August 2017 - Daily Markets & Politics (Greg Valliere - Horizon Investments)

August 31, 2017

Do We Really Need a Tax Cut?

SOMETHING DOESN'T ADD UP: The economy grew by 3% in the second quarter, the labor market has recovered spectacularly, the stock market is near record highs, interest rates are steady, and corporate profits are solid. So – do we really need the biggest tax cut of all time, as Donald Trump said yesterday?

WE HAVE ARGUED that tax reform – as opposed to tax cuts – is necessary to make U.S. businesses more competitive globally. And tax cuts for the middle class are a good idea; they could compensate for a lack of wage growth. And we still think a tax bill will move by late fall, with enactment likely by spring.

BUT THERE'S BEEN A SENTIMENT SHIFT recently, as economists warn that tax cuts in a climate of solid economic growth could have unintended consequences. The argument against big tax cuts seems to be focusing on two issues:

The deficit: Hurricane Harvey has revived a focus on the deficit, since a hurricane aid package could cost $100 billion or more. Red ink is rising sharply, spending restraint is minimal, so the deficit is projected at about $580 billion this year, a $100 billion increase from 2016, and it will surge well above $600 billion in 2018 – which would place it far above 3% of GDP. The deficit in fiscal 2018 could soar well above 3.5% of annual GDP; tax cuts – even with generous "dynamic scoring" built in – will increase the deficit.

Business behavior: If corporations, which are sitting on record cash levels, aren't spending that money now, what makes anyone think they will open up their coffers if tax rates fall? There's an excellent piece in this morning's New York Times that questions assumptions on business behavior; would repatriation of profits stashed abroad really stimulate the economy? The last time we tried that, most of the money went to dividend hikes, stock buybacks and M&A, not business fixed investment or hiring new workers.

DONALD TRUMP AND THE REPUBLICANS desperately need a legislative victory, no question; they promised tax reform. But if the path of least resistance is for a “sugar high” tax cut – not true reform – the focus may shift to questioning whether a tax cut is needed in an economy that's beginning to hit on all cylinders? Infrastructure spending – bring it on. Health reform – still necessary. Tax cuts? Well, we're probably going to get this whether we need it or not. 

TAX CUTS could keep the Wall Street rally percolating, and they might add a few tenths of a percent to GDP by a year from now. But stronger GDP growth in the long-term depends crucially on the labor force, which which needs more workers, especially skilled labor. Curbing legal immigration won't help.

BOTTOM LINE: There's overwhelming political support for tax cuts, especially for the middle class. There's virtually no support for tax cuts for the wealthy and only lukewarm public support for business tax cuts. Once the smoke clears from budget battles this fall, we would expect a careful look at the premise – tax reform is one thing, but can we afford huge tax cuts in a solid economy that faces dramatically higher deficits?

August 30, 2017

Federal Officials Prepare Contingency Plans if Debt Default Occurs

THE DEBT CEILING CRISIS: We've been outspoken that there's no more than a 5% chance of a U.S. debt default, but recent developments worry us; the House, as usual, is utterly dysfunctional on budget issues. Maybe there's more than a 5% chance of a default – it certainly isn't zero, and it increasingly appears that a genuine crisis could upset the markets by late September before this is resolved in October.

WHAT'S THE REAL DEFAULT DATE? The answer is nobody knows for sure. Treasury Secretary Steve Mnuchin has been juggling payments since the $19.808 trillion limit was hit months ago. He has said Sept. 29 is the drop-dead date, although independent experts think the U.S. could limp along into mid-October. The need to spend billions on hurricane aid could speed up the drop-dead date.

LOOKING FOR A "CLEAN" BILL: Arch-conservatives in the House view a debt ceiling extension as an opportunity to attach anti-spending amendments; they want more stringent Medicaid eligibility requirements, other deep spending cuts, and possibly a balanced budget amendment. Treasury Secretary Steve Mnuchin is adamant that the bill should be clean, yet Mick Mulvaney, head of the OMB, has been a strong opponent of raising the debt ceiling without amendments.

FEARS OF A HOUSE IMPASSE have prompted officials at Treasury and the Fed to prepare contingency options. The Securities Industry and Financial Markets Association (SIFMA) has been working with regulators on how markets might be affected, focusing on issues involving trading, clearing and settlements for Treasury debt. We don't expect an outright default, but payments on some obligations might be delayed on a day-to-day basis, and this could lead to higher rates on Treasury debt that expires in October; in fact, it already has. 

COULD PAYMENTS BE PRIORITIZED? Many conservatives claim the early October deadline can be extended for many months – if federal payments are prioritized. Social Security payments are politically sacred (although you can be sure Democrats will stir fears among retirees that their benefits might be jeopardized). Other payments – to contractors in particular – could be delayed, some fiscal hawks contend. We think the idea of delaying payments would be a political disaster for the fiscal hawks.

HOW THE CRISIS ENDS: The Senate wants a clean debt ceiling increase, but many House Republicans do not, so as an impasse looms there will be two logical conclusions: a debt ceiling hike that's combined with hurricane aid; very few lawmakers want to oppose that. The other option is that moderate Republicans unite with Democrats to raise the debt ceiling; it's happened before.

AN ALLIANCE BETWEEN PAUL RYAN AND NANCY PELOSI, producing a debt ceiling deal, probably will have an implicit understanding that the Democrats will win more domestic spending. This will become a huge issue in the GOP base, already angry over the Obamacare failure, and it will amp up the volume against Ryan and Mitch McConnell. And it would further complicate efforts to pass a 2018 budget, which could lead to a government shutdown crisis in December.

BOTTOM LINE: The markets can handle a brief government shutdown later this year, but a default is another issue. It would rattle investor confidence – throughout the world – in U.S. debt, and raise interest rates, at least temporarily. A drop in market and consumer confidence is looming unless this is resolved – it will be resolved, at the very last minute, after giving investors a serious scare. Meanwhile, how can tax reform advance with budget issues dominating the agenda for the next several weeks?

