – his departure is a plus for a Trump Administration mired in internal bickering.

MUCH OF THIS MORNING'S WASHINGTON POST was devoted to juicy reporting on warring factions and amateurish actions; this narrative is gleefully accepted inside the Beltway. But we have to ask whether this really matters much for investors, who are our audience every morning. And for all of you, the policies are encouraging: toning down the threat of trade wars, beginning to curb regulations, gearing up for tax reform, with a Federal Reserve that's in no rush to tighten aggressively. These stories, under- appreciated in the general media, are contributing to a powerful stock market rally.

IRONICALLY, THERE ARE SIGNS THAT CONGRESS – as usual – is just as dysfunctional as the White House. Conservative House members are demanding the passage of legislation killing Obamacare, even if there's no replacement available. Senate Republicans are adamantly opposed to that strategy. Likewise, deep GOP divisions are emerging over the price tag and specific provisions in the tax reform bill. And huge spending disputes loom as spring begins.

DEMOCRATS WILL POUNCE ON THESE DIVISIONS, but they simply lack the votes to prevail; only one of the 22 Trump Cabinet nominees may fall; Andrew Puzder, the pick to head the Labor Department, may be in serious trouble. But the Democrats are in no position to make policy; they can only obstruct and plot for the 2018 and 2020 elections, focusing on health care and the extent of Russian influence around Trump. But with the markets and the economy in good shape, the Democrats have a very weak hand to play.

THE CRUCIAL FACTOR in this town is political capital, and while the Flynn mess and its fallout could hurt Trump, there's little evidence that his fanatically loyal base will defect. And there's still plenty of time to right the ship – an iron-fisted White House Chief of Staff would help stem the tidal wave of leaks and in-fighting, while changing the focus to legislation that finally will begin to move on Capitol Hill.

OUR BOTTOM LINE is that an administration this far outside the box obviously was going to have a rocky first month, and the financial markets know this. The really big Washington stories for investors – taxes, interest rates, regulatory policy, health reform, etc. – haven't changed much amid the noise this week. Yes, White House dysfunction is a distraction, but it has had no impact on the markets thus far – it's largely background noise, and the markets focus on the fundamentals, which look quite good.


February 13, 2017

Janet Yellen Says One Thing, Does Another; Trump Success; The Democrats' Very Old Problem

JANET YELLEN IN THE SPOTLIGHT: The market view on the number rate hikes this year has wavered in recent weeks, so the Tuesday-Wednesday testimony by Fed Chair Yellen will be closely scrutinized. Our take is that she will talk tough, as usual, about the need to take away the punch bowl; she has to satisfy her increasingly hawkish colleagues. But Fed policy will remain accommodative – a clear plus for the stock market.

YELLEN IS THE MOST DOVISH CHAIRMAN IN HISTORY, and she believes the labor market has not fully healed; using measurements of discouraged workers or part-time workers who want full-time jobs, there's still room for improvement. With inflation a bit higher but hardly ominous, we think Yellen would like to continue overshooting to the upside, keeping the federal funds rate lower for longer. But she'll talk tough about not letting inflation break out.

THE KEY FACTOR IN YELLEN'S TESTIMONY will involve prospects for fiscal stimulus. A huge tax cut and a robust new infrastructure bill would prompt a more aggressive Fed stance, Yellen has indicated. But timing is everything, and as we have reported for weeks, it will be late 2017 – at the earliest – before tax reform passes, and infrastructure spending won't impact the economy until 2018 or later. At the least, there's uncertainty on the timing – still another reason for the Fed to go slow.

THE NEW FED: With the resignation announcement last Friday by Gov. Daniel Tarullo, there now are three vacancies on the Fed board, giving President Trump an opportunity to begin re-shaping the Fed. Trump and his inner circle have a beef with the central bank; they're not necessarily anti-Yellen, but they think the Fed has gotten too big for its britches, and they want to curb the enormous influence the Fed has on the economy. [The apparent selection of Fed critic David Malpass as Treasury Undersecretary for International Policy is still another signal that Trump is not happy with the Fed.]

SO IN THIS CLIMATE, WHY WOULD YELLEN OVER-REACT ON RATE HIKES? Our bottom line is that she will indicate that the Fed will have to hike rates this year, with a March 14-15 move not totally off the table. She will say all the right things about GDP and inflation getting closer to the Fed's targets. But will rates actually head higher? Eventually they will, once fiscal stimulus comes into focus, but for now Yellen isn't in a great rush.

TRUMP'S SUCCESS: Fresh on the heels of successful overtures to China and Japan, President Trump will stage-manage two more high-profile visits to Washington this week. Canadian Prime Minister Justin Trudeau has issues with Trump's immigration policy, but the two will pledge to work on a bilateral trade deal. And the visit by Israeli Prime Minister Benjamin Netanyahu will be a love-in. The heavy lifting on trade and the Middle East will come later this year; for now, Trump is exceeding expectations on geopolitics.

OPPOSITION TO TRUMP ON THE LEFT has exploded, and the jury is out on whether the Democrats can harness the fury. The party has no choice but to move leftward, but they're burdened by an astonishingly old bench. Incredibly, there's speculation that Joe Biden, 74, Bernie Sanders, 75, and even Hillary Clinton, 69, may run; they certainly have not ruled out one final try.

BUT THE DEMOCRATS ARE DETERMINED TO LOOK AT NEW FACES: The party's very, very early frontrunner is Sen. Elizabeth Warren, who sends shudders through the financial industry. Others clearly in the mix are Kirsten Gillebrand, not well known outside of New York but the insiders’ dark horse; New Jersey Sen. Cory Booker, a relentless self-promoter in a business that rewards self-promotion; Sens. Amy Klobuchar and Kamala Harris, Gov. Andrew Cuomo, on and on. There are another 20 potential candidates, including Mark Cuban – but voters would never support a bombastic billionaire without any governing experience, would they?


February 10, 2017

Trump Changes the Subject – Tax Cuts, Japanese Jobs, One China – all Great Stories for the Markets

WOULDN'T YOU WANT TO CHANGE THE SUBJECT? Yesterday's news was horrible for Donald Trump – the scathing 9th Circuit ruling; Neil Gorsuch's repudiation of Trump's remarks on judges; a disclosure that national security adviser Michael Flynn may have broken the law by discussing U.S. sanctions with Russian officials before the inauguration; and even Ivanka Trump's fashion setback, which elicited a repudiation of Kellyann Conway from the White House itself.

IT WAS TRUMP'S WORST DAY AS PRESIDENT, BY FAR, so the logical thing for him to do was play his strong suit: focus on exciting new issues. And he's got three big ones, all positive for the markets.

HYPE THE TAX CUTS: Trump's virtual silence on this subject was broken yesterday when he indicated that tax cut plans are "ahead of schedule," news that's catnip for the stock market, which rallied. As we reported yesterday, Trump's budget – due in early March – will assume massive tax cuts, but our sources Capitol Hill report this will be a very long slog.

THE PROBLEM, AS USUAL, WILL BE IN THE SENATE, where Finance Committee Chairman Orrin Hatch, 82, has made it clear that there are huge unresolved issues: border adjustability, the deductibility of debt, limits on individual tax exemptions, whether to abolish the estate tax, etc. The House will move quickly, perhaps beginning in a couple of weeks, but even in the House there are differences with the Trump proposal, especially over its price tag.

IF TRUMP CAN GET A LITTLE RISE FROM THE MARKETS by indicating that tax reform is about to move, more power to him. The markets need to hear – from Trump – that tax reform is still a top priority. But the sentiment in the trenches is that a final bill is a long way off; an effective date in 2017 is looking less likely. There’s no question, however, that massive tax reform will pass.

A SECOND PLUS FOR THE MARKETS was Trump's apparent reversal on the "One China" policy. In a lengthy conversation last night with Chinese President Xi Jinping, Trump affirmed U.S. backing for a "One China" policy, an apparent rebuke to Taiwan but more importantly a clear signal of a thaw in relations with Beijing and a reason for the markets to stop worrying about a U.S.-China trade war.

A THIRD PLUS FOR THE MARKETS will be the elaborately staged visit to the U.S. by Japanese Prime Minister Shinzo Abe. We expect a blockbuster announcement about Japanese investment in the U.S., accompanied by a claim that it will create hundreds of thousands of jobs. Differences over currencies and Japan's trade surplus will be papered over; this will be a “bromance” visit, culminating with golf in Florida. It will be hailed as a major success – and after a week like this, Trump needs one.

THESE THREE MARKET-FRIENDLY DEVELOPMENTS should serve as a reminder that Trump is a genius at manipulating the news cycle and promoting his brand. His team obviously botched the immigration ban, and now there's a genuine threat of an activist judiciary hounding him relentlessly. But if Trump can boast that Japan is providing new jobs in the U.S., his political base will hold.


February 9, 2017

Epic Budget Battle Begins Soon

THE TRUMP BUDGET IS DUE IN ABOUT A MONTH and already there are warring factions – within his administration and on Capitol Hill – that are digging in for a titanic battle that will affect the economy and the markets. Some quick take-aways:

  • Donald Trump will propose domestic spending cuts, far greater than Ronald Reagan won; many Cabinet agencies face cuts of 10% or more; food stamps and other welfare programs could be slashed by a third or more, and some programs like the National Endowment for the Arts face abolition.
  • Entitlements, where the big money is, will be largely spared, since Trump is on record as favoring an expansion. There's a furious internal debate over changes to Medicaid, but Social Security and Medicare appear safe – for now.
  • Pentagon spending will rise. It's just under $600 billion this year (about one-third of all discretionary spending), and undoubtedly will surge because Trump will seek to lift the budget sequester spending caps that apply to defense. We've said this for the past few years: the purest investment play in Washington has been the defense stocks, and it still is.
  • Trump's tax cuts almost certainly will not be "revenue neutral." He and his populist advisers favor a bill that cannot possibly be paid for without massive spending cuts, which they will assume. Paul Ryan and many House Republicans will seek a more modest tax cut that would, on paper, be revenue neutral.
  • The Democrats have a very weak hand to play. They simply don't have the votes to block deep spending cuts and massive tax reductions, but they have an issue for upcoming elections – the tax cuts will disproportionately favor the wealthy, they will argue, while spending cuts will hurt the poor. That was the argument against Reagan, but it didn't resonate with voters because the economy surged.
  • "Tax cuts for the very rich" may be a potent rallying cry on the left, but Democrats will have a modest impact on the Trump budget. The only way it can be significantly altered is if Congressional Republicans oppose it. They probably will lessen the magnitude of Trump’s proposed spending cuts and tax relief.
  • The fault lines on fiscal policy will widen within the Trump Administration. Trump himself has boasted that he's the "king of debt," and he's comfortable with the subject – as only a real estate developer can be. We think he'll accept large deficits in the short-term while assuming that the red ink can jump-start economic growth in the long-run.
  • The problem with that approach is the demographic certainty that as the country ages, Social Security and Medicare face enormous shortfalls in the next decade. Trump says he won't touch them, while his Budget Director, Rep. Mick Mulvaney, wants to. Something has to give.

OUR BOTTOM LINE: Trump will prevail with dramatically higher spending for defense, the Veterans Administration, huge tax cuts, and perhaps even a wall with Mexico. Even if domestic spending cuts are brutal, they won't be sufficient to offset his new spending.

THE BUDGET DEFICIT IS HEADED HIGHER: It may level off at around $600 billion this year and next, assuming the economy picks up, but then it will soar. The Congressional Budget Office has predicted that the nation's total debt, now close to $20 trillion, could surge by an additional $10 trillion in the next decade, and that forecast sounds about right to us.


February 7, 2017

What We're Hearing From Clients

IT'S GOOD TO GET OUTSIDE OF THE BELTWAY: We love hearing from investors – retail and professional – because they're in the trenches, with views that often differ from the group-think that prevails in Washington. We've been on the road, as usual, and have the following observations:

GOLDILOCKS RULES: Strongly contrasting with Donald Trump's dark view of America, a majority of investors we talk with see decent GDP growth, moderate inflation, a solid labor market, tolerable interest rates, good corporate earnings and a stock market that should move erratically higher. Virtually no one we talk with senses an imminent Recession, not with interest rates still low.

WHO'S AFRAID OF HIGHER RATES? A bit of a surprise – a large percentage of investors, especially on the retail side, would welcome higher interest rates. They agree with industry titan Charles Schwab and others who have complained that low rates punish savers and seniors, who are frustrated in their quest for higher yields. Could higher rates hurt the market and the economy? They'd have to go a lot higher, investors agree.

INVESTORS TO TRUMP – COOL IT A LITTLE: We get the same message – Trump's policies are exciting and long-overdue, but his constant tweeting and polarizing statements are exasperating. While there's investor optimism over the economy, there's anxiety that Trump could say or do something that rattles the markets. "Who knows what's next from this guy," one client says; she, like many others, worries that her clients are confused by the frenetic pace in Washington.

REGULATORY REFORM – TOO LATE: There's a consensus that regulatory reform in general is a good thing, but we're struck by attitudes on the Fiduciary Rule. "We're already in compliance," everyone says. Whether the rule is killed or modified, our industry is ready for it and has embraced most of its provisions. There's a somewhat similar view of Dodd-Frank; investors would like to see some changes, especially for small community banks, but the industry has learned to live with the law.

THE MOST IMPORTANT ISSUE: No question on this one – it's tax reform, by a mile. First and foremost, investors want to know the effective date; many think it will come sometime in 2017, even though we believe it's more likely to be Jan. 1, 2018. The cap on tax breaks is a huge concern, especially the threat that it might affect mortgage deductions, charitable contributions and even the muni bond exemption. Everyone is anticipating dramatically lower rates, but no one has a good sense on the details.

UNEASINESS ON GEOPOLITICS: There's optimism that the stronger dollar will help Europe's export sector, and there's no great hand-wringing over Italian banks, French elections, Greek debt, etc., even though professional investors are concerned. They also worry about trade protectionism and rocky relations with China and Mexico, but that isn't on the radar screen for retail investors.Virtually all investors worry, however, about a conflict with Iran in which Trump's generals might over-react.

WHAT ELSE TO WORRY ABOUT? Investors are paid to worry for their clients, so what do they worry about? Other than geopolitics, there's a worry that Washington has over-promised on Obamacare, tax reform, etc. And there's a strong consensus, once you leave Washington, that the labor market is tightening rapidly; there's an acute shortage of skilled labor in the country that eventually could lead to a sharp rise in wage pressure.

EVERYONE WORRIES ABOUT WHAT MIGHT LOOM DOWN THE ROAD:Surging budget deficits, entitlement liabilities, an inflation threat, higher interest rates, etc. But at the same time, there's a consensus that if Trump doesn't implode, those long-term concerns can be deferred for another couple of years on perhaps longer, with Goldilocks prevailing. Our main take-away: the economy is in far better shape than Washington realizes.


February 6, 2017

What the Trump Tweets Are Concealing

THE MORE OUTRAGEOUS DONALD TRUMP IS – ripping a "so-called" judge, defending Vladimir Putin, etc. – the more headlines he generates, and the more he diverts attention away from this developing trend: his Big Three policy initiatives have stalled, less than a month into his presidency.

1. Obamacare replacement, which he said a month ago would be completed by spring, is on the ropes, with Republican lawmakers now leaning toward "repeal and reform" rather than "repeal and replace." With angry protesters demanding the retention of Obamacare, it could take another year before the GOP can come up with an alternative, Trump conceded yesterday in an interview with Bill O’Reilly.

2. Tax reform could get finished by year-end, Trump said yesterday with little conviction. The big story here is the glacial Senate, already bogged down in bitter infighting; Finance Committee Chairman Orrin Hatch probably won't get a measure through the Senate until fall; a conference committee might not produce a final bill until Christmas (or later). We don't expect the bill to be retroactive, so the economic impact of tax reform may not hit until well into 2018.

3. Infrastructure spending generates tepid GOP support in the House, which is more concerned with reducing the deficit than repairing potholes. Wilbur Ross is aggressively pushing a private sector initiative supported by tax credits, so new projects could get a boost – but this clearly is a story for 2018, not this year.

PROGRESS ON OTHER FRONTS: The assault on regulations will continue unabated, with another dozen or so slated for abolition or delay this week. Energy producers and big banks have benefitted thus far. And the U.S. will soon begin to move on bilateral trade deals with allies like Canada and the U.K. The biggest positive is the continued healing in the labor market, with job creation rising, participation rates picking up and wage inflation staying moderate. This takes pressure off the Federal Reserve to hike rates anytime soon.

THE BIGGEST PROBLEM FOR TRUMP, as his domestic agenda encounters stiff headwinds, is that Republicans in Congress are increasingly alarmed by his behavior. Relations between Trump and Mitch McConnell are on the rocks, and Paul Ryan seems reluctant to defend Trump. Republicans had been counting on Mike Pence and Reince Priebus to rein Trump in, but uber-populist Steven Bannon is now mapping strategy.

TRUMP'S ROCKY FIRST MONTH may culminate with a Supreme Court rejection of his immigration ban; first comes a ruling from the very liberal Ninth Circuit Court of Appeals, which is highly unlikely to back him. "He wouldn't dare ignore a court order, would he?" a Republican source asked us this weekend. Probably not, but if Constitutional issues begin to percolate, it would be still another distraction that wouldn't help the cause for Obamacare reform, tax cuts and infrastructure spending.


February 3, 2017

What Wall Street Doesn't Understand About Washington

OVERVIEW: Quite a morning – we'll get the January jobs data soon, and details on the mercy-killing of the Fiduciary Rule, which we have predicted for the past few weeks. In the meantime, let's look a question we get almost daily: What does Wall Street fail to understand about Washington? Some very big themes...

THERE IS NO DESIRE TO COMPROMISE: The public says it, the markets say it, most of you ask – why can't there be a bipartisan climate in Washington? The answer is simple: no one wants to compromise. We can count on one hand the members of Congress who always look for a middle ground; most of them have been driven out of Washington, ostracized by their own parties for being insufficiently partisan. We repeat – there is NO desire to compromise. When you hear politicians vow to work with the other party, remember – it's pure BS.

SLOW MOTION: Wall Street lives in a world where decisions can be made – and executed – quickly. Washington lives in a world designed to slow the process. Major legislation often takes a year or two to win enactment; we remember an energy bill that was stuck in a House-Senate conference committee for over a year. Our rule: you have to double the amount of time proponents of a bill claim it will take to get it passed.

VACATION SCHEDULES ARE SACRED: People on Wall Street think nothing of working seven days a week, but vacations set the tone in Washington. The summer recess lasts five weeks, there's a long Fourth of July break, there are another half dozen vacations – and the work-weeks often are Tuesday morning thru Thursday evening. This is a major factor in the slow motion pace we cited in the previous paragraph.

THE POWER OF THE UN-ELECTED: A sea of faceless regulators have ruled Washington for decades, and perhaps Donald Trump can shake this up. But it's a mighty task: from the State Department to the SEC, the un-elected rule on thousands of small policies – regulations, enforcement, spending money – that affect the country. Trump may break this strangulation by the un-elected; he can simply tell the Labor Department, for example, to kill things like the Fiduciary Rule, and the regulators will have to comply. But make no mistake, they run this city.

FOLLOW THE MONEY: If you want to invest based on Washington policy, you obviously have to follow the big macro issues – the Federal Reserve, tax policy, etc. – but follow the money carefully. If you invest in laboratories that deal with the National Institutes of Health, look at committee budget markups. If you want a big investment theme, simply watch the defense appropriation process, it's a huge plus for the industry. And don't plan on leaving town in December – most of the final spending decisions come a week before Christmas.