August 29, 2017

Hurricane Will Affect the Budget Brawl; Korean Crisis Deepens

THE WORSENING HUMANITARIAN CRISIS in southeast Texas will require a huge federal aid package, which could have major implications for chances of a government default or a shutdown. Most politicians – even deficit hawks – will have to vote for hurricane aid, which will improve prospects for a budget deal that many lawmakers had opposed until the rain began in Houston.

SOURCES ON CAPITOL HILL report that a massive hurricane relief bill may be attached to the debt ceiling increase, which would make its passage certain – and relatively quick, by Washington standards. Or it may be attached to an overall budget package, avoiding a shutdown threat. We'd guess the former scenario is most likely; a shutdown threat can be deferred until December, when the budget will be resolved, as usual.

WE'RE RELUCTANT TO GAME OUT DEBT CEILING SCENARIOS in the face of such great human suffering, but the hurricane’s impact on the budget and politics was the major theme yesterday in this nearly-deserted city. Sadly, an aid package won't come quickly; Congress won't be back until next Tuesday, and it will take several days to put a package together – and to decide which larger budget bill will be the vehicle.

DONALD TRUMP WANTS FAST ACTION, and he's frustrated by the pace in Washington. But he can get a budget deal – with hurricane aid – fairly quickly if he drops his demand for funding a wall with Mexico. He simply doesn't have the votes for a wall, and his threatened government shutdown in the face of this Texas disaster would be a huge political negative for him. So for Trump, as well as Congress, the hurricane aid package offers a convenient cover for unpalatable bills.

THE IMMEDIATE ISSUE FOR TRUMP will be to convey empathy and strength today. He absolutely, positively cannot even think about a victory lap; his initial focus on this disaster has been solid, but a self-congratulatory theme today would be wildly inappropriate. The rain hasn't stopped; the human suffering will persist for months because so many homes are now uninhabitable.

AN EVEN GREATER CRISIS may be looming in Korea. Chances of strategic strikes on North Korean missile sites have increased significantly after a reckless missile launch last night that unnerved the Japanese. Trump's generals have plans drawn up, yet they are urging him to delay any action – but sanctions and war games have their limits, and this issue is now the single greatest threat to financial markets.

August 28, 2017

Yellen and Cohn Suddenly Fade as Fed Candidates; Our Take on Hurricane Impact

YELLEN, COHN FADE AS FED CANDIDATES: The two leading candidates to fill the Fed chairmanship, which becomes vacant on Feb. 3, seemingly have alienated Donald Trump. The president demands unwavering loyalty (just ask Jim Comey), and he never forgets a slight. Yet Trump got a smackdown this weekend from Gary Cohn and Janet Yellen.

THE ALLEGED FRONTRUNNER, White House economic adviser Cohn, ripped Trump's response to the Charlottesville violence; his interview this weekend with the Financial Times was harshly critical of the President, who reportedly was infuriated by the rebuke. Cohn is now like Jeff Sessions – still on the team, but tainted and not trusted by the boss.

YELLEN'S PROSPECTS have slipped even further, after her full-throated defense of tough Wall Street regulations and free trade deals. Her speech on Friday at Jackson Hole struck us as unambiguous on the benefits of regulations (even though she conceded that some small banks were hit too hard and may need relief). You would think that Yellen's monetary dovishness would make her a logical pick to stay, but she's way off the reservation on regulations, and probably just talked herself out of another term.

WHO'S ON THE SHORT LIST? Some experts would say John Taylor, the former Fed official who's now at Stanford. But if he followed his own "Taylor rule," the federal funds rate would be over 2% now – does Trump want that? Two other candidates always make the short list – Columbia University economist Glenn Hubbard and former Fed Gov. Kevin Warsh. We'd look for mavericks who want to ease regulations; Marvin Goodfriend, a Carnegie Mellon economist, is a dark horse. Randal Quarles, recently nominated to be Vice Chairman, is also a possibility.

WHAT DOES THIS MEAN FOR SHORT-TERM POLICIES? We still expect the FOMC to approve a gradual reduction of the Fed's balance sheet when the policymakers meet on Sept. 19-20. As for the next rate hike, December still looks like a good bet despite soft inflation and moderate GDP growth. If Yellen leaves this winter, she should hold her head high – at the least, she didn't hinder this Goldilocks economy; at the most, she nourished it. 

HARVEY – THE IMPACT: The extraordinary crisis in Texas is far from over, so it's premature to conclude that relief efforts have succeeded; the Trump Administration has learned lessons from Katrina and while the President isn't skilled at empathy, he gets good grades thus far.

AS FOR THE ECONOMIC IMPACT, a very wise old sage – the late Fed Gov. Lyle Gramley – always cautioned that natural disasters like this always have a minimal impact on the national economy. Yes, gasoline prices will spike for a couple of weeks, but that's transitory. Ironically, there could be a slight boost for GDP as thousands of workers begin to rebuild southeast Texas.

WHILE NO ONE WAS PAYING ATTENTION last Friday, the Trump Administration got some controversial issues out of the way – transgender rules for the military, the messy departure of controversial Sebastian Gorka, and the pardon of Sheriff Joe Arpaio. The latter generated criticism in both parties, and seemed to send a signal to those who may be targeted by Robert Mueller – don't worry, the White House implied, this is a president who isn't afraid to use his pardon power for allies who have his back. The Mueller probe colors everything.

August 25, 2017

Donald Trump's Secret Weapon; A glimmer of Hope in the Mideast?

DONALD TRUMP MAY BE CRAZY LIKE A FOX, since he is prepared to adroitly manipulate an issue that keeps his base aroused – the deep antipathy in America toward Congress, which has a job approval rating far below Trump's.

NEED A SCAPEGOAT? What better target than hapless Mitch McConnell, whose job rating is in the teens? Paul Ryan, Chuck Schumer and Nancy Pelosi don't score much better. What a foil Trump has: an inept, dysfunctional, mostly elderly Congress that makes him look good by comparison. And he knows it.

THE DOWNSIDE, OF COURSE, is that the animosity among Republican leaders toward Trump is intense, and it will complicate budget and tax issues – especially when the White House won't issue its own tax bill while freelancing on specific provisions. One can only imagine Ryan's reaction to a New York Post article this morning that indicated the White House might be willing to keep the state and local tax deduction – which Congressional Republicans definitely want to kill.

ON ISSUES LIKE THE DEBT CEILING, Trump has set the table – saying, in effect, "I expect a mess because Congress is totally inept, so don't blame me!" That could insulate him from public rage if budget dysfunction boils over this fall, he believes. The only alternative for Congress will be to move on its own, ignoring Trump – but he can't be ignored when he meddles on details like the state and local tax.

TRUMP DESPERATELY NEEDS A VICTORY, and perhaps he can show genuine leadership if much of Texas is devastated by Hurricane Harvey. Failure to handle a natural disaster hurt George W. Bush, so we would expect the White House to react aggressively; Trump needs to show empathy and not make Harvey all about him – this will be an important test of his presidency.

LOOKING FOR SOME GOOD NEWS? Our favorite geopolitical columnist, David Ignatius of the Washington Post, has a fascinating column this morning. He believes there's a new coalition, filled with fresh thinkers, in the Mideast that could lead to a lessening of tensions and some agreements on issues like trade. Participants include Saudi Arabia, the United Arab Emirates, Jordan and Egypt – with the much-maligned Jared Kushner playing a constructive role.

TRADE AND ECONOMIC REFORMS might come first, with an eventual goal of substantive talks between the Palestinian Authority and Israel. An uphill fight – especially as Benjamin Netanyahu moves rightward as scandals weaken him – but there are signs of a new, young, Sunni coalition in the region, potentially a welcome counterweight to Iran.

August 24, 2017

Donald Trump's Rookie Mistakes on a Border Wall

DEMOCRATS COULD BARELY CONTAIN THEIR GLEE yesterday after President Trump made three crucial blunders that will checkmate Republicans over building a wall on the Mexican border. The resulting fallout will not help the GOP's 2018 House election prospects.

TRUMP'S FIRST MISTAKE: You don't boast that you're going to shut down the government. The media, which already hates Trump, will now proclaim that if there's a shutdown it was Trump’s idea.

TRUMP'S SECOND MISTAKE: You don't make threats over a border wall if you don't have the votes. What a trap Chuck Schumer has set – there aren't enough votes in either house for a wall, so Trump will fail.

TRUMP'S THIRD MISTAKE: Trump has needlessly inflamed other budget issues. Ironically, a spending bill accompanied by a fight over a wall won't be resolved until December, so a shutdown isn't imminent – but Trump's threat will complicate two more pressing issues: a debt ceiling hike and a budget resolution designed to lay the groundwork for tax reform.

AS WE WROTE YESTERDAY, passage of a debt ceiling hike and a budget resolution is likely by early October, but there could be market anxiety by late September if there's no progress because of Trump's stridency. As for a shutdown threat in December – well, the markets have always yawned; even an actual shutdown didn’t have much of an impact on Wall Street.

BUT TRUMP HAS RAISED NEW CONCERNS about his temperament – he apparently views failure on a wall as a potential personal embarrassment. The public doesn't want a wall, Mexico obviously will not pay for it, all Democrats oppose it and most Republicans – like Paul Ryan – want the issue to go away. Yet Trump will not tolerate a personal embarrassment.

THESE THREE MISTAKES ARE PROOF, ONCE AGAIN, that Trump doesn't have a clue on how to deal with Congress, and he seemingly doesn't care about Republicans who face re-election unless they pledge unwavering loyalty on every issue. "It's all about him," a GOP source told us last night, "he doesn't worry about making a mess, but we have to deal with the consequences in the next election."

YET WE STILL THINK TAX REFORM IS DO-ABLE, because virtually every Republican on the Hill is determined to win on a signature issue that will help them back home. But make no mistake – if a tax bill passes, it will be in spite of Trump, not because of him.

August 23, 2017

Big Fiscal Issues Come Into Focus – a Plus for the Markets

FORGET DONALD TRUMP'S RANTINGS LAST NIGHT in Arizona, they were designed to keep the base happy, while giving the president the love he craves. The really big stories, many of which make his supporters uneasy, are now moving quickly – a ramp-up in Afghanistan, a focus on budget deals that require votes from Democrats, and a pro-Wall Street tax bill that is coming into focus.

AS WE WROTE ON MONDAY, the removal of Steve Bannon has opened a clear path for the defense establishment and the Goldman Sachs faction in the White House. A U.S. victory in Afghanistan is very unlikely – the goal is containment, as Rex Tillerson said in very candid remarks yesterday. But some victories are likely on economic issues this fall as Gary Cohn and Steven Mnuchin – free from Bannon's obstruction – work with allies on Capitol Hill.

FIRST THINGS FIRST – THE DEBT CEILING: Mitch McConnell said yesterday that there's a "zero percent chance" of a government default; we think there's a 5% chance, but why quibble? The U.S. government will not default.

WHAT McCONNELL FEARS isn't a default but a fierce blowback from the GOP base when he and Paul Ryan grovel for votes from Democrats, who will be needed to get the debt ceiling passed. A key issue: what concessions will the Democrats extract in exchange for their votes? More spending, one would suspect.

THEN COMES TWO OTHER BUDGET ISSUES: Appropriations bills for 2018 are hopelessly delayed and will be lumped into a continuing resolution which, as usual, will pass in the middle of the night just before the year-end break. The other issue is crucial for tax reform: passage of a budget resolution that permits reconciliation in the Senate – only 50 votes, not 60, needed to move a tax bill. 