DONALD TRUMP IS NOT PRO-BUSINESS: Wall Street thought it was getting a pro-business president, but remember – Trump is a populist first, a Republican second. His main focus is on the middle aged white guy in Bethlehem, Pa., who lost a good job and now has a lousy one. Trump hates price gouging and has no qualms about telling companies what to do, especially on out-sourcing. His tax cuts will be a dramatic plus for business, of course, but Trump instinctively dislikes crony capitalism – and Wall Street had better check his tweets by daybreak every morning.

YOU CAN'T BEAT THE PRESS: Finally, we think Wall Street and the public don't fully appreciate the dynamic in this town between the press and the politicians. It sets the tone, because everyone leaks like a 100-year-old rowboat. Leaking is an art form. And while the Trump team rants about the press, the president and all of his inner circle obsessively reads The New York Times and watches all the TV networks, including CNN.

WE COULD WRITE AN ENTIRE PIECE just on the press, but let's conclude with the biggest myth, that the media is reviled in Washington. No, the media is courted. The noisy media bashing is just a convenient foil, because both sides need each other –the politicians want to get their message out, and the media wants to sell newspapers, boost ratings and mold public opinion. A cautionary note to Steve Bannon: hatred of the press always backfires – Richard Nixon proved that the media will prevail. And sure enough, Bannon granted an interview this week with the New York Times.


February 2, 2017

The Next Crisis – Iran; Washington Bogs Down on Tax Reform

HE KEEPS HIS WORD: Say this for Donald Trump – he's determined to keep his campaign promises; what he said last fall, no matter how outrageous, is what he will do now. This brings us to the next potential crisis: a showdown with Iran.

TRUMP'S GENERALS LOATHE IRAN: They're convinced that Tehran is violating terms of the 2015 nuclear deal; Iran seemed to validate that view recently with a missile test that was expressly prohibited in the deal. Trump's generals believe Iran is aggressively attempting to destabilize the Middle East, and it wouldn't take much – perhaps an incident in the Persian Gulf – to prompt a harsh U.S. retaliation.

THE TRUMP ADMINISTRATION PUT IRAN "ON NOTICE" yesterday that the U.S. will take steps if there are further provocations. But what steps? Tough talk has its limits and military action doesn't seem imminent. So we go to this winter's No. 1 lesson: Trump does what he said he will do, so we think the U.S. soon may seek to kill the nuclear deal, which Trump has pledged.

THE GEOPOLITICAL PLATE SUDDENLY IS GETTING FULL: In addition to a deepening crisis with Iran, Trump now faces Russian aggression in eastern Ukraine, a stunning diplomatic breakdown with Mexico and Australia, a loud backlash in Muslim countries over his immigration proposal, and clear signals that China is about to assume dominance in Asian trade, since the U.S. has pulled out of the Trans Pacific partnership. And there's always the volatile and unstable North Korean regime to worry about.

WE LIST THESE CONCERNS BECAUSE ONCE AGAIN there seems to be only a passing focus on pro-growth economic policies. We're more convinced than ever that Orrin Hatch and the Senate Finance Committee are hopelessly behind the curve on a tax reform bill, which may not win enactment until late this year. Hatch seems unable to make a decision on "border adjustability" and some other key issues.

WE STILL THINK THE HOUSE will begin moving on taxes by early spring – a most welcome signal for the markets – but with geopolitics heating up, tax reform hasn't gotten the full Trump treatment. So we keep pushing our timetable back – maybe a bill can win enactment before adjournment in December. This would delay a potential GDP growth spurt until well into 2018.

WASHINGTON IS BOGGING DOWN in controversies. Trump needlessly led with his chin on the Senate "nuclear option" even though several Democrats indicated they could vote for Neil Gorsuch; now they've been provoked by Trump. Another head-scratcher is Trump's refusal to listen to the tech industry on H1B visas; instead of liberalizing the law, he wants to reduce the flow of immigrants despite a growing shortage of skilled labor in much of the country.

THE MARKET IMPACT: We're not seeing much to persuade us that economic growth is about to blast off; maybe 2-1/2% GDP growth this year is about all one could hope for. So Janet Yellen will go slow on rate hikes, and the Treasury 10-year bond yield may remain stuck in a trading range around 2.5%. Another market impact is that high hopes for the tech and drug industries –big beneficiaries of repatriation –may be delayed.

THE BIGGEST MARKET IMPACT may be that rising global tensions will provide the perfect backdrop for the defense sector, which seems more likely than ever to benefit from the end of a strict budget sequester that has curbed Pentagon outlays. The sky's the limit for defense spending; Trump's generals will get whatever they want.


February 1, 2017

Donald Trump Vs. the Dollar; Why Neil Gorsuch Will Win; Some Democrats Have Impeachment Lust

DONALD TRUMP VERSUS THE DOLLAR: If you're seeking a surge in U.S. exports, the last thing you want is a strong dollar. The Trump Administration is now regularly bashing the dollar – part of an aggressive strategy to reduce the trade deficit. Hard-line protectionist Peter Navarro said yesterday that Germany benefits from a "grossly undervalued" Euro, and Trump declared that "every other country lives on devaluation." But they face a major obstacle: Janet Yellen and the Federal Reserve.

THE FED CALLS THE SHOTS: What can the Trump Administration do other than jawbone against the dollar? The Fed has the policy lever, and we would expect today's FOMC statement to reiterate that the central bankers are planning several rate hikes this year and next. With inflation inching higher and the economy expanding, even moderate employment and wage growth would be sufficient to prompt a rate hike at the March 14-15 FOMC meeting. And that, of course, would be bullish for the dollar.

OUR ADVICE IS TO IGNORE THE JAWBONING: You simply cannot talk the dollar lower – pronouncements by Trump and others eventually will lose their shock value – just as Trump cannot drive drug prices lower by blasting excessive prices; the key is that Congress doesn't have the stomach to do anything about it. So for the dollar, watch the policies – rate hikes, higher deficits – because the the policies persuade us that a major dollar sell-off is unlikely.

JUST WHAT THE DOCTOR ORDERED: Trump needed to change the subject, as we wrote yesterday, and he certainly did last night with an impressively orchestrated prime time Supreme Court pick. Republicans are smiling this morning after a miserable 10 days; they have a brilliant nominee who should eventually win confirmation, perhaps by early summer. Some Democrats may refuse to even consider Neil Gorsuch, but he only needs eight votes from them.

TEN DEMOCRATS LOOK VULNERABLE in 2018 Senate races, so there's a chance that Gorsuch could win just enough support. But we don't rule out the "nuclear option," allowing a confirmation with only 50 votes. Harry Reid opened that door, and now Republicans are inclined to push through a change if Democrats filibuster Gorsuch. A change this radical makes some Republican Senators uneasy, but it's definitely on the table. The key in the Gorsuch fight is public opinion – we'd guess that the Democrats will look strident and obstructionist, and that Gorsuch will prevail because he's so clearly qualified.

STORMING THE BARRICADES: The Democrats' base is furious – and there's a growing chance that they will turn their fury on the party's leadership, just as Republicans did against their establishment in the past few years. Thousands of angry protesters marched on Chuck Schumer's Brooklyn apartment yesterday, outraged that he isn't sufficiently obstructionist. On the left, the talk – seriously – is that impeachment is coming.

THE REBELLION IS SPREADING in California, New York, Massachusetts and a handful of other locations, but it's preposterous to think that the House would indict Trump, followed by a two-thirds Senate vote to convict. No matter – a sizable chunk of Democrats want Trump out, and party leaders will pay a price if they don't join the uprising. Like the French Revolution, the militants could devour their own – just ask conservative Paul Ryan, who's despised by the GOP base.


January 31, 2017

Time to Change the Subject – Supreme Court in Prime Time

THE FEVER WILL RUN ITS COURSE: Washington was hyperventilating yesterday, amid juicy reports of Trump Administration infighting, anger among Republicans, anxiety in corporations, angst from foreign leaders, etc. That was yesterday.

LAST NIGHT'S FIRING of an Obamacare holdover at the Justice Department was greeted by impeachment advocates as if it was a reincarnation of Richard Nixon's "Saturday Night Massacre" on Oct. 20, 1973. But it wasn't comparable to that Constitutional crisis, and experts believe yesterday's firing was legal. So it may be time to take a deep breath and change the subject – let's nominate a Supreme Court justice tonight!!

EVERY NEW ADMINISTRATION SCREWS UP in its first few weeks, so it's no surprise that a team this inexperienced is off to a rocky start. But we'll stick with our New Year's resolution to not underestimate Donald Trump. Despite his myriad flaws, Trump is a genius at self-promotion and media manipulation, as he will demonstrate tonight.

SUPREME COURT IN PRIME TIME: The master showman will announce his pick to replace Antonin Scalia, making even the high court a primetime ratings ploy, and it will accomplish two major goals for Trump: it will change the subject from the immigration debacle and it will unify Republicans behind the pick. The GOP divisions will diminish, at least for now.

TWO SOLID CANDIDATES: It may be difficult for Democrats to lambaste either of the two frontrunners; both make for great copy. Neil Gorsuch is an elite talent, educated at Harvard and Oxford, and he has clerked for Supreme Court justices. Thomas Hardiman comes from a working class background; he would be the only current justice who did not attend Harvard or Yale. The populists, including Trump, may lean toward Hardiman. "The Democrats will look like obstructionists if they oppose either of these guys," a GOP source told us yesterday.

THERE WILL BE FRESH STORIES: Trump meets today with pharmaceutical executives, who he accused recently of "getting away with murder." Whether he makes peace or turns up the heat will be a fascinating story. Later in the week, after the Supreme Court spin begins to subside, there will be another big story – there always is with Trump. A leading candidate could involve Iran, which appears to have violated terms of the nuclear deal by test firing a ballistic missile.

BEHIND THE SCENES, House Ways and Means Committee Chairman Kevin Brady and staff are working on a tax reform bill that should clear his panel by spring. That could quell the stock market's anxiety that tax reform has stalled. By late spring or early summer, the House will have passed tax reform. While the Senate moves slowly and there are differences between the White House and Congress, tax reform will pass this year.

SO KEEP YOUR EYE ON THE BALL: The background noise about infighting and Steve Bannon and angry CEOs will surely be a distraction, but talk with Republicans in Congress and they'll tell you that tax reform is coming. It may take longer than the markets prefer, but it will win enactment and it will be dramatic.


January 30, 2017

Why the Markets Have to Worry About the Immigration Fiasco

EVERY DAY THERE'S A NEW BOMBSHELL – a Supreme Court nomination could come as early as today – so the Trump Administration can quickly change the subject, but this weekend's immigration fiasco is different. It angered global leaders, Muslims everywhere, Silicon Valley, and – most importantly – a wide range of Republicans who generally agree with Trump but were stunned by the lack of vetting from the White House.

THIS IS NOT A POSITIVE STORY FOR THE MARKETS: On Wednesday the focus will be on the Federal Reserve's FOMC statement, and on Friday the unemployment report will offer clues on the economy after the mediocre fourth quarter. In the meantime, the markets may begin to worry that the one issue that matters the most for Wall Street – tax reform – isn't on the front burner, and could get delayed amid the furor over immigration.

WE UNDERSTAND WHAT DONALD TRUMP IS DOING: He made promises to his base, and he will keep those promises. His political advisers are counseling a slower pace, but hard-liner Stephen Bannon is calling the shots. Trump's loyal base is thrilled, but Republicans are defecting in droves – not just John McCain and Lindsey Graham, but Rob Portman, Marco Rubio, Bob Corker, Lamar Alexander, Tim Scott, etc.

AS WE REGULARLY PREACH, political capital is the all-important X factor in this city. Trump lost some this weekend, and suddenly he faces grumbling within his own party – and even, we hear, among his new Cabinet nominees, who worry about needlessly provoking allies around the world. But the most cutting gripe this weekend – from both parties – was that the immigration plan was confusing, amateurish and ineptly explained.

SO WHAT DOES THIS SAY ABOUT THE REST OF TRUMP'S AGENDA?There's no clear path on an Obamacare replacement, which could take months to resolve. Democrats have thrown in the towel on a massive infrastructure bill, and there aren't enough Republicans to back it. And there are such enormous issues in tax reform – border adjustability, caps on deductions, the details on repatriation, etc. – that it may take many months before a bill comes into focus.

WE HAVE A HEALTHY RESPECT FOR TRUMP'S ABILITY to manipulate the news cycle, and within days the focus will be on his Supreme Court nomination. But there are warning signs that cannot be ignored: the seething hatred within his inner circle toward the press, the inability to vet – and explain – big policy initiatives, and the growing unease among Republicans on Capitol Hill.

LUCKILY FOR TRUMP, the Democrats are still adrift, seemingly unable to capitalize on growing protests. It's not Democrats Trump has to worry about – it's Republicans. If he starts to lose their support, his political capital may continue to fade, before he has a chance to shift the focus to his strong suit: pro-growth economic policies.


January 27, 2017

Donald Trump's Incredible First Week – Eight Key Takeaways

THIS WAS A FIRST WEEK UNLIKE ANY OTHER that we've seen in four decades of following new administrations. Surprises are inevitable with this outside-the-box president, but some of the things we've learned this week were eye-openers:

1. NO MELLOWING !! How amusing to recall that exactly a week ago, pundits were predicting that the Inaugural address would be conciliatory, reaching out to a broad cross-section of the country. Wrong. Trump will never mellow; his style is smash-mouth – and he will never stop tweeting and re-litigating issues such as voter turnout. More importantly, he is determined to do exactly what he said he would do; he's obsessed with keeping his campaign promises, as his adoring base expects.

2. CONGRESSIONAL REPUBLICANS ARE NERVOUS: It's not just Trump's temperament that alarms GOP leaders, it's the widening rifts with the White House on a wide range of issues, as we wrote earlier this week. For now, Mike Pence will keep the peace, but Republican dissent will become a dominant narrative in Washington. Make no mistake – Paul Ryan and Mitch McConnell can't stand Trump, and the feeling is mutual.

3. A STEEP LEARNING CURVE: We highly recommend the lead editorial in this morning's Wall Street Journal, which used a phrase we'll hear constantly in the next few weeks – "amateur hour." There's no other way to describe yesterday's fiasco on a possible 20% border tax with Mexico. Is it still on the table? Is it off? No one knows. What's clear is that Trump has a diplomatic crisis with a U.S. ally in his first week in office.

4. THE DEFICIT COMPLICATES EVERYTHING: Red ink will be a mere $500 billion annually for the next couple of years, but then it blasts off – and that will hamstring Trump's efforts to build a wall, boost defense spending, slash taxes, etc. Within his administration – where Stephen Bannon has enormous influence – the drumbeat is growing louder: let's ignore the straightjacket of revenue neutrality, let's worry about the deficit later, once the economy is humming.

5. A NEW GLOBAL ERA: Trump wasn't kidding about Mexico, Jerusalem, China, etc. and we suspect more geopolitical bombshells loom. He's not going to change, so what's next? Repudiating the Iranian nuclear deal? Abandoning NATO? Saber rattling aimed at North Korea? Trump would like to forge an elite alliance with Canada, the United Kingdom, Israel, Russia and European rightists, but we suspect some of the leaders of those countries worry about getting burned by the hot stove in Washington.

6. THE DEMOCRATS HAVE A STRATEGY: Any hint that the Democrats might try to cooperate with Trump has pretty much vanished. The party's base is furious, and Chuck Schumer has his marching orders: Democrats want a scorched earth strategy, and that's what they'll get. It will be months before Trump's first nominee to the Supreme Court will win approval, and we're sure another ugly fight looms when Justice Anthony Kennedy, 80, steps down,perhaps within months.

7. TIMING IS EVERYTHING: We emphasized all week that it will take far longer to get Trump's priorities enacted than he has promised, and that still appears to be a major take-away as the week ends. The impatient markets will have to live with a glacial climate in this city; the markets will just have to wait – Trump will get much of his agenda enacted, later rather than sooner.

8. PERHAPS THE MOST IMPORTANT THING WE'VE LEARNED THIS WEEKis that markets can rally amid all of this noise. We don't think the markets are oblivious to Trump – they have to worry about his tweets, his plunging approval rating, and the slow pace of the tax bill. But everywhere we look, there's wind at the stock market's back, and that can overcome even a rocky first week by this astonishing president.


January 26, 2017

What Could Cool This Rally?

OVERVIEW: Barring a geopolitical crisis, there are only two developments that could put a serious dent in this stock market rally: a major spike in interest rates, but Janet Yellen is in no great rush to move; or signs that the ambitious GOP agenda is running into turbulence. We'll focus on the latter this morning.

GRUMBLING IN PHILADELPHIA: You'd think the Republicans would be ecstatic – they won!! – but we're hearing from friends at the GOP retreat in Philadelphia that there's genuine anxiety over Trump's erratic first week – his obsessive re-litigation of issues, his blindsiding of lawmakers and the new Cabinet on regulations, and most importantly his sharp differences with Congressional Republicans. None of this bodes well for speedy progress on issues like tax reform.

THE ISSUE TO WATCH isn’t disputes over voter fraud or crowd size – that's just Trump being Trump – but serious rifts have opened up among Republicans on a wide front: how to replace Obamacare, how to pay for a wall with Mexico, whether torture should be permitted, and the big one: whether deficits matter. This goes to the heart of the tax cut debate.

SOME TRUMP ALLIES ARE ASKING – Why should we accept "a revenue neutral straightjacket?" Politico reported yesterday that Trump might propose massive tax cuts that couldn't possibly be paid for, even with generous "dynamic scoring." This stirred a hornet's nest on Capitol Hill, where Paul Ryan and most Republicans are vowing to pass a revenue-neutral bill with less dramatic tax cuts than Trump prefers.

STILL ANOTHER ENORMOUS ISSUE is the desire by the OMB nominee, Mick Mulvaney, to savagely cut spending, including Pentagon outlays, which has angered hawks like John McCain. And Mulvaney and other hard-liners want to begin cutting Social Security and Medicare, which Trump would oppose. This raises a valid issue: are these guys all on the same page?

WE'RE NOT TURNING PESSIMISTIC about getting things done. There will be plenty of kumbaya moments in Philadelphia, and Mike Pence can smooth over differences between widening factions. What concerns us is the timing of bills, not their ultimate passage. Trump, who is famously impatient, faces a long slog on tax reform, which may not pass until late this year..

RYAN'S TIMETABLE is way too optimistic; the Obamacare fix will take months, the debate over the wall and the Supreme Court pick also may take months, and there's a divisive debt ceiling fight looming this spring. All of this means there may be a perception in the markets that the agenda is bogging down; we would retort that it maybe slowing down.

THE STOCK RALLY MAKES SENSE: The economy looks solid, the labor market continues to heal, earnings are good, and Trump is fulfilling campaign promises. He picked off some low-hanging fruit this week, but many of his proposals will be endlessly litigated. A bigger concern is the widening rifts within his own party, which is not as impressed with Trump's first week as he is.