TAX PROGRESS BEHIND THE SCENES: As we have reported all summer, negotiations between Mnuchin, Cohn and GOP congressional leaders are yielding progress; we think a bill could come into focus within weeks. Enactment is still unlikely until next spring, because several controversial issues have to be resolved: a potential haircut for the mortgage deduction, abolition of the state and local tax break, the deductibility of corporate debt, etc. 

HOW MUCH IS AFFORDABLE? Perhaps the most contentious issue is whether the bill will be revenue neutral, or whether it will lose money early in a ten-year window, only to gain revenue (on paper) in the out-years, as receipts theoretically pick up. In any event, there isn't enough money for everything, which is why Trump's goal of a 15% top corporate tax rate has no chance; something like 23-24% seems likely – still a huge cut for those firms that pay close to the 35% top rate.

WHAT THIS MEANS FOR THE MARKETS: There are only three things that could derail this bull market, in our opinion: fear of a recession, which doesn't seem remotely imminent; a geopolitical crisis, which seems less likely after Trump said North Korea "seems to respect us more"; and the death of tax reform, which seems increasingly unlikely.

IT MAY TAKE MANY MONTHS to iron out a tax bill, but this process most definitely is not dead. And it still looks like a very positive story for the markets, which are counting on much lower tax rates for corporations and pass-through companies; huge benefits for tech and drug companies, which would be allowed to repatriate revenues stashed abroad; and much more generous treatment of corporate expenditures. Bannon and the populists never liked those ideas, which is why Trump needs to stroke his base at adoring rallies.August 23, 2017

August 21, 2017

Wall Street and Defense Hawks Win White House Power Struggle

A CLEAR RE-SET: The financial markets finally got nervous last week over Donald Trump's agenda, but there's a sense of change in the air – Trump may be pivoting toward a more centrist and less confrontational stance on key issues.

FIRST OF ALL, Trump may be toning down the rhetoric; he praised a peaceful anti-extremist protest in Boston, a sharp contrast with his disastrous post-Charlottesville comments. This may be a sign that he's listening to his inner circle, congressional Republicans, and the polls.

A HUGE POWER STRUGGLE within the White House has been resolved in favor of Wall Street and the foreign policy hawks. Steve Bannon has lost, and he's already vowing revenge against everyone from Matt Drudge to Gary Cohn – but the big story is that there may finally be policy clarity.

THE GOLDMAN SACHS FACTION PREVAILED: For most of our readers, the big issue is whether Trump's pro-market agenda has a chance, and yes – it's still alive. The populists have lost; Cohn and Treasury Secretary Steve Mnuchin prevailed – they won't play games on the debt ceiling, they're opposed to trade wars with China and others, and they'll push hard for progress on tax reform by October. 

AND THE HAWKS PREVAILED: Bannon's fury was largely directed at the military interventionists like H.R. McMaster, who will get their wish to reassert U.S. goals in Afghanistan, as Trump will explain tonight. The hawks also will maintain pressure on North Korea and they'll get a major increase in defense spending. 

TRUMP'S MOST IMPORTANT WEEK? He gets a chance to move past Charlottesville, starting with an address to the nation tonight. Tomorrow he could land in more controversy in Arizona. Hanging over the entire week will be joint U.S.-South Korean military exercises, which – at the very least – will ratchet up the rhetorical bombast from the north.

AMID THIS SUMMER'S DYSFUNCTION, there's been a fierce determination among congressional Republicans to stick with the tax cut agenda, as we wrote last week. Trump's move toward the policy centrists will not be seamless – his tweets will continue – but the Goldman Sachs faction will call the shots on economic issues. That's a major plus for the agenda – and for the markets.

August 18, 2017

Stunned Republicans Moving Toward Consensus: Go It Alone

FEARFUL OF LOSING THEIR PARTY – AND LOSING THE 2018 ELECTION – Republicans on Capitol Hill are nearing a consensus: it's time to go it alone, ignoring the dysfunctional White House and proceeding on legislation without input from President Trump. It's their only hope, and it could produce results.

SOURCES TELL US THAT top Republicans – Paul Ryan, Mitch McConnell, etc. – are reaching out to Steve Mnuchin and Gary Cohn, two Jewish moderates who are aghast over Trump's recent pronouncements. These four, with the help of a swelling chorus of GOP Trump critics, are determined to avoid a budget crisis this fall, while beginning to move on tax reform by October.

"TRUMP IS IRRELEVANT" on issues like taxes, a GOP source told us last night. "We have a job to do, and we want him to butt out." In fact, some Republicans are talking about overtures to Democrats, who may help produce a bill to fund health insurers. Even more intriguingly, some GOP lawmakers are floating a trial balloon – let's combine tax cuts with infrastructure spending, which could appeal to Democrats.

OF COURSE, SIGNS OF LIFE IN THE GOP could be derailed by more unhinged Trump tweets. "He wants to talk about beautiful Confederate statues, and if he keeps it up, he will lose Cohn," a Hill aide tells us. For now, we think Cohn will stay; he still has a reasonable shot at becoming the next Fed Chairman, and he knows that the markets are counting on him to hang in there.

SOME OF OUR READERS DON'T LIKE TO HEAR THIS, but there's a growing consensus on Capitol Hill – in both parties – that something is seriously wrong with Trump. Sen. Bob Corker, a conservative Republican who's universally regarded as a good guy, said in public yesterday what everyone is saying in private: Trump may not be connected to the reality of governing. Speculation about Mike Pence's plans is percolating again.

RYAN AND McCONNELL HAVE LARGE ARMIES of loyal supporters, but not quite enough to get a debt ceiling increase or a tax reform bill through both houses. That's why the Democrats suddenly are back in the picture; incredibly, many Republicans would prefer to deal with Democrats than Trump. A deal with more domestic spending and no tax cuts for the rich could appeal to Democrats – and in this scenario, tax reform and cuts for business and the middle class could still pass by early next year. 

WITH NORTH KOREA AND RACIAL TENSION AND TERRORISM STILL IN THE MIX, this is a deadly serious climate, very fluid and unsettling for financial markets. We understand this, but we also believe the vast majority of Republicans in both houses are prepared to go it alone on economic policy, without Trump. Tax reform may be on thin ice, but it's not sunk yet.

August 16, 2017

Trump's Epic Meltdown: Six Implications

DONALD TRUMP WAS FORCED by his family and advisers to issue a clarification on Monday of his post-Charlottesville comments – but he ripped the scab off yesterday and went on a self-destructive rant that will have profound implications for his presidency.

YOU CANNOT EQUATE WHITE SUPREMACISTS with protesters who confronted them. You cannot say there were "very fine people on both sides" because very fine people do not join neo-Nazi rallies. But Trump showed that his fury over being criticized has no bounds, so now he has to live with six implications:

1. His inner circle is dismayed. Trump cannot be controlled; it's just a matter of time before Chief of Staff John Kelly resigns, since he has utterly failed to curb Trump's tweets. Kelly will be gone, along with many others, by Thanksgiving if not sooner.

2. Trump is losing corporate America. We anticipate many more resignations from Trump's advisory councils; no business leader can work with a president who is warmly praised by David Duke and other white supremacists, who loved Trump's press conference yesterday. Boycotts will begin soon of companies whose CEOs do not disassociate with Trump.

3. Trump's polls are in free-fall. In a city where political capital is all-important, the polls are carefully scrutinized. We think there's a good chance Trump's approval rating will slide below 30 percent positive by Labor Day, a disastrous level that will allow members of Congress – in both parties – to defy him with impunity.

4. Republican defections. It's not just John McCain or Jeff Flake – the defections are mounting: Steve Scalise, Tim Scott, Paul Ryan, Orrin Hatch, etc. It's now certain that Trump will face a serious primary challenge in 2020 if he decides to run again, and you have to wonder – how much longer will Mike Pence have Trump's back? 

5. The tattered agenda. Yesterday was going to be about infrastructure, but like most of Trump's initiatives there isn't a legislative proposal from the White House. Republicans are in agreement – they'll move on their own, ignoring Trump, on issues like the budget and taxes, and they have a chance to prevail. There's growing unity among Republicans to forge ahead; if any legislation passes it will be in spite of Trump, not because of him.

6. Geopolitics, the great wild card. We can't deny the obvious – Trump is off-the-rails, eager to divert attention away from this epic meltdown. This makes him dangerously unpredictable, and it won't take much of a provocation for him to overrule his generals, who do not want war in Korea. We anticipate a stalemate with North Korea, but that's a hope more than a prediction.

THE SPECTER OF A FAILED PRESIDENCY gives us no joy whatsoever; like most Americans, we want to see our presidents succeed. But Trump lacks the temperament to succeed in a climate where a clear majority is now united against him.

August 14, 2017

Still Another Fight Brewing – Democrats Vs. Democrats

AS IF THE FIGHT AMONG REPUBLICANS isn't enough excitement – ramping up after Donald Trump's performance this past weekend – a deep split is now unfolding among Democrats, with Bernie Sanders' supporters demanding a litmus test that the party's moderates are rejecting.

FIRST, CHARLOTTESVILLE: This may be remembered as the last straw for many Republicans, who were disgusted by Trump's reluctance to speak out against neo-Nazis until he was embarrassed into responding by members of his own family. The GOP critics were significant: Sen. Orrin Hatch and House Speaker Paul Ryan, the two lawmakers who will write a tax reform bill, slammed Trump. They and most of their colleagues were already incredulous over Trump's tweetstorm against Mitch McConnell.

YOU'D THINK THIS WOULD UNIFY THE DEMOCRATS, but suddenly they are embroiled in a bitter fight between moderates and the ascendant left, headed by Sanders and Elizabeth Warren, who are demanding ideological purity. Apparently overlooking the ironic comparison to the GOP, the left is demanding that the party's candidates publicly endorse a single payer health system, even though it would never survive a Trump veto and lacks widespread public support.

WARREN, WHO SEEMS LIKELY TO RUN FOR PRESIDENT, is condoning attacks on Democrats like Kamala Harris, the fast-rising California Senator, because they are too "corporate." Sanders, who isn't really a Democrat, is tied to a leftist group called "Our Revolution," which wants to expel centrists from primary ballots in 2018. Our guess is that Sanders, 75, will not run for president, partly because of a financial scandal in Vermont involving his wife.

IF SANDERS DOESN'T RUN, there would be a clear path for Warren, who would be a formidable candidate. It's a given in the financial industry that she's a demagogue, too radical to get elected – but ask anyone under the age of 30 if she can get elected and you'll get a dramatically different opinion.

THIS MANEUVERING IS SO FAST because Trump's descent has been so stunning. He now faces a crucial six weeks, amid signs that his new chief of staff, John Kelly, has had no impact on Trump's reckless tweets. The first and most important challenge comes in the next few days – can he avoid a war with North Korea? His generals have plans completed for a furious 24 hours of strategic strikes, but they are urging him to hold off.

AN UNEASY STALEMATE WITH NORTH KOREA THIS FALL, the most likely scenario, will be only one of several huge headaches for Trump; the White House doesn't have a tax bill ready and is still mapping strategy on the Big Three budget issues – debt ceiling, budget resolution, and specific 2018 spending outlays. The latter can wait until December but the first two are enormous obstacles which will delay progress on tax reform. And let's not forget the Russia probe, quickly gaining momentum.

THE DEMOCRATS WILL SHOW UNITY in the halls of Congress, obstructing everything Trump wants, but out in the precincts there's a furious battle for the party's soul. Just as the GOP base veered sharply to the right, the Democrats may lurch to the left, damaging the party's chances for a surprisingly quick bounce-back after their 2016 election debacle.

August 10, 2017

Under the Radar: Four Important Developments Obscured by the Korean Crisis

NOT OVER YET: Several key Trump aides sought to calm jittery nerves yesterday, after the President stunned them with an off-the-cuff nuclear war threat. It's clear that Rex Tillerson and others view a military option as unlikely, but this crisis won't end soon – if North Korea tests more ICBMs that come close to Japan or Guam, that could be the last straw.