January 25, 2017

The Forgotten Issue; The Future of Trade Deals; Trump Changes the Subject

THE FORGOTTEN ISSUE: Lost amid the tidal wave of news this week is the budget deficit, which will level off around $500 billion for the next couple of years before resuming a sharp ascent – a huge issue for the fixed income market. We were intrigued yesterday by testimony from deficit hawk Mick Mulvaney, who has been nominated to head OMB. He and Trump aren't on the same page, to put it mildly.
HOW TO REDUCE THE DEFICIT? With several trillion dollars of fresh debt likely in the next few years – even with a rosy assumption of revenues from "dynamic scoring" – how can Washington deal with the deficit? There are five scenarios:
1. Savage spending cuts: Mulvaney and most Republicans will stir a hornet's nest by proposing huge spending cuts for domestic programs; there are lots of easy targets like the National Endowment for the Humanities, which may get abolished. But these cuts will be offset by a spike in defense outlays and other Trump priorities like a wall on the Mexican border.
2. Massive tax hikes: Not gonna happen. We don't anticipate any tax hikes whatsoever to emerge from the conservative House for the next three or four years. Tax cuts and reform are the big story, and they will help the economy.
3. Stronger GDP growth: The lure of much stronger revenues is like catnip, except GDP growth would have to exceed 3% for year after year to produce enough revenues just to keep the annual budget deficit steady at about $500 billion. Stronger economic growth would help – and keeping red ink at $500 billion is something the bond market can handle – but we simply cannot grow our way out of deficits, not with the new spending Trump is planning.
4. Entitlement reform: This is where Mulvaney and Trump disagree. GOP deficit hawks want major reforms – not just COLA trims, but elevated retirement ages, means testing, a higher income threshold, etc. But Trump won't bite; he undoubtedly knows the Democrats would be ecstatic if Republicans went after Social Security or Medicare.
5. Let it happen: This is the most likely scenario. The deficit will begin to climb sharply in the next decade, as the Congressional Budget Office predicted yesterday, because of demographic factors (we're getting older), and the scarcity of any politically palatable solutions. This is one of many reasons why bond yields are headed higher, which of course will make debt servicing costs even more burdensome.  
THE FUTURE OF TRADE DEALS: Just because the U.S. has dropped out of talks on a Trans Pacific Partnership doesn't mean the Trump Administration won't cut fresh deals. The new trend for the U.S. will be bilateral deals. We think there's a good chance of new agreements with the U.K. and Canada, separately.
"NO ONE HERE HAS A BEEF WITH CANADA," a trade expert tells us. Canada is the biggest U.S. trading partner, and Prime Minister Justin Trudeau is willing to negotiate a new deal; Mexico is threatening to bolt. The Trump villains – China and Mexico – may form their own alliances; this may shut the U.S. out of new opportunities, of course, but Trump is willing to take heat in 2017 for keeping his controversial promises that may pay off by 2018.
TRUMP CHANGES THE SUBJECT: Who has time to dwell on crowd size or voter fraud? Trump changes the subject with breathtaking speed. This morning's news is all about a wall with Mexico and possibly sending federal troops into Chicago. On top of the Keystone pipeline and scrapping trade deals, voter fraud gets lost in the noise. Trump manipulates the news cycle – and the media – better than anyone we've ever covered.


January 24, 2017

A Pushback Against Trump in 2018? Don't Bet on It

WISHFUL THINKING: We hear daily from Donald Trump opponents who are convinced that there will be a major push-back against him in the 2018 elections. But that looks highly unlikely – in fact, the Republicans are poised togain several Senate seats, bringing them close to the magic number of 60, which would cut off filibusters.

THE SENATE MATH IS WACKY, with Democrats defending an astonishing 25 of the 33 seats up for re-election. Only Nevada looks like a potential GOP loss. But of the 25 seats held by Democrats, 10 are in states that Trump carried – five in states he won in landslides: Montana, North Dakota, West Virginia, Indiana, and Missouri.

WITHOUT GOING THROUGH ALL THE RACES THIS MORNING we have concluded that the GOP almost certainly will increase its total of 52 seats; the only question is by how much. We think a jump from 52 to at least 55 is likely, and the high 50s is do-able. The House, where the Democrats need a 24-seat pickup, will be hotly contested; GOP control looks probable – but with a diminished majority. Actually, the House battle may be more interesting than the Senate, where continued GOP control looks virtually certain.

TWO GREAT WILD CARDS: Trump is off to a rocky start, unable to curb his passion for re-litigating feuds, still raising questions about his temperament. That’s a wild card. But the biggest wild card, assuming no geopolitical explosions, will be the state of the economy. On that front, Trump has a huge card to play – enactment of massive tax cuts, probably taking effect on Jan. 1, 2018.

SO THERE'S NO URGENCY FOR A TAX BILL NOW, some Trump advisers are arguing. So what if it doesn't take effect for another year? The key is to have the economy humming by the fall of 2018, and we would bet that tax cuts will ensure that economic growth will be over 3% by then, with an exceptionally tight labor market. Thus it's difficult to see the Republicans losing control of Congress in that scenario.

A WEEK IS A LIFETIME IN POLITICS, of course, and much will change between now and the fall of 2018. Trump is embarking on risky trade protectionism (see this morning's lead editorial in the Wall Street Journal). And health care, as usual, promises to be an albatross for the party in power. But the fluky 25-8 Senate election mix convinces us that Trump's power may only increase after the mid-term election.


January 23, 2017

Donald Trump Versus the Republicans

DONALD TRUMP CAN HANDLE the media (what a foil !!), he can handle lawsuits aimed at alleged conflicts of interest, and he can handle Democrats, who are still stumbling, unable to block Cabinet nominees. Ironically, Trump's greatest political challenge will come from Congressional Republicans, many of whom are still smarting from the Inaugural Address and, in private, are lukewarm at best toward him.

LAST FRIDAY'S SPEECH RE-OPENED OLD WOUNDS: Trump slammed career politicians who he claimed have lost touch and enriched themselves, and you could sense that Republicans like Mitch McConnell were squirming. But it wasn't the personal attack that stung; rather it was the rift between the populist Trump and the mainstream GOP on issues. "That was a speech Bernie Sanders could have delivered," one veteran Republican told us.

THE ISSUES GAP: Trump advocated spending much more on infrastructure; he slammed trade deals; he did not mention the surging budget deficit; and he did not embrace tax cuts – all issues where the Wall Street Journal and most traditional Republicans clearly differ with Trump. Our sources report that alt-right adviser Steve Bannon played a major role in writing the speech; Bannon has been scathing in his opposition to the GOP establishment.

BLINDSIDED AGAIN AND AGAIN: Republicans we've talked with resent getting blindsided – Trump recently proclaimed that an Obamacare replacement is imminent when in fact it is not; Trump recently rejected a major tax provision, complicating efforts to pay for the bill; and he will not abandon the tweeting and his vendettas, which many Republicans consider a waste of his political capital.

KISS AND MAKE UP: Luckily for Trump, he has some pros who know how to get things done – Mike Pence and Reince Pirebus will keep the focus on legislation, and they are urging a conciliatory approach when Trump meets with Republicans at a crucial off-site later this week in Philadelphia. We still think tax reform will pass this year, but there's a risk that the Obamacare replacement could get bogged down. That would delay passage of tax cuts until well into the fall.

WHATEVER HAPPENED TO THE DEMOCRATS? Chuck Schumer could lose every single Cabinet nomination battle; all he can do is delay. The Democrats still don't have much of a plan and they don't have a real leader. Their political clout is feeble. They were surprised by the crowds at this weekend's anti-Trump rallies, but that doesn't change one crucial fact – Trump has the votes on nominees and most crucial issues.

HE HAS THE VOTES, THAT IS, AS LONG AS REPUBLICANS STICK WITH HIM: Political capital is crucial – and it can be fleeting. This is a town that's addicted to job approval ratings, and if Trump doesn't get a bounce from the inauguration, and if his numbers continue to slide, even Republicans will begin to waver. Mocking them and ignoring their issues last Friday could come back to haunt Trump.


January 20, 2017

Key Takeaways from Donald Trump's Speech

OVERVIEW: We were on Capitol Hill this morning – spent several hours on CNN, marveling at their rooftop studio, overlooking the inaugural stage – then spent some time amid the throngs. Trump supporters, protesters, Middle Americans – all witnesses to this unique and moving transfer of power. Our takeaways:

HE'S NOT GONNA CHANGE: Trump is a fierce populist, a trade protectionist and an immigration hard-liner. Any suspicion that he would soften his stance was fanciful. This is who he is. Prepare for protectionist trade measures, perhaps as early as tonight. "Buy American and hire American," just became a classic new Trump mantra.

HE DIDN'T SAY THE ONE THING THE MARKETS WANTED TO HEAR: The financial markets were hoping for a full-throated embrace of tax cuts and tax reform, but they didn't hear it. It's coming, later this year, but it may come later than the markets would prefer.

INFRASTRUCTURE IS BACK: We reported for the past month that House conservatives were lukewarm over spending $1 trillion on infrastructure. But Trump is VERY serious about "highways, bridges, tunnels and railways." No mention of how to pay for this; the deficit clearly is not a big concern for Trump.

DARK VIEW: Trump painted a dystopian portrait of America in his acceptance speech in Cleveland, and he didn't back down today – he reflects the Rust Belt and inner city malaise, not Buckhead or Silicon Valley or North Carolina's research triangle, none of which are overrun by drugs and gangs.

NOT MAKING NEW FRIENDS: Trump ripped career politicians who "have reaped gains," and he did not distinguish between Republicans and Democrats. It’s a fair point – but no one in this town will be more inclined to help him than they were a day ago. He preached to his adoring base, but that’s not a majority.

A SHOT AT NATO: Most of Trump's generals support NATO, but Trump offered a thinly veiled threat to countries the U.S. aids "while they refuse to defend their own." The U.S., he made clear, will no longer spend money to defend these countries.

THE CHANGE STARTS TONIGHT: We're hearing that Trump will announce that scores of regulations will be scrapped or delayed – and we're hearing that the Fiduciary Rule is on the list to be delayed. He also may announce new protectionist trade measures and deportation regulations.

DEMOCRATS IN SHELL-SHOCK: The Clintons looked like they just awoke from a bad dream, Nancy Pelosi is hopelessly outnumbered, and Chuck Schumer can only delay the inevitable. The Democrats' bench is very thin – and old – but they understand that the key is to embrace populism, which Trump has snatched from them. One problem: His Cabinet isn't remotely populist, and Elizabeth Warren may sense an opening in 2020.

BOTTOM LINE: Trump is a tough guy, unsmiling and driven. He’ll get most of what he wants, because he has the votes. The markets should see significantly stronger economic growth by year-end, but the markets will have to deal with an unpredictable populist who is well outside the box.


January 19, 2017

The Most Important Confirmation Hearing – Steven Mnuchin, Today

SOME BODY BLOWS: Democrats have scored some points against Donald Trump's Cabinet nominees – from Dr. Tom Price's stock trading to Betsy DeVos' shaky answers. And a couple of nominees, including Andy Puzder at Labor, are on thin ice. But our focus this morning is on Steven Mnuchin.
TRUMP'S GENERALS WILL WIN APPROVAL, perhaps tomorrow, hours after the inauguration. They probably have made the most news – most are strongly anti-Russian and pro-NATO, in marked contrast to their boss. But in some respects the most newsworthy confirmation hearing will occur today, because Mnuchin's economic views are largely a blank slate, which is unusual for a likely Treasury Secretary.
THE MEDIA WILL FOCUS ON foreclosures by Mnuchin's One West bank during the housing crisis, but – like most of the Trump nominees – he probably will win confirmation (Trump has the votes, the one recurring theme on just about  every issue this year). What we'll be watching at today's hearing is where Mnuchin stands on a wide range of issues. Hopefully, someone will ask him these questions:

  • Does he have a serious plan to address the ballooning budget deficit, and will those plans surface before the early-spring vote to raise the debt ceiling?
  • Will Trump insist on much more expensive tax cuts than those favored by the House Republicans, or will the measure evolve into a tax reform exercise, not a huge tax cut?
  • What gets exempted if the tax bill imposes a limit (perhaps $200,000 per couple) on deductions? Will mortgages be included in the cap? What about charitable contributions? What about the muni bond tax break?
  • Does Mnuchin agree with Trump that the dollar is too strong? He certainly will get this question, and we'd expect him to equivocate; anything explicit would be astonishing.
  • Has the Federal Reserve gotten too big for its britches? Should Congress pass legislation to audit the Fed? Does he endorse the performance of Janet Yellen?
  • How aggressively will Mnuchin work to dismantle Dodd-Frank, or will there be some modest fixes, especially for hard-hit small community banks?
  • Does he fear an escalating trade war with China if the new administration hikes tariffs? Can the Trans Pacific Partnership get revived? Will tax policy reward U.S. exporters and punish importers?

THESE ARE CRUCIAL ISSUES FOR INVESTORS, who also will begin to size up Mnuchin's stature; he has a low profile in global financial circles and on Wall Street, and needs to fill in the blank pages quickly. The Democrats probably will zero in on his Goldman Sachs ties, but the real news may be his answers on policy, as the markets listen very carefully.


January 18, 2017

What We're Learning About Donald Trump – Ten Key Takeaways

UNDERSTANDING DONALD TRUMP: He likes surprises and can't be pigeon-holed; he'll be the most unique president in American history. Like everyone in our industry, we're trying to get a handle on Donald J. Trump...After talking with sources, here are ten key observations:

1. He's incredibly detail-oriented: This is quite a surprise. Trump doesn't delegate well; he's planning virtually every detail of the Inauguration, and he's getting into the weeds on legislation. He understands the incredibly complicated "border adjustability" tax provisions, which only hard-core wonks fully grasp.

2. Trump has no great affinity – or loyalty – to the GOP leadership: Trump will never have warm relations with Paul Ryan, and he has no reluctance to blindside his own party. Senate Republicans are still dumbfounded by Trump's assertion that universal health insurance will pass quickly. They weren't consulted – and they'd better get used to that.

3. Surprise!! Trump doesn't like a strong dollar: The financial markets were stunned yesterday by Trump's declaration that the dollar is too strong; no president – or Treasury Secretary – has ever waded explicitly into currency policy. If Trump really believes in a weaker dollar, that's a very big deal.

4. He's deadly serious about tariffs: For decades, Trump has asserted that the U.S. was getting ripped off by trading partners. He will not be dissuaded on this issue; he's adamant that the U.S. has been fleeced by countries like China. Trump will talk tough, hoping for concessions, but he's fully prepared to raise tariffs and pull out of trade deals.

5. He listens to Pence and Priebus: Maybe it's wishful thinking, but Congressional Republicans we talk with are convinced that Trump's rough edges will get smoothed over by Mike Pence and Reince Priebus, who are essentially pragmatists. "Trump likes to sound like a provocateur, but at the end of the day, Pence and Priebus will run policy," says one insider.

6. Impulse control issues: This is a great worry, even in his inner circle. Trump's remarks often are aimed at his adoring base, so he has no reluctance to differ with his Cabinet nominees on NATO, climate change, deficit spending, etc. He also has a vengeful streak and can be easily provoked – as North Korea and Iran surely must realize.

7. The tweets will continue: Get used to this; everyone we talk with is convinced that no one will take Trump’s Twitter away; he's a huge fan of this new bully pulpit. The first thing we do, very early in the morning, is check what Trump tweeted overnight, because obviously he can move stocks and markets.

8. His bark is worse than his bite: One day Trump blasts the press, the next day he's complimenting the New York Times. He's a genius at generating publicity, he masterfully manipulated the press in 2015. He starts negotiations with something outrageous (it’s in his DNA), then he looks for a deal. After the election, he essentially said many of his broadsides – such as locking up Hillary Clinton – were just theater.

9. He has a vision: Ronald Reagan had three major goals – diminish the clout of the Soviet Union, reduce the role of government, and lower taxes. That was basically it. Same with Trump – he wants to make the country more secure, he wants to reduce taxes and regulations, and he wants to reverse the economic malaise in the Rust Belt. Trump does have a vision; his opponent last fall did not.

10. Trump has blind spots: Everyone we talk with proclaims that Trump doesn't care about the deficit; he's remarkably comfortable with the concept of debt. He's tone-deaf on race and many social issues. And he has no reluctance to meddle in the private sector, intimidating companies that displease him.

BOTTOM LINE: Our main focus is whether Trump is good for the markets and the economy – we still think the answer is yes – but he’s a novice in a brand new arena, with little margin for error. The great presidents, and even the good ones, had the ability to grow on the job, so here's hoping that Trump will as well.


January 17, 2017

What the Markets Need to Hear in the Inaugural Address

MOST INAUGURAL ADDRESSES ARE QUICKLY FORGOTTEN but Donald Trump's speech this Friday will be intensely scrutinized after this past tumultuous weekend, in which he seemingly went out his way to alienate Western Europe, African Americans, the U.S. intelligence community, and even Congressional Republicans. The financial markets may be able to handle that –but investors absolutely, positively need to hear Trump embrace a pro-growth agenda.

THE MARKETS HAVE GIVEN UP on a free trade agenda, it's clear that Trump will endorse tariffs and pulling out of trade deals. His inner circle is remarkably protectionist, to such an extent that Larry Kudlow – whose pro-growth tax views are impeccable – apparently has been rejected to head the Council of Economic Advisers because he's a free-trader. This is a serious issue – read this morning's lead editorial in the Wall Street Journal – and China undoubtedly will retaliate as Trump raises tariffs.

WHAT THE MARKETS NEED TO HEAR from Trump is a full-throated defense of tax reform, but even on a layup like this, Trump muddied the message this weekend. He seemingly rejected the idea of "border adjustability," which many House Republicans support because it would reward exporters and punish importers. "It's too complicated," Trump said, scrambling the tax deliberations before they begin (border adjustability has flaws, and plenty of big corporate opponents, but Trump should have conveyed his misgivings to the tax-writers in private).

ELIMINATING BORDER ADJUSTABILITY would deprive the tax-writers of about $1 trillion in new revenues over ten years, and that would doom the already-tricky attempt to make the bill revenue-neutral. If this prompts GOP deficit hawks to scale back the size of the Trump tax cut, that would widen deep fault lines between the new president and Congressional Republicans.

THE DIFFERENCES ALREADY ARE WIDENING OVER OBAMACARE, as Senate Republicans – who aren't remotely close to agreeing on a new health bill – reacted with astonishment this weekend when Trump proclaimed that he will soon introduce a new plan that offers universal coverage. That simply cannot be done without dramatically increasing the deficit, and it cannot be done quickly.

LOWERED EXPECTATIONS: As we wrote last week, impatient CEOs can't stand the glacial ways of Washington, and the plodding Congress is about to anger Trump. He won't have a full Cabinet in place for weeks to come, and a few nominees are on thin ice – Andrew Puzder at Labor, Scott Pruitt at EPA and perhaps even Jeff Sessions at Justice, who has to deal with a serious ethical issue.

ALL OF THIS SEEMINGLY PALES compared to Trump's extraordinary comments this weekend on Western Europe. He thinks the EU is doomed and irrelevant, and almost gleefully threw Angela Merkel under the bus. This is Vladimir Putin's wildest dream come true – Western Europe has been cast adrift, now looking more favorably toward Moscow than Washington.

WHY ALL OF THIS MATTERS: The most valuable asset in Washington is political capital; Ronald Reagan and LBJ and Bill Clinton used their political capital adroitly, they picked their fights carefully. This weekend's controversies surely will keep Trump's approval rating below 40% – it was 37% last week – and that will prompt Republicans on Capitol Hill to begin pushing back.


January 13, 2017


Timing is Everything – Why the Markets Are Beginning to Worry


JEEZ, THAT WAS A BRIEF HONEYMOON: It's exactly one until the Inauguration and already the hecklers are out in force. Charles Krauthammer, writing in this morning's Washington Post, proclaims that "the honeymoon has come and gone," and the Wall Street Journal's Streetwise column asserts that "the market has already started to dump Trump." Yikes!!

THIS CRITICISM IS BASED ON THE ABSURD PREMISE that there hasn't been any progress yet on economic stimulus – but Trump hasn't even been sworn in!! The markets, which are looking for instant gratification, will have to be patient. Massive legislation, like the tax reform bill that will pass later this year, takes time. It always does.

WE HAVE WRITTEN SINCE THE ELECTION that the real GDP impact of Trump's policies – reduced regulations, infrastructure spending, and particularly tax reform – will not come until calendar year 2018. The House will pass a tax reform bill by late spring, the Senate should pass it before the August break, and a House-Senate conference committee should iron out a final measure this fall. The effective date probably will be Jan. 1, 2018. This is remarkably fast, by Washington standards.

A LEGITIMATE CONCERN in the markets is that the GOP dysfunction over Obamacare might be a precursor of more policy stumbles. Congressional Republicans are like the barking dog that caught the car; they don't know what to do next. Could there be "simultaneous" abolition of Obamacare and a replacement with something new? Unlikely – there's no agreement on the fix, and every Democrat will militantly oppose changes.

THIS RAISES AN UNCOMFORTABLE COMPARISON: The Obama Administration got bogged down early on health care; even Democrats like Chuck Schumer conceded that health reform should not have been Obama's initial priority because it diminished the president's political capital to deal with other domestic issues. Could we be headed for a repeat? If the Obamacare replacement effort turns into a GOP fiasco, it will raise questions on the timing of tax reform.

COMPLICATING THIS OUTLOOK, AS WE HAVE WRITTEN THIS WEEK, is Trump's desire for a Team of Rivals, which sounds good conceptually but may convey an impression of policy paralysis. And Trump hasn't helped – there's a sense that he can't focus on issues like economic stimulus, not when he's Tweeting angry messages about Meryl Streep and Arnold Schwarzenegger.

SO THE MARKETS ARE RE-THINKING the GDP blast-off scenario; there can be no better proof than the Treasury 10-year bond yield, which spiked higher during the post-election sugar high, but hasn't budged above 2.4% for the past few weeks. A yield below 2-1/2% is a sign that the markets aren't expecting robust growth any time soon. Accordingly, the next Fed rate hike doesn't appear to be imminent.

OUR BOTTOM LINE: Despite signs of market anxiety over Trump, we'll stick with our mantra: Do not underestimate him, Trump has the votes to prevail on most every issue; and an exceptionally tight labor market will drive the economy, inflation and interest rates higher by late 2017. Be patient, the economy should be percolating a year from today – but it could be a bumpy ride between now and then.



January 12, 2017

Key Take-Aways from Yesterday's Press Conference and Confirmation Hearing

WHAT A DAY !! If there's one clear take-away from yesterday's news whirlwind, it was this: the financial markets have to pay very, very close attention to Washington in the next few years. Look away for a second, and – pow !! – a Donald Trump comment or tweet will hammer drug stocks, or auto companies, or the Mexican peso.


1. Trump is not on the same page as many of his Cabinet nominees. As Doris Kearns Goodwin wrote in her terrific book on the Lincoln Cabinet, "A Team of Rivals," Trump has competing factions. Some examples: the Goldman Sachs economic moderates versus the trade protectionists; the friends of Russia against the military hawks; the immigration hardliners against those who are skeptical about a wall, including his nominee to head Homeland Security.

Trump's own nominees already have contradicted him on waterboarding, allowing Muslims into the country, upholding Roe V. Wade, etc. And on many other issues – how to pay for infrastructure spending, for example – there are no details. Our inclination is to cut the new administration some slack – Trump won't be sworn in until next Friday, after all. But some decisions have to be made quickly, especially on Obamacare.

2. Trump is not a politician, he's a CEO. That was clear in the press conference; he's keeping much of his business, and he has a CEO's impatience on issues such as Obamacare. He wants it killed (the Senate began this process yesterday) and he wants it replaced immediately. Good luck with that. Washington moves glacially on huge issues like this, and Republicans on Capitol Hill simply are not ready with a replacement. There may be some band-aids, but a failure to come up with a quick replacement will irritate this impatient CEO.

3. Ethics issues? Who cares? Trump was blunt but accurate on the issue of releasing his taxes. "No one cares except reporters," he declared yesterday. Trump's indifference to ethics standards may be an issue for Washington scolds and wonks, but the public seems indifferent – for now. Trump can't become too oblivious to public attitudes, of course; his job approval rating has plummeted to 37% this month.

4. Russia – the story that won't go away. There were rumors for months that Russia had something on Trump; we chose not to report on this because it was – and is – so unverifiable. As we wrote yesterday, the BuzzFeed report looks like fake news, and it still does. But this story will stay alive for two reasons: anything involving sex always generates a media buzz; and more importantly, the FBI is aggressively probing contacts between the Trump team and Russian operatives before the election.

5. The war on drugs. Trump has a burr in his saddle against the drug industry. His criticism can knock down pharma stocks for a few hours, but here's the key issue: is there anything that Congress will do to curb drug prices? This issue makes most Republicans uneasy; they're close to the industry and don't want to get involved with quasi-price control, which is anathema to free market conservatives.

6. The war on the media. This is almost too easy for Trump; it's like shooting fish in a barrel. In a new twist, Trump seemingly will employ a carrot-and-stick approach; in addition to criticizing CNN and others, he is praising news outlets – including the New York Times – that did not publish the Buzzfeed garbage. But if Trump thinks he can control the media, he's mistaken. The press loathes him, and that will never change.

BOTTOM LINE: We're in for a bumpy ride, with plenty of surprises, as this very unpredictable President breaks the mold. He's often not on the same page as most Washington Republicans, or even his Cabinet nominees. He's a populist who lashes out at profiteers. He has his own ideas on trade and geopolitics and rejects the experts on these issues. The markets like Trump because the economy should improve. But – the markets do not like uncertainty.


January 10, 2017

The Looming Assault on the Federal Reserve

THE NEW REGIME HATES THE FED: Donald Trump's supporters are remarkably unified on the Federal Reserve: it monetizes the debt, it creates asset bubbles, it is utterly non-transparent, it's controlled by Keynesians, its regulations hurt the economy, its bloated balance sheet will be impossible to wind down in an orderly manner, etc. But most importantly, the new regime thinks the Fed has too much power.

SO HERE WE GO, WITH "AUDIT THE FED" LEGISLATION likely to move quickly in the House. Sen. Rand Paul, an increasingly important player, has reintroduced his "Federal Reserve Transparency Act," which has a good chance of passing in the Senate as well. Paul will need 60 votes to break a filibuster, but some left-wing Democrats ­– Bernie Sanders, Elizabeth Warren, Sherrod Brown, for example – might support the bill. If it passes, Trump probably would sign it.

THIS ISN'T NECESSARILY ABOUT JANET YELLEN: It's clear that the Trump Administration wants her gone when her term as chairman expires in 13 months (economist Diane Swonk wrote yesterday on her excellent web site that the feisty Yellen might stay on through her term as governor, which doesn't expire until 2024). Trump might eventually appreciate a dove like Yellen, but he and his supporters have a bigger issue than Yellen – their beef is with the Fed as an institution.

ONE WAY TO CHANGE IT will be nominating Fed critics to the Board of Governors. Trump gets two nominees this year and two more in 2018; the key may not be whether these nominees are monetary hawks or doves – it's whether they want to curb the Fed's power, reduce its balance sheet and accept more transparency. The "Audit the Fed" bill is the beginning of that slippery slope. The Fed's books are already audited by Deloitte & Touche; what the Rand Paul bill would do is audit the Fed's policies.

THIS BILL IS VIEWED WITH ALARM by Fed officials, who worry about follow-up legislation that might curb the New York Fed, or impose rigid standards on conditions that would warrant rate hikes or cuts. Could the Fed's "dual mandate" of ensuring stable inflation and full employment eventually come under assault? That may be Paul's ultimate objective.

OUR BOTTOM LINE: The Fed has its flaws, but it's largely apolitical – you have to go back to Arthur Burns and Richard Nixon in the early 1970s to detect political dealmaking. The concern in financial markets is that the Fed once again may be on the verge of politicization.

THAT CONCERN ON WALL STREET will be strongly conveyed to the Goldman Sachs faction in the Trump Administration. These pragmatists may get Trump and his supporters to tone down the Fed bashing, but this issue may take on a life of its own – as politicians in both parties squirm over rate hikes this year. If the funds rate is 75 basis points higher at the end of this year, the Fed will become a political pinata – just as legislation to curb it is advancing.


January 9, 2017

Fiduciary Rule in the Spotlight; Who's in Confirmation Trouble; The Greatest Threat This Year

THE FIDUCIARY RULE, easily the most controversial policy issue in our industry, probably will be delayed or killed, congressional sources tell us – but it won't be easy. Most of the financial regulatory focus has been on Dodd-Frank, but aggressive lobbying by opponents of the Fiduciary Rule – including the U.S. Chamber of Commerce – have had an impact. Most Trump allies (with the possible exception of Carl Ichan) want the rule killed, and legislation has been introduced.

REP. JOE WILSON, a conservative Republican from South Carolina, introduced a bill on Friday that would delay the April 10 implementation of the Fiduciary Rule for two years – enough time, presumably, to alter or kill the regulation. Several industry groups immediately applauded Wilson's move and indicated they would step up lobbying efforts for his measure.

IT'S COMPLICATED: Opponents of the rule are hoping that one of four cases pending in federal courts could result in killing the Fiduciary Rule, but they can't count on that. They could introduce legislation killing it, which surely would pass in the House, but a filibuster could block it in the Senate. Or they could persuade the new Trump Labor Department to issue a regulation to un-do it, probably the most likely path, but that would require notices, a comment period, public hearings, etc.

BOTTOM LINE: We doubt that Trump has looked at this issue; it's not even clear that Andy Puzder, the likely Labor Department Secretary, has firm position (even though most of his aides are opposed to the rule). So our take is to wait until Pudzer's confirmation hearing during the week of Jan. 16 for a clear signal. In the meantime, we think clients should not count on the rule's death – but it's on thin ice, with an increasingly good chance of delay.

CONFIRMATION HEARINGS BEGIN TODAY, starting with Attorney General-designate Jeff Sessions, who's likely to win quick approval. Hearings start tomorrow for Rex Tillerson, who probably will squeak by – provided he talks tough on Russia. Is anyone in trouble? Steven Mnuchin's controversial financial history will give Democrats a chance to score points, but he'll probably survive.

THE NOMINEE WHO COULD BE IN TROUBLE is climate change skeptic Scott Pruitt, who's a close call to head the Environmental Protection Agency because a handful of Republicans have reservations. Barring explosive disclosures on nominees' finances or personal lives, we think virtually all will be confirmed by late January.

THE MOST GRIPPING TESTIMONY will come from the "Team of Rivals" on foreign policy, amid growing geopolitical concerns. This morning's Washington Post has a eye-opening front-page article on Gen. James "Mad Dog" Mattis; the Defense Secretary-designate has been a fierce proponent of taking military action against Iran. And North Korea says it's prepared "at any time" to test ICBM missiles, while Trump pledges that "it won't happen." Yes, the U.S. economy and the labor market look fine – but geopolitics is the great wild card, the biggest market threat this year.

MUST SEE TV: Trump holds his first press conference since July this Wednesday; time hasn't been announced. Two issues will dominate – Trump's unwillingness to concede Russia's massive hacking, "which makes him look like a sap for Mr. Putin," according to an editorial in the Wall Street Journal this morning. And there will an intense focus on conflict-of-interest issues, which is a huge Trump albatross – but his supporters don’t seem to care.


January 6, 2017

What Worries Us About Donald Trump

WE'VE BEEN OUTSPOKEN RECENTLY about Donald Trump's impact on the economy – we anticipate higher GDP growth, even greater improvement in the labor market, and reduced regulations. These are positive stories for the financial markets, which were not looking forward to four years of more taxation and regulations from Hillary Clinton.

BUT THERE ARE SOME WARNING SIGNALS: Trump loves to be unpredictable; who knows what new tweet will arrive in the next few hours – will it affect Ford or Toyota, or a drug company that's hiking its prices? Markets don't like to get blindsided, and Trump seems to relish surprises.

THE MICRO-MANAGER: Fiercely vengeful, Trump has injected himself in today's race for the Chairmanship of the Ohio Republican Party; he wants to defeat the current leader, who did not support him this fall. Trump is far more of a micro-manager than we anticipated; will he emulate Jimmy Carter, who signed off on the White House tennis court schedule?

SETTLING OLD SCORES: His desire to settle scores in Ohio and elsewhere will persist, and we suspect that in private Trump is no fan of Paul Ryan and others in the GOP congressional leadership who did not fully embrace him last fall. Trump has an enemies list and he doesn't forget.

A TEAM OF RIVALS: Well, it worked for Lincoln . . . but on issue after issue, Trump's inner circle is divided – the Goldman Sachs pragmatists versus the trade protectionists, the big spenders versus the fiscal hawks, the geopolitical hard-liners versus the pro-Russia doves, etc. This could produce a vibrant intellectual climate – or it could generate confusion.

THE ONGOING SUITS: Trump needs to wrap them up. He's still in a bitter suit with ex-members of his Florida golf club, and he refuses to settle with celebrity chef Jose Andres. There are 75 pending suits against Trump, many of which will require depositions from him, which will simply shine a spotlight on his conflicts of interests.

SCOFFING AT EXPERTS: Does Trump really know more than most generals and intelligence experts? Does he understand that trade protectionism actually hurts consumers? Does he appreciate that Social Security is a looming train wreck, as experts insist? Experts sometimes are full of beans, we get that – but there's a growing concern in Washington that Trump simply won't listen.

WE'LL GET EMAILS from those of you who are huge Trump fans, but this morning's commentary isn't about his policies; it's about his leadership style – different, yes; refreshing, possibly. But as Trump prepares for his inauguration in two weeks, he needs to act presidential – and catching investors off-guard with tweet after tweet is not presidential.


January 5, 2017

The New Geopolitical Order

SIGNS OF A CHANGE are in the air in Europe, where we spent the holidays and observed a fascination with Donald Trump – some people fear and ridicule him, but many others sense the dawn of a new geopolitical order. Astonishingly, Russia is viewed by many in Europe as a partner – not necessarily an ally, but not necessarily an enemy.

THE OLD ORDER HAS FADED: Even more than Americans, Europeans are sick of stagnant economic growth, globalization, big banks and – most explosively – the terror threat from radical immigrants, which is the elephant in the room that has radicalized the West. Trump gets this, and so does Vladimir Putin; Angela Merkel may have realized this too late.

THE OLD GUARD IN WASHINGTON, led by John McCain and Lindsey Graham, will have center stage today – they'll get saturation coverage from the mainstream media at a Senate hearing on Russian hacking and Trump's alleged naiveté toward Putin. Trump surely must know that Putin directed the pre-election hacking, but he's playing a chess game with the Russian dictator, and both know they have mutual interests. The real threat, they agree, is radical Islam.

READING PUTIN'S MIND: He may consider Trump a rookie, as Nikita Khrushchev viewed John Kennedy when the two first met in Vienna in 1961, a humiliating disaster for JFK. But does Putin think he can brazenly take military action in the Baltic countries or in eastern Ukraine? Why should he, when his hacking and manipulation of the media can stealthily win him hegemony without firing a shot?

EUROPEANS ARE SO SHELL-SHOCKED by the post-2008 economic collapse that they don't have the luxury of worrying about Russia; Theresa May in the U.K. and Marine Le Pen in France have warmed to both Putin and Trump. European leaders desperately need economic growth, and the strong dollar is just what the doctor ordered. From BMWs to Brunello wine, European goods are now much less expensive in the U.S., and that's an under-appreciated boost to the EU economy, which is showing some signs of life.

WE'RE NOT NAIVE TO THE RUSSIAN THREAT – the hacking from Julian Assange and other Russian agents during the U.S. election was outrageous and must be countered with more robust U.S. cyber terrorism policies – stronger than those belatedly embraced by the Obama administration, which deserves much of the blame for lax oversight.

BUT THE RUSSIAN THREAT pales compared to the threats posed by ISIS, Iran, North Korea and even China, which is an adversary in the South Pacific and on trade. These threats demand a new world order, and an alliance between the U.S., Russia and Western Europe could provide a counter-weight.McCain will defend the old order today, but a different order will begin to emerge after January 20.


January 4, 2017

Fresh Worries on Trade War; New Sheriff in Town; 
Shake-up at the Federal Reserve

WHAT WILL MAKE THE MARKETS NERVOUS? There's no shortage of risks – we're all in an industry that's paid to worry for our clients. High on our list of risks is surging interest rates, Kim Jong-un, ISIS, and cyber terrorism. What will become the first major market concern? Let's start with trade protectionism, a terrible idea that propelled Donald Trump to victories in the Rust Belt.
HOW MUCH IS BLUSTER? We understand that Trump plays a classic negotiators' role of talking tough then softening his stance, but we don't think there will be much softening on trade. Trump's tweets apparently have dissuaded GM and Ford from building more plants in Mexico; the details on these episodes are murky – but it's clear that Trump could intervene in virtuallyany plant closing. "Make it in the USA or pay a big border tax," Trump says.
A SHIFT ON TRADE POLICY: We anticipate Trump will announce later this month that will to re-negotiate NAFTA, and and he apparently will pull out of talks on the Trans Pacific Partnership. We also expect him to announce tough new tariffs on China, while alleging that Beijing is a currency manipulator (the Chinese used to be, but there's no evidence of current manipulation). It’s worth noting that several of the country's leading trade hawks have been nominated to serve in the new administration.
A MOVE TOWARD PROTECTIONISM – including a possible tax change that would punish importers and reward exporters – almost certainly would be challenged by the World Trade Organization, but more importantly it would prompt retaliation from China and other countries. Trump has public support for a trade war – the AFL-CIO and the Bernie Sanders left will be huge allies – but this will be viewed with alarm in the markets. Hopefully the Goldman Sachs faction in Trump's administration will tell him this.
NEW SHERIFF IN TOWN: Wow, did House Republicans cave quickly yesterday – a tweet from Trump apparently is sufficient to send the GOP running for cover. There are valid reasons for killing the Office of Congressional Ethics, but the optics were terrible – this was the first issue of business in the new Congress?? Trump sent quite a message: I'll go directly to the people if Congress does something I don't like, and who do you think will win that fight?
FEDERAL RESERVE SHAKE-UP? Interesting piece yesterday by Jeff Cox on the CNBC web site about the possibility that former bank executive John Allison may be nominated to the Fed board to head banking regulation. Allison, now at the Cato Institute, has been a harsh critic of the Fed; he once said he would like to abolish it, "although it's not do-able in practice." He and other potential Trump nominees will send a clear signal to Janet Yellen: there's no place for you in 2018 in the new Fed.
SCHUMER TALKS TOUGH: New Senate Minority Leader Chuck Schumer wants to unify his troops, so he offered them a huge dose of red meat yesterday: "I may keep the 9th Supreme Court seat open," he proclaimed, a threat that a Trump replacement for Antonin Scalia may never win approval (Democrats, with 48 members, could have enough votes to filibuster). Schumer is jawboning, of course, for a relatively moderate pick but make no mistake – this will be the nastiest fight of the spring.