NOTHING IS AS IMPORTANT AS THIS CRISIS, so it has obscured several other stories that ordinarily would have been front page news. Consider these four:

1. WILL PAUL MANAFORT SING? Robert Mueller is playing hardball, ordering a humiliating pre-dawn raid on Paul Manafort's apartment to clean out his records. The special counsel obviously got a judge to agree that there was "probable cause" of a crime, and Mueller's message was clear: cooperate with us or we'll turn up the heat even higher, including a probe of your son-in-law's business activities. Manafort's allies swear he won't sing in exchange for leniency, but that's clearly Mueller's goal.

2. THOSE FEUDING REPUBLICANS: Some heavyweight brawls – an increasingly nasty back-and-forth between Donald Trump and Mitch McConnell over the latter's inability to get a health bill passed. A bitter fight between Steve Bannon and H.R. McMaster, as pressure grows on the security adviser to resign. And more attacks on John McCain, this time from Sen. Ron Johnson of Wisconsin, who said in public what some Republicans are whispering: McCain's brain tumor might have affected his health care vote. Time for these combatants to take a chill pill.

3. LET'S TALK ABOUT A BUDGET DEAL: White House officials are talking with Democrats on a budget deal, which is an intriguing development. They're proposing a trade-off: give us a few billion dollars for a wall with Mexico, and we'll agree to lift rigid budget spending caps. Any funding for a wall is a non-starter for Democrats (who might consider a fence), but these preliminary talks show that some kind of deal – raising outlays for defense, with some leniency on domestic spending – may come into focus after Labor Day.

4. GOOD JOBS, NO WORKERS: The Labor Department reports that there are 6.2 million job openings in the U.S., a record. Yet most of these jobs, good jobs, can't be filled – a scandal, in our opinion. Why is this happening? Talk with business leaders and they'll tell you they're willing to provide worker training but it's increasingly difficult to find job applicants who can pass a drug test. Incredibly, despite the 6.2 million openings, the Trump Administration wants to slash legal immigration.

* * * * *

EDITOR'S NOTE: We probably will not publish tomorrow, back next week.

August 9, 2017

The Greatest Korean Risk

THE GLOBE'S TWO MOST PROMINENT GRENADE THROWERS have finally spooked the markets, and we're now in a serious crisis. A Korean shooting war is unlikely, but there's one huge risk: a miscalculation – could a border or sea skirmish spin out of control?

DONALD TRUMP'S THREAT OF A NUCLEAR RESPONSE stunned Washington yesterday, prompting predictable condemnation from Democrats and some Republicans, who believe the President has drawn a red line that could trap him if he can't back it up. A military response is now on the table, despite the likelihood of enormous casualties on the Korean peninsula – and that threat will persist for the foreseeable future, prompting the key question: how to defuse this crisis?

CHINA IS THE KEY: Top geopolitical experts believe Beijing is exasperated with Kim Jong-un; the Chinese sided with the U.S. to condemn North Korea in a recent United Nations vote. Should China exert a positive role, helping to defuse this crisis, it would greatly increase Beijing's stature and influence in Asia. We think Trump's analysis is correct: China is the key, which is a major reason why U.S. trade complaints against China have been put on the back burner.

IN THE MEANTIME, WHAT ARE THE OPTIONS? The U.S. will step up its delivery of THAAD missiles to South Korea. More military exercises are likely. Even more sanctions could cripple North Korea's coal exports. Covert U.S. cyberattacks on Pyongyang will be intensified. The rhetoric from Trump and Kim will stay red hot. And make no mistake – Pentagon officials are preparing contingency plans for a military response. 

IN THIS CLIMATE, EVEN WITH A CONSTRUCTIVE CHINESE ROLE, the risk of a miscalculation will persist. Just as the assassination of Archduke Franz Ferdinand ignited the kindling in Europe in the summer of 1914, a random act of violence could spin out of control (a similar threat is a concern in the Persian Gulf, as Iranian ships and jets test the U.S.).

THE MARKET IMPACT: Just as there was the "Trump trade," there will be a "Korea trade." This crisis may make fixed income assets and gold more attractive. Defense stocks should benefit – especially Lockheed Martin, the prime contractor for the THAAD missile. 

THE STOCK MARKET, which was breezing through the summer, finally has something serious to worry about. At the least, there will be headline risks as the bombast ramps up. Just the threat of war could begin to weigh on consumer and business confidence – and spending. The safest bet is that an uneasy stalemate will persist, with the threat of war eventually subsiding. But that is not a certain bet.

August 7, 2017

Robert Mueller, Ramping Up – and Over-Reaching

THERE'S NO STOPPING A ZEALOUS PROSECUTOR, and Robert Mueller is no exception. There's a serious case to investigate – Russian meddling in the 2016 election, and possible cooperation from Donald Trump's aides. But the scope of Mueller's probe apparently is morphing into a sweeping investigation of Trump's finances and anything else that interests the special counsel's all-star team of pit bull lawyers.

AS BILL CLINTON DISCOVERED, a Special Prosecutor can veer into any side-issue and find something nefarious – in Clinton's case, it was lying about his involvement with Monica Lewinsky. Finding perjury, obstruction of justice and cover-ups in the Trump Administration should be child's play, even if those alleged infractions have little to do with Russia.

MUELLER'S PROBE COULD TAKE another year, some experts believe, and he has unlimited subpoena powers to obtain emails, documents and testimony that will be presented to a grand jury that apparently has been empaneled. There is little likelihood of Mueller being restrained; many Senators – including several Republicans – are preparing legislation that would prohibit Trump from firing Mueller.

IT'S DIFFICULT TO FEEL SORRY FOR TRUMP, when he still insists – outrageously – that the Russians did nothing wrong last year, when there's overwhelming evidence that they did. After Congress unanimously passed new sanctions against Moscow, who did Trump blame? Not the Russians, but Congress.