January 3, 2017

 New Era Begins Today – Slowly

EVERY JOURNEY OF A THOUSAND MILES begins with a single step, according to the ancient Chinese proverb, and here we are on Jan. 3, with a new Congress about to be sworn in at noon. We remain convinced that Donald Trump will prevail with sweeping changes – tax reform in particular – but the American electorate is impatient and wants to see immediate action from Republican leaders – many of whom worry, in private, that they have over-promised.

REPUBLICANS NEED AN IMMEDIATE SIGNATURE ISSUE – and it probably will be regulatory reform, which is easy to sell. The House will vote to kill numerous executive orders and begin the process of dismantling regulations affecting energy production, clean air regs, financial services, overtime hours, etc. And congressional oversight of regulations will increase. This will address a cry from small business that regulations are suffocating them.

THIS WEEK'S SIGNATURE ISSUE WAS SUPPOSED TO BE OBAMACARE, but this looks more and more complicated. The House will set in motion within days a budget reconciliation process that eventually will lead to a vote to abolish Obamacare – but key provisions of the ACA will persist for years to come. (The Obamacare tax will die quickly.) A symbolic victory by spring, killing Obamacare, will clash with the reality that it won't actually die.

TOO HOT TO HANDLE: As the new Congress takes office today, it's noteworthy that some of Trump's key issues have only lukewarm support among Republicans. There's no great enthusiasm for a $1 trillion infrastructure package. Trump is expected to announce immediately after his Jan. 20 inauguration that the U.S. will impose new tariffs on Chinese exports, and that the U.S. will seek to renegotiate NAFTA and withdraw from talks on the Trans Pacific Partnership. But many Republicans aren't enthusiastic about this – or strict new immigration policies. Mention "the wall" to Paul Ryan and he probably will roll his eyes.

THE THREE BIG OBSTACLES: Trump's top advisers like Reince Priebus know they have to manage expectations; they acknowledge that three major obstacles could slow their momentum this winter:

  • Democrats who will demand tons of tax records from Trump's ultra-wealthy Cabinet nominees, which could delay confirmation for several weeks for at least half a dozen candidates before they eventually are approved.
  • Republican dissidents like John McCain and Lindsey Graham, who will doggedly criticize Trump's relations with Russia; and GOP fiscal hawks who will resist any new spending.
  • And the great wild card: geopolitical threats, whether from ISIS or the erratic North Koreans. Who knows where the rapidly escalating tweet-storm between Trump and Kim Il Sung may wind up?

THESE OBSTACLES MAY SIMPLY BE SPEED BUMPS, because Republicans have the votes on most issues – and Senate Democrats already are worried about 2018. So Trump will get his victories, but the timing may be disappointing; it still looks unlikely that tax reform can pass before fall, with an effective date perhaps not until Jan. 1, 2018.

BOTTOM LINE: The "sugar high" stock market rally after the election was entirely warranted because there's a good prospect of stronger GDP growth in the next two years – stimulated by tax reform and reduced regulations. But the legislative process is often glacial: this will not be a 1,000 mile sprint, it will be one step at a time, starting at noon today.


December 30, 2016

A Look Ahead: Washington's Top Ten Stories in 2017

HAPPY NEW YEAR!! We're back to a regular publishing schedule this morning with our list of what may be the top ten stories in Washington in 2017 – a year that should prove to be stunning on the policy front.
1. Dramatic Tightening of the Labor Market: Even as discouraged workers return to job-hunting, the unemployment rate will continue to plummet – perhaps to nearly 4 percent by autumn. There already is an acute shortage of skilled labor in much of the country; a shortage of unskilled labor is coming also. Wage growth is percolating, which will produce a significant increase in real disposable income – and, of course, it will begin to generate inflation fears by fall.
2. The Inevitable Trump-Yellen Clash: The Fed cannot afford to get behind the curve on interest rates – this was the clear message earlier this month when the FOMC changed its forecast to three rate hikes in 2017, not two. We can imagine the late-night Trump tweets: “Yellen gave Obama a break on interest rates and now she's picking on me.” Trump will appoint Yellen critics to the Fed, the beginning of his plan to oust her in a year. 
3. Trump Gets His Tax Reform: It may take a little longer than Trump would like – autumn versus summer – but dramatic tax cuts are coming for individuals and businesses, probably with an effective date of Jan. 1, 2018. We will focus on tax reform more than any other issue in the new year, largely because of the explosive details: a likely cap on individual deductions, a possible "border adjustment" that would punish importers and reward exporters, and the likely repatriation of staggering U.S. profits stashed overseas.
4. Potholes for Infrastructure Spending: There simply isn't much enthusiasm for this among House Republicans. Trump may have to move to Plan B – which would provide tax incentives for private firms, but of course this would cost money also. In any event, the impact on GDP – and construction firms – won't come in 2017; infrastructure may be a story for 2018 and beyond.
5. Jitters this Winter on Trade: If you're inclined to worry, a good place to start is U.S.-China relations, which are headed south in a hurry. Trump has to keep promises he made in the Rust Belt, so we anticipate new tariffs on Chinese exports to the U.S. – perhaps within days of the Jan. 20 inauguration. As George Will and others have pointed out in recent days, protectionism saves virtually no jobs and winds up costing consumers plenty, but Trump has a blind spot on this issue and he apparently will not be dissuaded.
6. Democrats Play Stall-Ball: What can Chuck Schumer do other than stall? He doesn't have the votes (and several Senate Democrats look vulnerable in 2018), so the new Senate Minority Leader will drag his feet on everything, especially Trump's Cabinet nominees. Democrats will demand detailed tax records (good luck to Wilbur Ross and Steven Mnuchin), so a full Cabinet may not be in place until spring – which will delay progress on legislation.
7. Obamacare, RIP, Sort Of: Yes, Obamacare will be killed by the House, probably by late winter, but as several readers point out, it will be replaced by . . . Obamacare, which will stay largely in place for at least another year as Republicans debate an alternative. Health care is one VERY hot potato, and soon the Republicans will own this hot potato.
8. Domestic Spending Cuts: We've changed our view on this in recent weeks. Trump has sent an important signal to House fiscal hawks; he has nominated one of their leaders, Rep. Mick Mulvaney, as his budget director. Defense spending should soar as geopolitical tensions persist, but domestic discretionary spending could get quite a haircut – not a positive story for lab companies and other health firms that deal with NIH. Watch the debt ceiling fight in late winter – tough new curbs on domestic spending are likely. 
9. The Biggest Failure: Trump will rescind or delay many executive orders in late January (the Fiduciary Rule is still very much in play), but the highest-visibility orders – involving the deportation of illegal immigrants – may fizzle. Perhaps a few thousand people will get deported, but most will fade into the urban landscape, in cities that will continue to look the other way. There may be tougher screening of Muslims, but as for a wall, Trump has a fallback: much tougher border enforcement – which will look like a success, because there's not exactly a wave of new illegal immigrants willing to take any chances in 2017.
10. Scandals and More Scandals: The press will have a field day – Trump depositions, Trump charities, Trump conflicts of interest, etc. But this will simply be background noise; the mainstream media is a fabulous foil for Trump. He will prevail – his political capital intact – as long as the economy improves, and a stronger economy has already arrived and will only accelerate.


December 19, 2016
What We Heard at Holiday Parties as the Trump Era Begins

THE CHAMPAGNE WAS FLOWING THIS WEEKEND – some people drank to celebrate, others drank to forget – in anticipation of today's Electoral College formality, which will bring the election to a close. Everyone at Washington holiday parties had an opinion this weekend, so here's a summary of what we heard . . .
DONALD TRUMP RIDES HIGH as long as the economy and the markets ride high. Incredibly, he already owns both, even though it's still a month before the Inauguration. A sudden correction – perhaps prompted by soaring bond yields or a too-strong dollar – could quickly take the glow away from Trump, but make no mistake: he should not be underestimated.
MANAGING EXPECTATIONS: Trump unquestionably will get massive tax reform, but it probably won't be signed into law until the second half of the year, and the effective date may not come until Oct. 1 or Jan. 1, 2018. No one believes the bill will be retroactive. On taxes, immigration, Obamacare and infrastructure, expectations may be unrealistically high for immediate action.
THE MOST CONSERVATIVE CABINET IN OUR LIFETIMES: Everyone we spoke with expressed amazement at the hard-right cabinet, with some prospective secretaries promising to abolish the very departments they will head. Will Trump over-play his hand? Watch HHS, where arch-conservative Dr. Tom Price will preside over the abolition of Obamacare – but his desire to transform Medicare is one very hot potato.
THE GUY TO WATCH: Trump can scramble the daily news cycle – or a stock price – with just one tweet, but the other person everyone is watching is Mike Pence. He knows Capitol Hill and the players, and the Trump inner circle will defer to him. Pence – not Trump – is the real conservative, socially and economically.
TRUMP AND THE GENERALS: The President-elect is attracted to powerful and confident men, so generals (and CEOs) are all the rage. But are the generals trigger-happy? That reputation could be a deterrent, of course, but some countries such as Iran would love to provoke the U.S into over-reacting. Geopolitics – not the economy – is THE concern in Washington.
WHAT WILL THE DEMOCRATS DO? They will delay everything, especially Trump nominations, and they will question Trump's legitimacy; after a couple of drinks virtually every Democrat says – without proof – there was direct collusion between Vladimir Putin and Trump's inner circle. But sour grapes and Putin hearings can go only so far – both parties have to govern, and the Democrats will rely on Chuck Schumer to obstruct. He’s a lonely player on a very thin bench.
A HEAD-SCRATCHER: No one in Washington can quite figure out the appointment of deficit hawk Mick Mulvaney to head OMB. The South Carolina conservative is a co-founder of the Freedom Caucus; he helped oust John Boehner. Mulvaney never supports raising the debt ceiling, so that fight should be interesting in late March. Trump wants to spend billions more on defense and infrastructure, so Mulvaney could be a square peg in a round hole.
IT'S ALL SO DIFFERENT: We heard over and over again this weekend that Trump is unlike anything Washington has ever seen; the role of Ivanka Trump and her husband Jared Kushner is one of many examples. Everything feels different – the economy and the markets feel different – and we conclude by reiterating the new consensus: don't underestimate this guy. Trump has the votes in Congress – and as we will see today, he has the votes in the Electoral College as well.

* * * * *

HAPPY HOLIDAYS!! After a year like this, it's time for a vacation; we'll only write sporadically thru the holidays. A sincere thanks from all of us at Horizon Investments for your friendship and support this year – we wish you and your families a joyous holiday season.


December 16, 2016

Most Ridiculous Story of the Year; Fiduciary Rule on Thin Ice; Here Comes Larry Kudlow?

THE ELECTORAL COLLEGE HYPE will end – mercifully – on Monday, as electors confirm that Donald J. Trump indeed is the President-elect. We'll probably be subjected to more speculation this weekend about "unfaithful electors," and proponents of delaying the vote may get air time on the Sunday talk shows. But this is going nowhere – 37 electors would have to defect away from Trump, and currently we can find only one such elector.
VIRTUALLY ALL DEMOCRATS WE'VE TALKED WITH dismiss chances of an Electoral College stunner, but they add that the real objective of Trump opponents is to delegitimize his presidency – that somehow Vladimir Putin succeeded in preventing Hillary Clinton from winning the presidency. But most of her wounds were self-inflicted – not visiting Wisconsin for the entire fall is just one example of her dysfunctional campaign. The Russian hacking is a serious story, however, and it will have legs.
FIDUCIARY RULE – ON THIN ICE: One of the biggest stories in our industry is the Fiduciary Rule, set to take effect in early April. We continue to believe it may die, and there was confirmation this week in an article in the publication Investment News. The incoming Labor Secretary, fast-food exec Andrew Puzder, may know nothing about the rule, but his advance team is comprised of people who strongly oppose it, the article points out. We continue to believe the rule will either be killed or delayed.
LARRY KUDLOW: Is there room in this town for another mouth that roars? Bombastic Larry Kudlow apparently is on the short list to head Trump's Council of Economic Advisers, an intriguing pick that would delight supply siders who correctly predicted that Clinton could not win the presidency without a pro-growth agenda.
BUT KUDLOW COULD STRAY FROM THE RESERVATION on issues such as trade protectionism, and he advocates keeping hands off Janet Yellen and the Fed. And Kudlow loves the camera; it could be a challenge to rein him in. On a personal note, while Kudlow could be annoying with his TV shouting, off camera he's unfailingly polite and friendly. We've rarely encountered a TV personality whose demeanor on camera and off is so divergent.
PAYING FOR TAX CUTS, CONTINUED: More feedback from you on how the massive tax cut can be paid for. We got an email from one of Washington's savviest tax experts, a regular reader, who said the following: "Making the numbers add up to deficit neutrality may not be that difficult, and it will be necessary over 10 years if they use budget reconciliation, and we don’t see how they don’t use reconciliation."
BORDER ADJUSTABILITY raises a ton of money, our friend continued, but that's a controversial idea, hardly assured of enactment. It that's deleted from the bill, "look at all the base broadeners Rep. Dave Camp used to get to a top rate of 25%, and he paid for making permanent hundreds of billions of dollars’ worth of expiring provisions that have since been made permanent and thus are built into the baseline."
SO WE REITERATE: There will be some spending cuts and revenue offsets, there will be some very rosy assumptions, and while the tax bill may be watered down slightly it is virtually certain to pass. If it raises the deficit, which is likely, that's an issue that can be addressed in ten years, when the entire package would "sunset," as required in the reconciliation process that will pry the measure out of the Senate.


December 13, 2016

The Deficit – a Forgotten Issue; The Case For Tillerson; 
Wisconsin Recount Surprise

DATA RELEASED YESTERDAY SHOW THE BUDGET DEFICIT climbing at an alarming rate, with receipts down by 2% in the first two months of the new fiscal year and outlays up by 25%, mostly because of health costs and timing issues. Red ink this year is likely to exceed the $587 billion total from 2016, which itself was up by $148 billion over the previous year.
THE KEY FOR THE BOND MARKET is the deficit as a percentage of GDP; anything less than a 3% rise annually is usually acceptable. But it was 3.2% of GDP last year and may be headed to something like 3.5% this year. A 2017 deficit of over $600 billion comes as the markets wrestle with Fed tightening, inflation pressures, and an increasingly tight labor market.
PERHAPS MOST SIGNIFICANTLY, there's no talk in either party about attempting to curb the deficit. "It's time to prime the pump," Donald Trump said recently. Neither he nor the Democrats are focusing on spending restraint; only a relative handful of House fiscal hawks are grumbling about deficits. New projections by the Congressional Budget Office this winter will give those hawks some ammunition, but it's unlikely they can stop the locomotive of higher spending.
THE CASE FOR TILLERSON: Republicans who are squawking about Rex Tillerson will get a major push-back today. His nomination will be endorsed by Condoleezza Rice, James Baker and Robert Gates, and perhaps Dick Cheney as well. They know how connected and brilliant Tillerson is and they believe it's time for a re-set with U.S. allies and adversaries. His nomination is a close call but we suspect Tillerson will ace his confirmation hearings and squeak through.
THE WISCONSIN RECOUNT: There's been plenty of chatter in recent weeks that Russia not only hacked into both parties but actually hacked into voting machines. Well, that was not confirmed by the Wisconsin recount – officials reported yesterday that the final tally showed Trump's victory margin increased by 131 votes in the state, which Clinton inexplicably did not visit this fall.
THE CAMPAIGN WILL OFFICIALLY END NEXT MONDAY, as electors will confirm that Trump indeed won. Embittered Clinton Campaign Manager John Podesta – who wrote a ton of indiscreet emails that were hacked – called yesterday for briefing all electors about Russian hacking before they vote. That won't happen. And a federal judge in Colorado ruled yesterday that electors in that state are not free to become "unfaithful," a setback for efforts in other states.
THE DEMOCRATS' GOAL IS CLEAR: The uber-liberal New York Times columnist Paul Krugman proclaimed yesterday that Trump will be an "illegitimate" president. He cited Russian hacking, the FBI's James Comey and Clinton's stunning margin in the popular vote. But Trump won the states that count, and debate about Trump’s legitimacy will fade.
THERE’S VERY SERIOUS DEBATE, HOWEVER, about Russia's involvement in the election – does Vladimir Putin hate Clinton and Barack Obama that much? A bipartisan probe into Russia's motives will persist for months because, leaders of both parties agree, it cannot be allowed to happen again.


December 12, 2016

What Will Trump Tweet Next? 
Will Janet Yellen Displease Him on Wednesday? 

FIRST, THE RUSSIA DISPUTE: Our take is pretty simple – yes, the Russians hacked the DNC, the RNC and Lord knows what else. But this didn't alter the outcome of the election. That's absolutely crucial for Donald Trump, who sees an attempt to deny his legitimacy as president – the Russians, FBI Director James Comey, Hillary Clinton's popular vote victory, etc. So naturally Trump will hit back hard at what looks like an unsubstantiated charge that Russia somehow rigged the election.
TWO NEW CHALLENGES FOR TRUMP: He apparently won't give up tweeting, which raises two fresh issues as the week begins – Will he turn the other cheek after a Chinese government-controlled newspaper called him "an ignorant child" last night? We'd guess he will respond. And will Trump stay silent after Janet Yellen raises rates by 25 basis points on Wednesday?
THE FED IS WAY BEHIND THE CURVE: There’s a case for a 50 basis point move this week – central bankers have to know that there's a stock market melt-up underway. It may be a sugar high but it could last much longer – and the market euphoria is a major reason why this suddenly is looking like a 3% GDP economy, with a tightening labor market. 
THE FED ALMOST CERTAINLY WILL SIGNAL that more hikes are coming next year, which poses a dilemma for Trump – does he blast Yellen for raising rates too late (while keeping policy super-dovish for Barack Obama), or does he take credit for the stock and economic surge that has forced the Fed's hand? If Trump criticizes the rate hike, it would be a green light, in our opinion, for Yellen critics to begin moving legislation to curb the Fed.
IT’S ALL ABOUT TRUMP: The inauguration is still over a month away, but Trump now totally dominates the Washington stage. The Democrats seem clueless; in private they're bracing for a Trump blitzkrieg this winter that they cannot stop. In fact, we would argue that Trump's greatest political challenge won't be the Democrats – it will be Republicans who oppose him on several fronts.
THE GOP PUSHBACK: John McCain, Lindsey Graham, Marco Rubio and others do not like Russia. They will vigorously investigate charges of Russian hacking, and they may oppose the nomination of Rex Tillerson as Secretary of State. Many of Trump's nominations are controversial but barring bombshells they should all win confirmation – but Tillerson could be vulnerable because GOP defense hawks despise Vladimir Putin.
REPUBLICANS WILL ALSO PUSH BACK on the cost of the Trump tax cuts – how to pay for them? – the size of an infrastructure bill, the details of an Obamacare replacement, etc. The fissures within the GOP will become apparent in 2017 but for now the message is clear: Trump won, no excuses, and he'll get his way on just about everything for many months to come; if no one can even stop him from tweeting, how can he be stopped on policy issues?


December 8, 2016

Better Late than Never – Congress Gets Its Act Together; 
Trump and Marijuana

MAYBE THE 8 PERCENT APPROVAL RATING finally had an impact . . . because Congress has surprised to the upside by overwhelmingly passing the "21st Century Cures Act" by 94-5 in the Senate and 392-26 in the House. Hard to argue with the key provisions: reforms in the FDA drug and device approval process; more funding for cancer and Alzheimer's research; expanded access to mental health services.
JOE BIDEN'S CANCER "MOONSHOT" was included in the bill; there will be an extra $1.8 billion in funding for cancer research. Biden, who lost a son to cancer, has a mixed record with the public, but he's extremely popular on Capitol Hill. So there was a rare bipartisan mood, despite dissents from Elizabeth Warren and Bernie Sanders, who opposed generous treatment to drug companies. President Obama will sign the measure in the next few days.
STILL ANOTHER POSITIVE STORY that's emerging from Congress is the likelihood of a serious overhaul of the broken budget process. The great web site Real Clear Politics reports this morning that Senate Budget Committee Chairman Mike Enzi will propose a two-year budget process with a mechanism that will keep the government open in the event of a stalemate. One reason why Congress gets such terrible job approval ratings is shut-downs, or at least the threat of them.
CONGRESS WILL LEAVE TOWN in the next few days after passing a budget extension that will last until April, so the usual pre-holiday dysfunction won't occur this year. There's still a threat of budget fireworks late this winter when the debt ceiling expires, but the Enzi proposal contains an intriguing new angle: rather than push for a balanced budget amendment, which is an impossible goal, there may be a focus on deficits as a percentage of GDP, which might seek to keep red ink at – or below – the post-World War II average of about 3%. That type of target, with a downward slope, would attract widespread support.
WE'VE BEEN SURPRISED IN RECENT MONTHS by the number of institutional investors who tell us that they are eyeing marijuana as an investment opportunity; it's a big business. But we see two, ahem, clouds over this industry: signs of an over-supply of the weed – just as there's an over-supply of oil and grain. Second, the new Attorney General-designate, Jeff Sessions, is a fierce opponent of marijuana.
IT'S UNCLEAR WHERE TEETOTALER DONALD TRUMP STANDS on marijuana; he may not wish to wade into a controversy that many conservatives believe should be left to the states. Nevertheless, the climate for the pot industry is now unclear and could get much more adversarial with a new Attorney General, as an article in Politico contended earlier this week.
WHERE TRUMP IS TONE-DEAF: Some of Trump's Cabinet picks are controversial – especially the hawkish generals – but the public wants strong national security. The one area where Trump is way outside of public opinion is on the environment – does he really want to dismantle clean air regulations? Despite window-dressing meetings with Al Gore and Leonardo DiCaprio, Trump apparently wants to weaken the EPA and hand environmental regulations over to the fossil fuel industry.
REPUBLICANS ON CAPITOL HILL TELL US THAT IGNORING CLIMATE CHANGE could hurt the GOP. It's one of the few issues that could motivate young people to vote in greater numbers – and it's one of the few issues where Trump is way out of touch with public sentiment. We suspect his own children are telling him this.

December 7, 2016

A Dozen Rules to Remember for 2017

As this extraordinary year comes to an end, it's time to reflect on all the lessons learned – and the major rules that are likely to prevail in 2017:
Rule 1: Do not underestimate Donald Trump. Ever. He's not as unscripted as it seems. He has a plan, and Mike Pence will execute it. The mainstream media and the cognoscenti hate Trump, and that just makes him more popular. The media can't touch him, no matter what they dig up.
Rule 2: The great economic pendulum shift – fiscal restraint is out, spending is in. High taxes are out, dramatic tax reform is coming. The Federal Reserve's easy money policy is out, and rate hikes – a lot of them – are likely. Biggest pendulum shift since Reagan.
Rule 3: Washington's cozy relationship with corporate America is over. The billionaires in Trump's administration may be torn, but this is a populist era, and Trump is sensitive to the Rust Belt voters who made all the difference. Big companies that displease Trump will be a convenient foil for his tweets. A truce will emerge – don't ship jobs overseas, and we'll reform taxes and toughen the trade laws.
Rule 4: The industry that wins the most: That's easy, defense. The Pentagon will get everything it wants – and more. The budget "sequester" that limits defense spending will be history by spring.
Rule 5: Health care – the hot potato. Republicans are determined to kill Obamacare this winter, and they will. But a replacement is nowhere in sight. This is an enormously complicated issue – the options are difficult to explain to voters – and there's a major risk that Republicans will overplay their hand on this one.
Rule 6: Regulatory reform is coming. Executive orders will get overturned; regulations that haven't taken effect will be killed; some existing regulations will be un-done. The impact on GDP will be modest but the impact on business psychology will be huge.
Rule 7: Immigration – the big fizzle. Less than a million immigrants with criminal records will be subject to deportation, and most of them will hide out in sanctuary cities. The labor market is tightening dramatically, so deportation will lose its appeal. Tougher border enforcement? Sure. What about a wall? We'll believe it when we see it.
Rule 8: Infrastructure comes later, not sooner. Great story in Barron's this week on a massive infrastructure build, but House Republicans haven't gotten the memo. Quite an irony – Trump has real vision on infrastructure, he wants to build great things, but his own party may resist.
Rule 9: The Democrats don't have a clue. Chuck Schumer may win a few filibuster fights – Dodd-Frank won't get abolished – but a party that re-elects Nancy Pelosi as House Minority Leader doesn't have a vision for the future. Four or five of their Senate seats will fall in 2018.
Rule 10: China will saber-rattle. The foreign policy establishment is aghast, and U.S. influence in the Pacific will wane without American participation in the Trans Pacific Partnership. But Trump is playing a game with China; the next ambassador, Terry Branstad, has many friends in Beijing.
Rule 11: Trump's real challenge will be Iran. Hard-liners in both countries are itching for a fight. Saber-rattling won't work with Iran, which would love to drag the Great Satan into a new Mideast conflict. Watch the Strait of Hormuz.
Rule 12: When in doubt, remember Rule 1. It's all about the economy, and Trump will get the credit as growth intensifies.


December 6, 2016

Trump and Democrats – The Alliance; Electoral College Intrigue; Which Nominees Are in Trouble? 

RESISTANCE IS FUTILE: Republicans on Capitol Hill are increasingly vocal about their differences with Donald Trump – they don't like tariffs, big infrastructure spending, the Wall, etc. – but they're checkmated on two fronts. First, polls show strong support for Trump and his involvement with Carrier; second, Trump can align with Democrats, who need cover for 2018, when they have seven or eight vulnerable Senate seats in states Trump won.
THE HOUSE FREEDOM CAUCUS, which played a major role in ousting John Boehner and is famously cool toward Paul Ryan, is talking boldly. The arch-conservatives want an Obamacare replacement soon, but their imminent goal is to attach strict conditions to a debt ceiling extension late this winter. They want spending cuts and caps on future budgets, and they're demanding a balanced budget resolution. Not gonna happen.Trump's spending goals are ambitious, and if he can't get enough Republicans to go along, the Democrats will play ball. So welcome to the new world of Keynesian Washington. 
ELECTORAL COLLEGE INTRIGUE: Lots of speculation this morning about "unfaithful electors" who could scramble the formal presidential vote on Dec. 19. This has been fueled by a Texas elector who has a column in this morning's New York Times; he and others are toying with voting for John Kasich instead of Trump. Hillary Clinton is staying out of this; she now leads by 2.6 million votes yet she's not going to win. But any kind of monkey business on Dec. 19 will highlight a serious issue – it's time to take a long hard look at the antiquated Electoral College.
WHICH NOMINEES WILL HAVE ROUGH SLEDDING? Chuck Schumer knows he can't use the filibuster indiscriminately – that would give Trump still another issue to exploit. But the vetting process for Trump Cabinet nominees will be painstaking and we predict one or two might bog down.
IN NO PARTICULAR ORDER, here are the nominees who will have rough sledding: Betsy DeVos at Education because of her views on school choice and gays; Steven Mnuchin at Treasury because of his business dealings; Jeff Sessions at Justice because of alleged racial bias; Tom Price at HHS over the politically explosive issue of Medicare. All probably will win approval, but Democrats say privately that Mnuchin is vulnerable.
CHINA IS NOT THE HOT SPOT: China will howl and relations between Beijing and Washington may cool, but that's not the hot spot to watch. The hot spot is Iran,despised by Trump's macho Generals, who are seemingly itching for a confrontation; they want to kill the Iranian nuclear deal. Iran's fanatic Ayatollahs and their Revolutionary Guards actually believe in the apocalypse; the pragmatic Chinese do not.


December 5, 2016

Five Reasons for Caution as the Sugar High Wears Off

A PRO-GROWTH TRUMP AGENDA AND THE PROSPECT OF FEWER REGULATIONS have made Wall Street very happy, but that now seems to be fully factored in, doesn't it? No one likes a Christmas grinch, but it strikes us that there are growing reasons for the red-hot stock market to cool off – even aside from renewed anxiety this morning over Europe. Five reasons to be cautions:
1. Froth at the retail branches: Retail clients HATED this rally until a few weeks ago, but suddenly they've got a case of animal spirits. We're hearing from retail brokers that their clients finally appreciate – belatedly – the mantra to buy stocks and get out of fixed income. So let's be blunt: retail froth is a flashing warning signal for the stock market. 
2. Free markets, RIP: The more we look at Donald Trump's intervention in the Carrier case, the more this looks like a disturbing precedent. He doubled down in a tweet-storm this weekend, threatening companies that leave the U.S. with tariffs as high as 35%. So companies suddenly aren't allowed to maximize profits? We're with the Wall Street Journal editorial page – and Sarah Palin – on this one: Trump may like crony capitalism and government intervention more than free markets.
3. Other signs of GOP dissent: We talked with Republicans this weekend who will resist 35% tariffs, and they have other issues: they're lukewarm on huge infrastructure spending; they fear a fierce blowback if the mortgage deduction is curbed; they worry that even a hint of Medicare changes will hurt them politically; and they think Trump could squander political capital this winter in a nasty fight with most of the country's big cities, which will insist on "sanctuary" status for immigrants as Trump threatens to cut off urban federal aid.
4. Geopolitics: A phone call with Taiwan's leader seemed long-overdue, but the real story is that officials in Beijing were caught off-guard – appearances matter – and yesterday they got blasted by more Trump tweets; now the Chinese are preparing for a very rocky road with the U.S. Trump also has free-lanced with Pakistan and the Philippines, yet he rarely attends foreign policy briefings.
5. No one can stop Trump from tweeting: He's so thin-skinned that he attacked Saturday Night Live this weekend while the show was still airing. Past presidents have laughed off the ribbing – Gerald Ford was perhaps the greatest athlete ever to occupy the White House, he was a football All-American at Michigan – yet he laughed along with SNL's portrayal of him as a bumbler. But Trump is all about settling scores; he used a victory rally in Cincinnati last week to bash John Kasich.
THERE ARE OTHER REASONS TO COOL THE EUPHORIA: Everywhere we look, we're a little more cautious – especially as the Federal Reserve embarks next week on a more aggressive policy stance. That could produce an even stronger dollar, which few seem to want. On balance, we still think Trump can do good things for the economy and the markets – but the post-election sugar high may be waning.


December 1, 2016

Trump and Wall Street – It's a Good Thing; 
Could Italy Disrupt Yellen's Plans?

WE UNDERSTAND that many of Donald Trump's supporters are dismayed to see his Cabinet filled with Goldman Sachs types and Washington insiders, but we think this is a generally positive story. Chances of a protectionist trade war and a Trump dispute with the Fed – the two greatest market concerns about the new presidency – have diminished, because his top advisers will counsel him to cool it. The markets will call the shots, to a far greater extent than seemed likely just a month ago.
BUT THE GRUMBLING IS GROWING, and the Wall Street Journal editorial page – always lukewarm toward Trump – has an editorial today that offers faint praise for Steven Mnuchin and other Keynesians who are joining the new team. The role of big government is at the core of this uneasiness.
TRUMP INTENSIFIED THOSE CONCERNS YESTERDAY: He won a spectacular public relations victory as Carrier announced that it won't export jobs to Mexico, but he raised eyebrows with a reported threat to the firm's parent, United Technologies – a company that has nearly $7 billion in federal contracts. The message to UT was that those contracts could be jeopardized, so naturally the company caved in. Will this set a precedent of Trump strong-arming companies that want to maximize profits? American businesses are on notice.
HERE WE GO AGAIN: After the release of unemployment figures tomorrow, markets will immediately focus on this Sunday's vote in Italy on constitutional reforms. We have vowed to never again believe the polls, but it appears that Italian voters may opt for "No," in the hopes that more dramatic reforms could result in 2017. But that scenario has a very big problem – the shaky state of Italian banks, which may teeter if a "No" vote leads to political instability.
THIS COULD POSE A PROBLEM FOR JANET YELLEN: It's a lock that she will finally agree to a rate hike on Dec. 14, isn't it? Well, what if markets are in turmoil amid fears that the EU faces more unrest? What if the Italian vote leads to speculation that dollar-euro parity is likely by early 2017? Yellen always seems to look for an excuse not to raise rates, and turmoil in Europe could provide her still another excuse.
WE THINK THE SAFE BET is that Yellen realizes the Fed is behind the curve on interest rates, and she gets a rate hike out of the way, setting the stage for at least two moves in 2017 and Lord knows how many in 2018 as the U.S. economy heats up, with a very tight labor market, inflation pressures, and a surging budget deficit. But Europe is a major wild card, especially if a super-strong dollar sends U.S. multinationals into a funk.
AND FINALLY, WHAT CAN YOU SAY ABOUT HOUSE DEMOCRATS? They've been hemorrhaging members for a decade, and desperately need fresh blood, with a focus on blue collar white voters. But they rewarded Nancy Pelosi yesterday with another term as Minority Leader. So the team stays intact – Pelosi, 76, Steny Hoyer, 77, and James Clyburn, 76. Pelosi is from Nob Hill; she defeated Tim Ryan, who’s from struggling Youngstown, Ohio – which tells you all you need to know.
OFF TOMORROW: Barring something shocking (like a Sarah Palin Cabinet appointment) we're off tomorrow, back on Monday.


November 30, 2016

What Can Donald Trump Get Done? 
Part One – Taxes and Infrastructure

WE WROTE YESTERDAY about the first 100 days, highlighted by sweeping regulatory changes and the near-certain death of Obamacare. Then the focus will shift to two huge issues – dramatic tax reform, greater than the Ronald Reagan reforms, and an infrastructure package that could disappoint.
TIMING IS EVERYTHING: The tax reform package will be massive, with differences among Republicans over how – or whether – to pay for it. After a quick start in the House, which will pass a bill by spring, the Senate will take a more deliberative path, perhaps not finishing its bill until mid-summer. A final version may not emerge from a conference committee until fall.
THE GDP IMPACT OF TAX REFORM may not hit until 2018, even if the effective date is Oct. 1, 2017. Likewise, there will be no infrastructure boom until 2018, if then. So our first major conclusion is that the impact will come later rather than sooner – hardly a problem for Donald Trump, who could enjoy a favorable mid-term election if the economy is surging by 2018.
STUNNING TAX REFORM: Taking the individual side first, we expect the top rate to fall to about 33% (abolition of the Obamacare 3.8% surcharge is certain). The estate tax finally may get killed. The alternative minimum tax is likely to die or only affect the ultra-wealthy. The standard deduction could be doubled (at least) from the present $12,600 for joint filers. Itemized deductions will be capped, a potential concern for the mortgage tax break, charitable contributions and the muni bond break – although all three could win exemptions.
CORPORATE TAX CUTS: The top rate of 35% almost certainly will fall into the mid-20s, perhaps even lower. The tax on "pass through" small businesses will fall into the low-20% range. The corporate alternative minimum tax probably will die. The carried interest tax break could die, but let's see what Steven Mnuchin has to say. And there's "repatriation," a key element of international tax reform as the U.S. moves toward a "territorial" system. U.S. multinational firms – mostly big tech and drug companies – will get to repatriate nearly $2 trillion in profits stashed abroad, without strings that Democrats wanted to attach.
WILL REPATRIATION PAY FOR INFRASTRUCTURE SPENDING? No, even if Trump gets his wish for a 10% fee on revenues brought back to the U.S. Congressional Republicans probably will lower that figure to 7 or 8%, which isn't enough to pay for the ambitious $1 trillion Trump plan for highways, bridges, dams, urban sewer upgrades, etc.
REPUBLICANS WE TALK WITH ON CAPITOL HILL seem lukewarm about infrastructure spending; it's the Democrats, led by Chuck Schumer, who are truly enthusiastic. Republicans instinctively are wary of big new federal spending programs, and they note that the 2009 plan couldn't attract "shovel-ready" jobs, and money was bottled up in the federal bureaucracy. Nevertheless, there will be fresh infrastructure spending by 2018, with much of the activity funded by the private sector, which will get tax credits – but it's unclear whether non-highway projects can generate much of a revenue stream for private companies.
WHAT ABOUT THE DEFICIT? The great debate is between "dynamic" scoring, which assumes that increased economic activity will boost revenues to the government, and "static" scoring, which doesn't factor in the potential for stronger growth. But even when using dynamic scoring, it's clear that tax reform will cost at least $3 trillion over the next decade. And that bothers a lot of Republicans, especially deficit hawks in the House.
SO WE CONCLUDE WITH AN IRONY: Tax reform will pass, and some new infrastructure spending is coming, but much of the dissent will come from Republicans, who may seek to curb the extent of both reforms. As for the Democrats, they're looking for issues, so they will get to howl about huge tax cuts for the very wealthy, and they have a new battle cry – Trump's appointees want to radically restructure Medicare, an issue sure to scare the elderly.
THE REAL STORY ISN'T THE POLITICAL POSTURING, THE REAL STORY is that the certainty of tax reform – and dramatic rate reductions – will be like rocket fuel for the economy, which already is in pretty good shape. A GDP growth rate of 4% is possible in 2018, but that raises a crucial issue: could roaring growth in 2018 be accompanied by an extremely tight labor market, with wage and other inflation pressures – and an inevitable spike in interest rates?