SO TRUMP HAS DWINDLING SUPPORT ON CAPITOL HILL, where he is despised by all Democrats and many Republicans – none of whom will do him any legislative favors. A debt ceiling crisis looms this fall along with other complicated budget issues, and it's unclear whether Trump and his aides have the knowledge or skills to deal with these issues. Yes, the Republicans want to move on tax reform, but budget issues will gobble up all of September.

TRUMP HAS ONLY TWO ASSETS: First, he enjoys a solid economy, now firmly in Goldilocks territory. Second, he has a fanatically loyal base of support, still over 50% of the Republican Party, that is enraged over "fake news" and the Russia probe. A cynic might suggest that the Russia probe is a plus for Trump, because it has solidified his support among his base while diverting attention away from his legislative failures.

BUT THE TRUMP SLUMP will continue, with a fresh leak every few days from the Washington Post and the New York Times. We understand Trump's fury over leaks but there are two inescapable facts – most are coming from within his administration, which is simmering with in-fighting and palace intrigue; and while the leaking may be illegal, most all of the leaks are true.

IS IT ANY SURPRISE, in this volatile environment, that several Republicans are toying with a 2020 run for the presidency? We've been reporting since spring that Mike Pence is establishing a campaign operation; yesterday's New York Times was about three months late with that story. Every leading Republican from John Kasich to Tom Cotton to Nikki Haley can smell blood in the water, and they're considering a run.

WHAT CAN TRUMP DO? He could listen to his new Chief of Staff, John Kelly, and tone down the tweets, but that seems unlikely. He could demonize Mueller, but he's a Boy Scout, a Republican with an impeccable reputation. Trump could seek to divert attention to other issues, perhaps geopolitical. Or Trump could risk a Constitutional crisis and fire Mueller, citing an over-reach into issues that are not relevant to the Russia probe.

BOTTOM LINE: This will drag on for months and months; Mueller seems determined to find a crime, any crime. But a two-thirds vote to convict in the Senate still seems like a stretch, so chances of impeachment are unlikely – but they're not zero. 

IN THE MEANTIME, the Trump agenda will sputter on Capitol Hill; the Republicans are hopelessly divided between moderates and conservatives on most issues. Except, of course, they are unified in their disdain for Trump, whose political capital will diminish further as Robert Mueller, unchecked, casts his very wide net. 

August 3, 2017

Let's Attack Conventional Wisdom With Seven Contrarian Thoughts

CONVENTIONAL WISDOM RULES in the Washington echo chamber, but conventional wisdom is often wrong. So let's have some fun this morning – while risking angry emails – with some contrarian thoughts:

1. No wave election: It's a given inside the Beltway that the Republicans are headed for a major smack-down in the 2018 elections, but we don't see it. Yes, Donald Trump's job approval numbers are terrible – below 40% positive, even in the Rasmussen poll – but the economy is solid and the Democrats are still looking for a message other than "we hate Trump." 

A look at House districts persuades us that the Democrats will fall short of the 24 net seat gain needed to capture the House; a pickup of 15 or even 20 seats is possible but 24 looks like a stretch. In the Senate, incredibly, the GOP is poised to gain seats, jumping from 52 to maybe 54 or 55. The Democrats have to defend 10 Senate seats in states that Trump won last year; five are in states Trump won in a landslide.

2. Trump will tire of John Kelly: The retired four-star general has been canonized in Washington; he's a savior, everyone agrees. But Kelly may be overstepping his bounds already. The new White House chief of staff reportedly has assured Jeff Sessions that his job is safe, and he apologized to James Comey for the way he was fired. How do you think Trump reacted to that in private?

More significantly, Kelly is attempting to control who Trump talks to and the information he gets. No more schmoozing with Steve Bannon and the old gang, no more reading Breitbart; everything will be controlled so Trump is shielded from politically incorrect thinking. Good luck with that. At some point Trump will begin privately criticizing Kelly; he criticizes ALL of his aides, including Jared Kushner. For Kelly, the bloom will be off the rose by Thanksgiving, guaranteed.

3. Scare tactics on government default: The markets in general – and the dollar in particular – could be affected by threats of a U.S. debt default this fall, but despite all the drama, it won't happen. Steve Mnuchin may have to dig deep into the Treasury Department's bag of tricks in mid-October, but debt obligations can be juggled well past his Sept. 29 drop-dead date.

4. The Fed doesn’t matter much: For all the hand-wringing about an activist Federal Reserve, it's becoming clear that the central bankers are boxed in. They cannot raise rates anytime soon, despite a tight labor market, because there's no inflation threat. So maybe we'll get only one measly 25 basis point move late this year, which won't make a difference for the markets or the economy. What about a fourth quarter shift on the balance sheet? The most telegraphed move in Fed history.

5. China deserves a smack-down: Fears over a U.S.-China trade war are valid, but there are ample reasons why China deserves a smack-down: Beijing has hacked into EVERY ONE of the U.S. Fortune 500 companies; the Chinese have brazenly stolen U.S. trademarks and intellectual property rights, they don't play fair on trade, and they continue to trade briskly with North Korea. The Chinese are not our friends.

6. Vladimir Putin is losing: The Western media portrays the Russian dictator as a geopolitical mastermind, but he's presiding over a crumbling economy that just got shakier because of tough new U.S. sanctions. Putin now has a fresh counter-weight in Emmannuel Marcon, as Europe becomes less naive about the Russian thug. Did Putin really gain much with Trump's election victory? Actually, he united the entire U.S. political establishment against him – even, reluctantly, the president. 

7. The Trump stock market: It's gospel truth in the media that Trump had nothing to do with the stock market rally. Of course he did – despite the tweets and other annoyances from Trump, he has established an unabashedly pro-business climate in Washington, a relief after eight years of adversarial relations between the Obama administration and business. Tax reform is still alive, and economic policy is now run by Goldman Sachs veterans – and to assert that this isn't significant for the markets simply panders to the conventional wisdom.