November 28, 2016

What Motivates the Recount; Fissures in the Trump Camp;
Obama Agencies Ready "Midnight" Regulations

UPCOMING RECOUNTS WILL NOT CHANGE THE OBVIOUS – Donald Trump won the presidency. He leads by 22,177 votes in Wisconsin, 10,704 in Michigan and 70,638 in Pennsylvania. Were there irregularities in some electronic voting machines? Maybe, but it won't change the outcome. Democrats know that, but they have another objective.
THE DEMOCRATS WANT TO DENY TRUMP any pretense of a mandate; they want to question his very legitimacy (as he did, of course, by questioning Barack Obama's birthplace). With Trump trailing by 2.2 million votes nationwide, the Democrats now want to advance a narrative that the election result wasn't clear – perhaps clouded by fishy voting patterns in the Rust Belt – and Trump, as usual, has overplayed his hand.
BY SUGGESTING THAT HE ACTUALLY WON the popular vote, despite no supporting evidence, Trump has plunged into another no-win Twitter diversion. He always rises to the bait – he spent three days in a cringe-inducing dispute with Miss Universe this fall – and now Trump has shifted the focus to a group he sometimes cites called Infowars, which makes up fake news (and claims, outrageously, that the 20 children massacred at the Sandy Hook Elementary School were part of some government hoax).
OF COURSE TRUMP WON, but he won't back down on who won the popular vote, and the spectacle of the future president in a Twitter war like this, questioning the election result, raises concerns after a couple of weeks that we thought were first-rate.
NOW TRUMP HAS A NEW HEADACHE: He let a bitter fight over Secretary of State become a distraction, with chief campaign adviser Kellyann Conway leading an increasingly vocal fight against Mitt Romney. We're told that Rudy Giuliani may not have survived the background check, so a third option – former UN Ambassador John Bolton or New Hampshire Sen. Kelly Ayotte – may get a careful look.
AN EQUALLY IMPORTANT INTERNAL BATTLE pits Mike Pence and Reince Priebus against hard-liners over the next Treasury Secretary. Trump's core supporters want anti-Fed Rep. Jeb Hensarling, while the moderates want Steven Mnuchin, who is highly regarded on Wall Street – but what would that say to Trump's base, appointing a former Goldman Sachs executive?
NONE OF THIS MAY MATTER BY INAUGURATION DAY: This may simply be inside baseball on the day after a long Thanksgiving break. We'll focus on key policy issues this week, but it's worth commenting this morning that appearances matter, and the Trump optics over this weekend – especially from Conway – showed that the discipline and unity within the Trump camp, which was remarkable after the election, may be wavering.
GET READY FOR AN AVALANCHE OF REGULATIONS: Excellent article in this morning's Politico on a flurry of "midnight" regs coming from the Obama Administration. You name it – energy regs, health regs, education regs, financial regs, transportation regs, trade regs, immigration regs, overtime regs – here comes a tidal wave of new regs that undoubtedly will be thrown out when the Trump Administration takes over in one sweeping decree that also may kill or delay the Fiduciary Rule.


November 23, 2016

A Thanksgiving Carol –
the Transformation of Donald J. Trump

JUST AS EBENEZER SCROOGE MORPHED on Christmas week from a snarling grouch to a pussycat, Donald J. Trump has morphed this Thanksgiving week from a hard-line candidate to a nuanced, malleable president-elect. The evolution of Trump over the next four years unquestionably will be the most intriguing story we've ever covered.
OUR MORNING MISSIVES ARE DIRECTED TO INVESTORS, who surely have much to be thankful for: a return to pro-growth policies and less intrusive regulations – and this week's Trump pivot has other major implications. He listens well, and he's hearing from experts that a fight with Janet Yellen and the Fed would worry the markets, and he also is hearing that a trade war with China could jeopardize the U.S. recovery next year. Our concerns on both of those issues are diminishing.
A CALCULATED RISK: Trump must know that his hard-core supporters are concerned; yesterday he called the New York Times "a great, great jewel," and he said prosecuting Hillary Clinton "is just not something I feel very strongly about." He now seems open to evolving on climate change and torture of captives, and he blasted the alt-right movement. And, suddenly, he no longer talks about building a wall.
BUT TRUMP'S SUPPORTERS NEVER TOOK HIM LITERALLY: They wanted someone to reflect their anxiety about globalization and an economy that doesn't work for them. And how fortuitous – the economy is surging, the labor market is tightening – even before Trump takes office. His policies should easily transform a good economy into a very good or excellent economy, assuming interest rates don't rocket higher. The economic improvement Trump promised looks baked in the cake.
ONE DARK CLOUD: Washington can live with Trump because he's willing to dial it back and evolve, but there's one danger zone: his refusal to acknowledge that he cannot continue to run his business. The conflict-of-interest laws will be a minefield for him, and if he continues to suggest that he can skirt these laws it will make the Clinton Foundation look tame by comparison. Trump may bend on climate change, but he is tone-deaf on his company.
HAPPY THANKSGIVING !! We all have much to be thankful for, and for us a great gift is our loyal readers – always sharp and eager to comment. We'll be back on Monday; in the meantime, all of us at Horizon wish all of you and your families a joyous holiday.


November 21, 2016

Reality Check: How to Pay for the Coming Reforms?

MUCH OF DONALD TRUMP'S AGENDA WILL PREVAIL: He will get sweeping tax reform, the killing of dozens of regulations, the deportation of illegal immigrants with criminal records, higher tariffs on China, major changes to Obamacare. But some of these initiatives will cost tons of money, which will intensify differences between Trump and GOP conservatives – most of whom are openly skeptical about throwing $1 trillion at infrastructure projects.
THE KEY ISSUE is whether "pay fors" should be applied to infrastructure and other projects. Most House Republicans – not just the hard-core "Freedom Caucus" – insist that infrastructure in particular must be paid for with offsets, which would entail huge spending cuts (not tax hikes).. Even "dynamic scoring," which assumes that things like infrastructure spending and tax cuts can generate higher revenues, is not enough to fully pay for new projects.
SO WE SEE A SHOWDOWN LOOMING between Republican deficit hawks and the Trump administration, perhaps forcing the new president to align with Democrats, who are eager to approve infrastructure spending that isn't necessarily paid for. We got some push-back last week by asking whether Trump is a closet Democrat (he certainly is not on social issues), but on spending let's say he's a closet Keynesian.
BUT HOUSE REPUBLICANS ARE NOT KEYNESIANS, and they have an instinctive wariness of massive infrastructure programs. Whether it's because of corruption or a lack of shovel-ready jobs or the plodding federal bureaucracy, infrastructure projects often don't seem to get much bang for the buck, as was clear in 2009-10. Proponents
say that the private sector, not the government, will play the key role; that's intriguing, but there still would be a massive expenditure on tax credits to incentivize private investment.
CAN'T TAX REFORM PAY FOR EVERYTHING? It strikes us that one-time revenues generated by repatriation of profits stashed overseas is like catnip – intoxicating politicians who have already come up with ideas to spend this windfall two or three times over. There may not even be enough extra money to pay for the cost of tax reform, let alone infrastructure.
OUR BOTTOM LINE is that there will be some new infrastructure projects – not just for highways and bridges but for water and power projects in decaying inner cities. One idea embraced by Democrats would be the creation of an Infrastructure Bank that would dole out tax credits, but politicians in both parties are leery of giving too much authority to private developers, who would own many of the new projects. As for a higher gasoline tax to help pay for these projects, that's a non-starter in the tax-phobic House.
SO THE IRONY FOR TRUMP is that while most of his agenda will pass in the next year, the one where he has the most expertise and vision – building massive new projects – may get watered down because his own Republican troops in the House will not agree to anything close to a $1 trillion project without strict assurances that it won't add to the ballooning federal debt.


November 7, 2016

Final Election Predictions

HOW FITTING – STILL ANOTHER CURVE BALL at the last moment; erratic James Comey has no credibility left and his pronouncement yesterday won't change many votes. Who knows – there could be another curve ball today, but it's time for final predictions...
PRESIDENTIAL: Propelled by enormous majorities among women and Hispanics, Hillary Clinton wins by 2-to-4 points, with a surprisingly narrow Electoral College victory, perhaps winning as few as 275 votes without Florida or 304 votes with Florida. There are lots of paths to 270 for her and few for Donald Trump.
HOW NARROW A WIN? We sure don't see her getting close to 332 votes, as Obama did four years ago, and we think it's possible she won't win 50% of the popular vote – the final total might be Clinton 49% Trump 45% Johnson 4%, Stein 2%. Hardly a mandate for a president-elect who will be under an ethical cloud on several issues from the get-go.
SENATE: A coin toss, probably not determined until early Wednesday morning in Nevada, where Democrats need to hold on to the seat vacated by Harry Reid. We'll predict a tie, with the Democrats thus gaining de facto Senate control, but recounts could keep this in doubt for several weeks.
HOUSE: Still the safest bet of the election, a 100% chance the GOP will maintain control. Democrats won't come close to the necessary 30-seat takeover; they might gain 15 or 16 net seats. Clinton's agenda – especially tax hikes – will die in the House.
THE DAY AFTER – THREE ISSUES: We'll be focusing on three developments on Wednesday –
1. Will Trump sincerely concede, or will he persist with a narrative that the result was rigged?
2. How will Paul Ryan and Mitch McConnell react – regardless of who wins, will they pledge to cooperate? Will they vow endless investigations of Clinton?
3. How aggressively will the left claim they made all the difference in a Clinton victory, thus warranting special favors? Will they push for a Supreme Court nominee who's younger and more liberal than Merrick Garland, a moderate who’s about to turn 64?
THE MARKETS WANT CLINTON: Most investors aren't crazy about Clinton's agenda, but she's the devil they know. Stock markets slipped for several recent days as Trump began to climb, and Asian markets rallied last night after the Comey statement – so it's pretty clear that Trump's defeat won't disappoint the markets. Clinton has lots of friends on Wall Street, and she will take their phone calls.

October 29, 2016

Weekend Extra:
Three Scenarios for Hillary Clinton -
None of Them Good For Her

THE UPROAR over James Comey's announcement yesterday largely missed the point; his reasons aren't as important as the implications – which instantly and profoundly have changed the political climate. Obviously, FBI agents have found extremely sensitive emails on the computer of sex pervert Anthony Weiner, and that has three enormous implications for Hillary Clinton:
1. She could lose the election: Sailing toward a 5-6 point win, bolstered by an improving economy and revulsion toward Donald Trump, Clinton now faces the possibility of an upset loss. We still think she's the favorite, but it's only Oct. 29 – who knows what will unfold in the next week and a half? In an instant, she's gone from a 90-10 favorite to a 60-40 favorite.
The bigger impact may be down ballot. These stunning revelations – especially the connection to the reptilian Weiner – will energize Republican voters, who may be more inclined to forgive Trump's flaws. And undecided voters may break to the Republicans. Chances that the GOP will keep the Senate, which were slipping in the past week, are now back to 50-50. Chances the GOP will keep the House – the key issue for financial markets – have soared to nearly 100%.
2. She could win but enter office under a cloud: Talk about a pyrrhic victory – Clinton already was facing months and months of congressional investigations in 2017; now she faces the very real prospect of entering office under an enormous cloud, with a possibility that she could get indicted; David Petraeus and John Deutsch were indicted for less. Her political capital could be minimal – a president crippled from the get-go.
3. She could be driven from office: This is the nightmare scenario – an indictment or an impeachment in 2017. Could there be enough votes in the House to impeach? It's possible. Could there be enough votes in the Senate to convict? Probably not. Eerily, that was the scenario Bill Clinton faced in 1998-99, as he ultimately won acquittal. In retrospect, his sins seem far less profound.
The Clintons don't give up and they brilliantly play the role of victim. She would fight ferociously against any attempt to oust her, but we have to acknowledge the possibility of two remarkable scenarios:
First – Could Barack Obama pardon her before he leaves office on Jan. 20? Hard to believe that he would risk a permanent stain on his reputation; Gerald Ford never truly recovered after his pardon of Richard Nixon (and of course, Nixon was out of office when pardoned; Clinton could be just entering office if pardoned).
Second – Could an indictment or an impeachment drive her from office? This was an unthinkable scenario just 24 hours ago but now it's not totally out of the question. Tim Kaine is scandal-free, affable and well regarded by colleagues in both parties – as was Ford. The nation's fever broke under Ford but it's unclear whether the current toxic national mood could break under Kaine.
BOTTOM LINE: We can understand the rage in the Clinton camp over the timing of this – and they can't fight back against Anthony Weiner's emails without knowing what they're dealing with. This cannot be resolved in the next ten days. So there will be enormous uncertainty for weeks or months to come – not a good story for her, not a good story for the dollar and other markets, and not a good story for our country.

October 28, 2016

How Paul Ryan Could Lose His Job;
The GDP Report; Does Elizabeth Warren Have Veto Power on Cabinet Picks?

ON THIN ICE: Paul Ryan, the nice guy brainiac who once seemed to be on a fast track to the presidency, is in danger of losing his job. The House Speaker is loathed by most Donald Trump supporters, who consider him a traitor for not supporting the GOP nominee – and they are urging House conservatives to oust him. Here's how it could happen.
THE DEBT CEILING TIME BOMB: We don't think Ryan will be ousted this winter when the House votes for its leadership; despite grumbling from the uber-conservative Freedom Caucus, even Ryan opponents agree that there's no obvious successor. But that could change by early spring, when Ryan faces an issue that began John Boehner's downfall: defusing a budget crisis and keeping the government open.
THE POSSIBLE DOWNFALL: The federal debt ceiling probably will be hit by late March, and with far fewer House Republicans next year – the GOP could lose about 20 seats on Nov. 8 – Ryan probably will not have the votes from his caucus to pass an increase in the statutory ceiling. What a checkmate – Ryan would either have to let the debt ceiling languish, prompting talk about a government default, or he would have to seek votes from Nancy Pelosi's Democrats to pass an increase.
THE CONSERVATIVE GOP BASE, pumped up by talk radio, went nuclear when Boehner aligned with Pelosi to keep the government open, and we suspect that a similar move by Ryan would lead to a serious effort to oust him next spring. "He's John Boehner without the drinking problem," a source told us recently. Make no mistake, Ryan is on thin ice; Politico speculated yesterday on possible replacements – Rep. Mike Conway of Texas is a potential compromise candidate.
A REALLY BIG NUMBER THIS MORNING: With Hillary Clinton flush with cash and maintaining a solid if not spectacular lead, there aren't many variables left to turn this election around. One possible wild card is upcoming economic statistics – third quarter GDP this morning, and the October unemployment report next Friday. Here's our take on the GDP report…
THE THREE GDP SCENARIOS: If the number is close to consensus, up by about 2.5%, it will be a Rorschach test – everyone will see what they want too see . . If it's a downside surprise, something under 2%, it will give Trump supporters a talking point that the economy is still mediocre... If it's an upside surprise, something over 3%, it will prompt Trump to brand it as a phony report – but a strong number could rock the markets, sending yields and the dollar still higher.
THE OVER-CONFIDENT CLINTON CAMP: Counting on an election win strikes us as bad karma, yet the Clinton camp is already focusing on their Cabinet appointments. This week's buzz is Joe Biden as Secretary of State. He's a known commodity among global leaders, but really – Joe Biden ?? The other buzz is Fed Gov. Lael Brainard for Treasury Secretary, but whether she – or anyone on the short list – could satisfy Elizabeth Warren is unknown. A key issue for the markets: Does Warren have veto power on the Treasury pick?

October 27, 2016

Donald Trump Finally Has an Opening

WE HAVEN'T READ ALL THE EXPLOSIVE WIKILEAKS DOCUMENTS – who has that much time? – but the initial take-away is breathtaking: the Clintons clearly used their influence and status to enrich themselves, blurring the boundaries between charity and personal gain while dragging the State Department into an ethical swamp.
IS IT TOO LATE TO INFLUENCE THE ELECTION? Probably, because the sheer magnitude of this week's hacked documents makes it difficult to fully digest all of the implications. This much is sure: Congress will hold hearings on the Clinton Foundation for months and months to come – still another reason why Hillary Clinton's honeymoon
may be brief.
IS DONALD TRUMP DISCIPLINED ENOUGH TO EXPLOIT THIS ISSUE? He still has nearly two weeks to turn the homestretch into a referendum on the Clintons' corruption – but we suspect this late gift interferes with the major goal within the Trump inner circle: destroy the traditional Republican party. Trump has abandoned fundraising for the party, leaving House and Senate candidates without money they had counted on for get-out-the-vote efforts.
TRUMP PROBABLY EXPECTS TO LOSE, which is why the focus is now on demolishing the Paul Ryan-Chamber of Commerce Republican Party. But Trump still still has an outside chance of winning if he hammers away 24/7 on the Clinton Foundation and the other late-breaking issue – the incredible Obamacare health premium increases for 2017, which seemingly confirms all of the GOP's warnings.
POLLS SHOW THAT THE RACE MAY HAVE TIGHTENED a bit in the past couple of days. Combine that trend with the Clinton Foundation and Obamacare, and this race could get very interesting in the final week. Has our thinking changed about the outcome? Not really – Hillary Clinton still has a very good chance of winning, but her final margin may be slipping, virtually guaranteeing that the GOP will maintain control of the House (odds have ticked up slightly that Democrats will capture the Senate).
AN ELECTION OF 'WHAT-IFS": This remarkable election will be analyzed for years to come because of myriad sweeping themes. Clinton's likely victory will confirm the enormous demographic changes in America; it will highlight the huge disconnect between satisfied America and angry blue collar voters who have been left behind by globalization; and this election may be remembered for "what ifs."
FOUR HUGE "WHAT IFS" – What if Hillary Clinton was running against a GOP ticket of John Kasich and Marco Rubio? What if the Trump campaign beefed up its ground game in June in key states rather than neglecting this crucial factor? What if someone could have imposed discipline on Trump and his message? And what if the WikiLeaks and Obamacare stories broke in September, giving voters time to fully appreciate the implications? 

October 26, 2016

Should We Believe the Polls? 

WE'RE AT A CONFERENCE IN CALIFORNIA this week, and everyone asks us the same question: should we believe the polls? The polls got Brexit wrong, they got a recent Colombia referendum wrong, they've gotten plenty wrong in the last couple of years.
OUR RESPONSE is that even the polltakers have doubts about their methodology: they acknowledge the difficulty of calling cell phones versus land lines, and they have huge issues in the weighting – young/old, rich/poor, black/white, Democrat/Republican. What percentage of each should they include among respondents? But a bigger issue is this: what if someone holds controversial views – anti-immigrant, anti-EU, etc. – would that person share those views with a complete stranger who calls at 7 p.m.?
THERE'S AN EVEN BIGGER ISSUE – TURNOUT: The polls are far from infallible in predicting turnout, which could be pivotal in this election. Suppose it's cold and raining in Columbus, Ohio on election day? We think Trump supporters are still smarting over being called "deplorables," and they will turn out. But a 22-year old Ohio State student, who liked Bernie Sanders in the first place, might not turn out, especially if the election outcome looks pretty likely.
SO OUR GUESS is that it might be justified to add 1 or 2 percentage points to Trump's polling scores. RealClearPolitics shows Hillary Clinton ahead by 5.1 points, but maybe it's more like 4 points. Does Trump have a chance of winning? We do the math almost every day – it's virtually impossible to get him to 270 electoral votes without huge upsets in states like Wisconsin, Colorado, Pennsylvania, etc.
BUT A FAIRLY CLOSE ELECTION is still the best bet, with Clinton winning by 3-to-6 points, getting something close to the 332 electoral votes Obama won four years ago. A moderate Clinton win – with her perhaps not reaching 50% of the vote as concerns rise over Obamacare – almost certainly would keep the House in GOP control (the Senate is a much closer call, with perhaps a 55% chance that Democrats regain power there).
FOR THE FINANCIAL MARKETS, the election has come down to this: as long as the House is controlled by Paul Ryan and the Republicans, investors won't have to worry about the troika of Clinton-Pelosi-Schumer – and all that would imply on tax policy. We still don't see a that result, but could Trump pull off an epic upset? Polls showing him trailing may be a bit off, but they’re not that far off.