* * * * *

EDITOR'S NOTE: The Dog Days have arrived, so we will publish only three or four times a week between now and Labor Day. We'll be watching the jobs report at 8:30 tomorrow but will not write unless there's a shocker.

August 2, 2017

Republicans in Congress in Open Rebellion; U.S.-China Relations Heading South

THE AUGUST BREAK BEGINS WITH THE GOP IN OPEN REBELLION against President Trump, a remarkable political development that does not bode well for high-stakes debates after Labor Day. Forget policy differences for a second– we're dealing with egos, and Republicans in the Senate did not appreciate being called "fools" by Trump earlier this week.

SO THE GOP WILL DEFY TRUMP and work with Democrats this fall on legislation to shore up shaky health insurers. Trump's threat to deny federal funds to these insurers will be blocked by Congress; key GOP Sen. Lamar Alexander said yesterday that there will be bipartisan legislation to "stabilize and strengthen" the individual insurance market. We think Trump should be pleased, because he would be blamed if there's a health insurer crisis later this year; like it or not, he now owns the health issue.

THE SENATE IS AN EXCLUSIVE CLUB, and members have each others' backs. Thus the Trump tweet-storm in July against former Sen. Jeff Sessions was very poorly received by his many friends in the club. And in private, most Republicans in both Houses agree with scathing comments about Trump's temperament in a new book by Sen. Jeff Flake.

WHY THIS MATTERS: Trump will need GOP votes, plus some from Democrats, in the next major battle– raising the debt ceiling before an apparent Sept. 29 deadline. Talks on the debt ceiling broke down yesterday, and with only a dozen legislative days before the deadline, a crisis looms. Tax reform will have to take a back seat– very complicated budget issues will dominate this fall, and the White House is not ready for the GOP in-fighting that will erupt.

CHINA WARNING SIGNAL: As we wrote on Monday, a clear deterioration in relations between the U.S. and China is likely this month. Trade and economic sanctions may ratchet up soon, and the Trump Administration is about to begin a probe of China's trade policies. Why? Partly because China doesn't play fair, especially on intellectual property rights, and partly because Trump is angry that China won't lean on North Korea.

WITH A U.S. MILITARY OPTION against North Korea still on the table, the Trump Administration "is readying harsh trade sanctions against Chinese steel producers and perhaps against several big Internet companies, too," according to Washington Post foreign policy expert David Ignatius, whose plugged-in column is a must-read. 

IGNATIUS WROTE THIS MORNING that "sources tell me that a milder trade deal worked out by Commerce Secretary Wilbur Ross last month was scuttled by the White House, humiliating the Chinese, and Ross too, but sending the message that Trump is serious in demanding China’s help on North Korea as the price of trade flexibility." This story is about to heat up, filling the vacuum as Congress leaves for a month. 

* * * * * 

EDITOR'S NOTE: With Washington clearing out for the August break, we'll probably write only 3-4 times a week, depending on news developments, until Labor Day.

August 1, 2017

Unrealistic Expectations on Tax Reform

IT'S A MYSTERY TO US why the White House keeps raising expectations for tax reform. We understand why Republicans want to change the subject after the health reform debacle, but assertions yesterday by White House officials that a tax bill will sail through Congress this fall are wildly optimistic, for four reasons: 

1. The health reform hangover: Republicans want to move on, but there are dozens of health options that will be considered after Labor Day, and President Trump won't take no for an answer. He still demands that the Senate must do something, and Trump reportedly is considering executive orders to change Obamacare. 

Actually, we think a health bill can pass this fall, aimed largely at keeping insurers afloat, and that bill could become a vehicle for some modest health changes; even the device tax could be in play. But this revived health bill will take time – lots and lots of time.

2. Details, details, details: A super-optimistic tax timetable overlooks the likelihood of major differences that will have to be ironed out. Just one example: The chief Senate tax-writer, Orrin Hatch, told Reuters yesterday that he's not even sure the top corporate tax rate can get to 25% (the White House wants 15%). The issue of how – or whether – to pay for tax cuts has not been resolved.

3. The looming budget train wreck: We've been warning for weeks that an epic budget crisis looms in September, which will preclude any quick action on tax reform. Treasury Secretary Steve Mnuchin warned yesterday that a government default looms in late September, and he's not kidding. Congress isn't remotely close to an agreement on that, or on a budget resolution that would contain tax-cut instructions. And of course there will be the usual blather about a government shutdown as the fiscal year ends on Sept. 30.

Republicans are not unified on any of these issues – still another fierce battle looms between GOP hard-line conservatives and the moderates. It seems inevitable that the beleaguered Republican leadership will need support from Democrats on some of the budget issues, especially the debt ceiling. And that will expose raw divisions within the GOP that will not heal as tax debate begins.

4. It's always something: There will be a fresh story, embarrassing and distracting, every few days from The New York Times and The Washington Post, that's just reality. This morning's is a doozy – did Trump really craft his son's spin on the Russian meeting, writing a deceptive statement? This Post article relies on anonymous sources, so who knows if it's true? But it's more fodder for Robert Mueller to investigate; the Russia cloud will continue to darken.

BOTTOM LINE: Tax reform takes time, and there's still no bill !! Once the smoke clears after the budget brawl, it's possible that the House could pass a measure by late fall, and there's an outside chance that the Senate could finish by year-end. Getting a bill enacted by next winter would be miraculous; a bill by spring is possible; a bill by summer is likely. Why claim that a bill can be enacted this year?? It simply sets expectations too high, which means a disappointment is inevitable. 

A QUICK NOTE ON ANTHONY SCARAMUCCI: Bravo to John Kelly, he's a tough guy for a weak president, and there actually may be a chain of command in the White House. Trump was hemorrhaging support from Christian conservatives after Scaramucci’s profane rant, so he had to go. But we're hearing there may have been a sleeper issue: Scaramucci's sale of his hedge fund to the Chinese, which could have become a political embarrassment for the White House.

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