October 20, 2016

Game, Set, Match

WHAT LOOKED LIKE A RELATIVELY CLOSE DEBATE turned into an epic disaster for Donald Trump last night after he made one of the greatest gaffes in the history of presidential debates. His refusal to accept the result of the election which he is virtually certain to lose will have immediate consequences in the next 24 hours, forcing still more Republicans to repudiate his candidacy.
HOW CAN MIKE PENCE REMAIN LOYAL? What about Kellyanne Conway? What about the Wall Street Journal? Trump's few remaining supporters are bailing, including Laura Ingraham, who immediately tweeted that he went beyond the pale last night.
TRUMP SURELY ELECTRIFIED HIS HARD-CORE BASE, which will be the target of his new post-election mega-media project that will keep alive his claim that the election was rigged. This project, to be headed by Steve Bannon, will play a major role in the likely break-up of the Republican Party, bolstered by an angry 25% of voters who will never coexist with the likes of Paul Ryan.
BUT THAT'S A POST-ELECTION ISSUE the immediate focus now, especially for the financial markets, is the extent of Trump's loss on Nov. 8. We still think Hillary Clinton's victory will be moderate but a landslide became a little more likely last night, and that prospect has prompted us to raise the odds that the GOP will lose the Senate to 60%, while more ominously there's perhaps a 40% chance that Republicans could lose the House as well.
THE IRONY IS THAT TRUMP was doing well last night before his game-changing blunder; Hillary Clinton was wounded on several issues, although she made no major gaffes and helped solidify her enormous advantage among women. It looked like a debate that wouldn't move the needle much.
BUT ALL OF THAT CHANGED as Trump veered over a cliff refusing to accept the election results has no precedent in American political history. Is the media biased against Trump? Sure it is, but the media helped create him in the first place. He has grievances? Welcome to the club, most losing candidates have grievances. The difference is that Trump simply does not care that he may drive the Republican Party to an historic landslide, up and down the ticket. But why should he care? He was never a Republican or a true conservative in the first place.
AS WE WRITE THIS, AT 3 A.M, it's unclear how much damage has been inflicted on the party; the fallout in the next couple of days is likely to be brutal. For now, we'll offer three conclusions: Trump will lose decisively; the House is now in greater jeopardy; and the GOP faces a post-election crackup that could divide and weaken the conservative movement for years to come.

October 19, 2016

An Unserious Election Closes With
Virtually No Focus on Issues

OVERVIEW: We got quite a response earlier this year when we wrote about "the unserious election." The tone of the campaign has only worsened since then, with a focus largely on sex scandals. Tonight's debate allegedly will cover six issues: entitlements and debt, the Supreme Court, the economy, foreign policy, and each
candidate's fitness to serve as president.
PERHAPS MODERATOR CHRIS WALLACE can keep the candidates focused on these issues; Wallace is a very aggressive interrogator. But we suspect Donald Trump will swing for the fences on the politicized State Department and perhaps even Hillary Clinton's health – while she'll play it safe, hoping to run out the clock with no major errors.
MEANWHILE, THIS REMARKABLY UNSERIOUS CAMPAIGN WILL END with little if any focus on a wide range of serious issues. There are two reasons why the issues aren't addressed: First – voters in the Kardashian era don't want to drill deep; talk to most Americans about tax credits for health insurance and their eyes will glaze over in less than 30 seconds. And second – the prescriptions are difficult, and who wants to hear that?
WE COULD LIST DOZENS OF ISSUES that need to be discussed, but let's focus on just a few that have been virtually ignored in this cringe-inducing campaign:
Middle East: Even if Mosul falls, the U.S. is there to stay – which the politicians are loath to concede. Nearly 5,000 American troops and special ops forces will participate in the battle for Mosul, and an equal number will have to stay for years in Iraq and Afghanistan. Meanwhile, no politician wants to talk about the next great threat in the region: nuclear proliferation – everyone wants a bomb, and there's no easy answer to that threat.
Hacking: Out-of-control Vladimir Putin and others now hack with impunity, and we think the U.S. needs to respond aggressively. Vice President Biden, indiscreet as usual, proclaimed recently that Washington will soon retaliate against Russia, so that won't exactly be a surprise. A comprehensive anti-hacking strategy is needed – before there's the equivalent of Pearl Harbor or 9/11, perhaps involving the U.S. power grid.
Growing the economy: We're astonished that this isn't a dominant issue. GDP growth is still stuck below 2%, yet Trump has failed to exploit this issue; he'd rather spend three days attacking Miss Universe than explain why the economy needs a jump-start. As for Clinton, can anyone seriously argue that her agenda of more regulations and higher taxes is a pro-growth agenda?
Entitlements: Maybe there will be a serious discussion of this issue tonight, but don't count on it. Social Security and Medicare are less than a decade away from imploding – the Disability Trust Fund hits a wall in five years – yet all of the leading politicians – Clinton, Trump, Bernie Sanders, Barack Obama – want to expand entitlement benefits. The solution is obvious: aggressive means-testing, but try telling that to the voters.
Health insurance: Obamacare is in trouble. Yes, more Americans have health insurance, but providers are pulling out of state after state, and rates will skyrocket next year. Clinton will not explain how she could get the conservative House to approve a single payer scheme; Trump is absurdly vague on how he would reform Obamacare.
Heroin: There's a crisis in small-city America, from Manchester, N.H. to Erie Pa. – deaths from heroin and fentanyl have exploded, and the politicians don't seem to have an answer. This affects more Americans than any other social issue, and it's become a major topic in House and Senate races, but the presidential candidates haven't moved past calls for curbing drug smuggling from Mexico (Trump) and spending more money on opioid research (Clinton).

ON THESE AND MANY OTHER ISSUES, neither Clinton nor Trump see an advantage in getting specific. Perhaps this unserious election will prompt Congress to act forcefully next year; Paul Ryan and Chuck Schumer are deal-makers. But don't count on anything substantive in the next three weeks, as the dive to the bottom accelerates.

October 18, 2016

Hillary's Strange Strategy

IT'S TOO SOON TO RUN OUT THE CLOCK, yet Hillary Clinton's advisers apparently are content to hide her; we've never seen a presidential nominee disappear in the home stretch. Donald Trump, meanwhile, had a reasonably good day yesterday – he stoked populist flames on voting irregularities, trotted out Melania Trump for interviews that dominated TV news, and got a legitimate issue to exploit – an apparent State Department attempt to pressure the FBI to change its classification of Clinton emails.
TRUMP'S OPENING: He has nothing to lose, so we'd expect him to throw everything at Clinton tomorrow night. He'll hammer away on the State Department story and will demand her prosecution, and we suspect Trump will go for broke on the issue of Clinton's health. Everywhere we go, people ask whether Clinton has an illness that we won't discuss here, because there's absolutely no proof. But the whispering won't stop, and we think Trump won't hesitate to play the health card.
WE STILL THINK CLINTON WILL WIN – and we still lean toward the modest win scenario, not a landslide – but her strategy is curious. She's clearly ahead in states with 279 votes – only 9 above the magic 270 – yet her aides are pouring money into states like Arizona and Georgia. We would keep her in Ohio (18 votes), North Carolina (15) and Florida (29) – that's where the votes are. (It's worth noting that Trump could win all three of those states and still lose the election; he needs more swing states like Iowa, Wisconsin, Nevada, etc.)
THE MISSING CANDIDATE: Clinton will get plenty of help from Barack and Michelle Obama, Bernie Sanders, and Elizabeth Warren; the latter will be quick to pounce in 2017 if Clinton does not return the favor. All of these surrogates will help the Clinton campaign, but apparently her aides have decided that keeping her out of the limelight makes sense; when voters see her, they are reminded that they don't like her.
WE'VE SAID IT BEFORE AND WILL SAY IT AGAIN: If Clinton was running against a GOP ticket of John Kasich and Marco Rubio, she would be trailing – perhaps decisively. But she benefits from two enormous breaks: FBI Director James Comey refused to indict her, and she got to run against the most polarizing presidential nominee in our lifetimes. So of course she will try to run out the clock, but that strategy sometimes backfires on teams that decide to coast in the fourth quarter.
THIS RAISES A CRUCIAL ISSUE – TURNOUT: If a perception grows that she's the likely winner, will her supporters turn out? An awful lot of them – especially young voters who would prefer Sanders – might pass on voting if they think she's headed for an easy win. The Trump supporters, still smarting over being called "deplorables," most definitely will vote. The polls are notoriously incapable of measuring turnout, still another reason why her victory is likely to be modest – so modest that Republicans will maintain control of at least one of the two houses. 

October 17, 2016

We're Betting the GOP Keeps the House; Donald Trump Versus the Media; Another Reason Why Yields May Rise

TRUMP UN-HINGED: We don't know whether to laugh or cry after this weekend – Donald Trump mocked Hillary Clinton's posterior, suggested she's on drugs, declared that some of his accusers were too unattractive to molest, warned that a vast international conspiracy is seeking to deny him the presidency, mocked Paul Ryan, and took the time to criticize Saturday Night Live. The explosive WikiLeaks revelations were totally obscured.
REPUBLICANS FLEE: Sensing an election debacle, Republicans are fleeing; one GOP strategist told us this weekend that Mike Pence "has the toughest job in America," defending Trump while assuring voters that the party will respect the outcome of the election. Less than a dozen prominent Republicans are willing to defend him in public; he's that toxic.
THE ELECTION THAT MATTERS: So what does all of this mean for the Congressional elections? That's what the markets are focusing on – with good reason, since the troika of Hillary Clinton, Nancy Pelosi and Chuck Schumer would not please Wall Street. Our take: this still doesn't look quite like a "wave" election; there's a 55% chance the Democrats take the Senate but only a 30% chance they will capture the House. The markets could live with a Clinton win as long as at least one of the two houses are controlled by the GOP – and that still seems likely.
ABOUT THE MEDIA: Of course the press hates Trump, and the "Access Hollywood" tape was held for release until just weeks before the election, when Trump could not be replaced as the GOP nominee. An August release could have had a different outcome. That tape effectively sealed the election outcome – so who leaked it? Probably someone from NBC, we’d guess.
THE MEDIA BASHERS have to acknowledge this: CNN relentlessly promoted Trump a year ago, and he phoned in almost daily to shows like "Morning Joe." The networks loved the ratings and Trump surged amid the free publicity. The networks would televise live rooster fighting if they thought it would boost ratings – so spare us the sanctimony; Trump used the media and the media used him. The real shame is that serious policy issues, like the one below, have been ignored.
STILL ANOTHER ISSUE THAT HAS BEEN IGNORED amid the election carnival is the sharp rise of the budget deficit. Figures released last Friday showed that red ink surged an astonishing 34% in the fiscal year that ended on Sept. 30, thanks to anemic revenue growth of 1% and a 5% spending jump – largely entitlement spending. The trend on deficits is higher – both candidates want to spend more – and this is still another reason why bond yields may have bottomed.
FUNNIEST LINE OF THE YEAR: We were in a taxi in NYC on Saturday, listening to a talkative Romanian cab driver who had lots of opinions. We asked: "Who are you voting for?" He replied, seriously and without a hint of irony: "It's such a difficult choice, I really, really like both of them." Never heard that one before!!

October 14, 2016

How Politicized is the Federal Reserve?

EVERYWHERE WE GO, PEOPLE LOVE TO BASH THE FED: Senior citizens moan about ridiculously low yields, investors complain about the Fed's confusing communications, and analysts worry that the Fed is creating bubbles. Whether the central bankers are to blame is not the issue; these criticisms by themselves have politicized the Fed, which the central bankers so earnestly try to avoid.
A SHAKY DEFENSE: We believe Fed officials who insist that politics and elections are never discussed at FOMC meetings, and we believe that the Fed is generally apolitical. But this cuts two ways – the Fed is so determined to stay out of the limelight ahead of an election that it raises this ironic issue: if there's a compelling reason to hike rates at the Nov. 1-2 meeting, will the Fed abstain because of the impending election? That in itself acknowledges politics.
SELF-INFLICTED WOUNDS: The Fed owes it to the markets to communicate clearly, yet investors are subjected to a cacophony of confusing statements from Fed officials. Every few days the markets are roiled by "Fedspeak" – James Bullard of St. Louis says one thing, Charlie Evans in Chicago says another, and Eric Rosengren in Boston sometimes contradicts his own previous statements.
IN THE OLD DAYS, Fed officials were far more circumspect. Our dear friend Lyle Gramley, the late Fed Governor, once recalled getting an earful from Paul Volcker for making a speech that wasn't pre-approved by the Chairman. Volcker would never tolerate the babble currently emerging from the Fed, but in recent years Ben Bernanke and now Janet Yellen have condoned the confusing communications.
THIS IS NOT ENTIRELY ABOUT STYLE: Substantively, the Fed has to appreciate its worsening flaws: forecasts have consistently been too optimistic, yet the trend persists. Quantitative easing worked initially but by QE3 the impact was muted. The saver class – mostly senior citizens – has been punished by low rates, and that may have harmed consumer spending. And the Fed seemingly has added a third mandate – in addition to seeking stable inflation and full employment, there's a new goal: don't spook the markets, especially global markets, even if uber-low rates may produce bubbles.
THIS HAS PROVOKED THE FED’S CRITICS, many of whom resent the central bankers for monetizing the debt and want to diminish the Fed's authority. Conservative Republicans want to curb the Fed's power, but if they send anti-Fed legislation to President Clinton, she would veto it. Yet the sniping won't come exclusively from the right – let's see what Elizabeth Warren and Bernie Sanders and Paul Krugman have to say when the Fed raises rates in December, with hints of more to come.
SO THE FED MAY BECOME EVEN MORE POLITICIZED: We're fans of the Fed – more than anyone on the face of the earth, Bernanke saved the world from a second Great Depression, but no good deed goes unpunished. The modest recovery has not lifted all boats, and an institution as powerful as the Fed should expect plenty of criticism from all sides. It's politicized already, and you have to wonder if that will have a subtle impact on the timing and extent of its gradual tightening.

October 13, 2016

Our Final Call – Clinton Wins, Easily

FINAL CALL: Hillary Clinton will win the presidency on Nov. 8; it probably won't be a landslide, but it won't be particularly close. She should approach the 332 electoral votes that Barack Obama won in 2012.
WE BELIEVE CLINTON WOULD HAVE LOST to a Kasich-Rubio ticket, but we'll never know. She's the luckiest politician in American, avoiding indictment over her emails, and running against the worst Republican nominee since...well, Donald J. Trump is the worst ever.
THE RISK TO THIS FORECAST is that Trump's free-fall will accelerate, giving Clinton a landslide that not only flips the Senate back to the Democrats, but costs them the House as well. For now – Chances the GOP loses the Senate: 55%. Chances the GOP loses the House: 25% and rising.
WE WAITED UNTIL OCTOBER 13 TO MAKE A FINAL CALL because in an election this bizarre, plenty of October surprises could alter the outcome – terrorism, the candidates' health, leaked emails, etc. There's an October surprise, to be sure: Trump and women.
AS WE REPORTED EARLIER THIS WEEK, there were two reasons why Paul Ryan backed away from Trump: Ryan's fear of a looming landslide, and his belief that there would be more allegations of sexual impropriety. Make no mistake, there's plenty more Trump dirt to come.
THE SEXUAL ALLEGATIONS will persist, and Trump is uniquely incapable of dealing with them. He always rises to the bait, and his dismissal of accusers will be cringe-inducing. If he couldn't let go of the Miss Universe controversy for several days, imagine his reaction to these far more serious allegations. Is this a dirty trick, waiting until mid-October to raise these charges? Who ever said politics is fair ??
COULD WE BE WRONG? Like virtually all Washington pundits, we were wrong initially about Trump. He tapped into a seething anger that still persists, but he's simply too flawed to be taken seriously as a plausible president. It's not too late for him to make this a close election – a focus on pro-growth economic policies would help – but he has virtually no chance of winning 270 electoral votes.
WE WROTE YESTERDAY ABOUT THE POST-ELECTION CLIMATE, and that will be our focus in the coming weeks. There are serious issues that have been neglected – none remotely as critical as dealing with the thug Vladimir Putin, whose brazen behavior in the Middle East, Ukraine, the Baltic states – and his attempt to hack into the U.S.
election – has to be confronted.
OUR CALL ON THIS ELECTION isn't an endorsement of Clinton; the prospect of four more years of regulations and high taxes and Clinton scandals is demoralizing. But the opposition party is imploding and its once-ascendant young star – Ryan – may never fully recover. He's loathed by the angry Trump base, and that will persist forever.
THE FINANCIAL MARKETS have been relatively sanguine, more focused on earnings and a likely rate hike from the Federal Reserve in December. But a day is coming, soon, when the markets will have to contemplate the possibility that if the Trump free-fall continues, Washington could be run by the troika of Clinton, Nancy Pelosi and Chuck

October 12, 2016

The Fascinating, Tumultuous Post-Election Environment

OVERVIEW: It strikes us that key players in both parties are already focusing on what promises to be a fascinating post-election environment. Let's take a look at the dynamics:
FIRST THINGS FIRST: For our readers, once the election is finished the focus will shift immediately to the Dec. 13-14 FOMC meeting. We'd put odds of a rate hike at 75%, and the markets are already pricing it in, as the dollar surges and bond yields climb.
FOR CONGRESS, the focus will immediately turn to the post-election lame duck session. If Hillary Clinton wins, there will be a push by moderate Republicans to approve Merrick Garland's nomination to the Supreme Court; he's far preferable to a Clinton liberal. But the big focus, as usual, will be the budget and efforts to avoid a government shutdown. An ugly grab-bag of a bill will pass a few days before Christmas.
A MAJOR POST-ELECTION FOCUS will be on whether Hillary Clinton can govern and how much political capital she will have; the posturing is well underway on this front. Republicans who are resigned to her winning want her vote total to come in at under 50%, and there's a decent chance that will happen, as Gary Johnson and Jill Stein combine to win 7 or 8% of the vote. Clinton also faces unending probes of her emails, the Clinton foundation, etc. A honeymoon? Not really.
THE GREAT WILD CARD: Donald Trump will not accept losing gracefully; he is resuming his charges that the election will be rigged. If, say, Pennsylvania is a narrow win for Clinton, Trump will cite voting irregularities in Philadelphia. If a sizable percentage of Americans think the election was rigged, that will produce a poisonous climate that will keep alive the Trump movement and fulfill Russia's goal of sowing doubts about the U.S. political process.
THE EARLY 2017 LANDSCAPE: Will there be more dysfunction for Paul Ryan and the House? You betcha. He faces an immediate challenge by late winter – the debt ceiling will have to be raised, and Ryan can't count on moderate Republicans to help him, because their ranks will be greatly diminished in the upcoming election. So Ryan will face this prospect: either risk a government default, or cut a deal with Nancy Pelosi's Democrats and raise the debt ceiling, which would infuriate the GOP base. The more things change, the more they stay the same.
THE RECRIMINATIONS: If the Republicans lose the White House, Trump voters and the conservative base could bolt from the party; odds are close to 50-50. We take very seriously the possibility of a potent new third party – angry and populist – that detests crony capitalism and the Republican establishment. Conservative talk radio will play a huge role in this rebellion.
FISSURES AMONG THE DEMOCRATS: Even if Clinton wins, she could face a revolt from the left by spring on issues ranging from a single payer health insurance scheme, to Wall Street regulation, to U.S. troop commitments in the Middle East. Fearless forecast: Elizabeth Warren and Bernie Sanders will be sniping at Clinton by March.
SO THE LONG KNIVES WILL COME OUT almost immediately after the election; don't believe pledges that both parties will try to get along with each other. It will become apparent by New Year's that neither party can get along among themselves.

DISCLAIMER: Horizon Investments, LLC is an SEC-registered investment adviser. The views expressed are those of the author, Greg Valliere, and do not necessarily reflect the views of Horizon Investments. They are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. Horizon Investments is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. For more information about Horizon Investments, contact us by calling 866.371.2399 or visit our website at www.horizoninvestments.com.