October 2017 - Politics & the Markets (Greg Valliere - Horizon Investments)

The ongoing thoughts from Greg Valliere, the Chief Global Strategist for Horizon Investments, who has a lot of great insights to politics & the ramification on financial markets.

October 31, 2017

Who Sings Next – And How Will Trump Respond?

ROBERT MUELLER ISN'T SUBTLE: The Special Counsel and his team of pit bulls are just beginning. More indictments are inevitable, as dozens of White House aides worry about their emails to and from George Papadopoulos, who is singing loudly. This probe is ramping up dramatically, and Donald Trump – convinced he's the victim of a witch hunt – has some very difficult decisions to make. 

THE RIGHT PUSHES BACK: Rupert Murdoch's Fox TV and the Wall Street Journal are mounting a furious counter-offensive, targeting a Russian uranium deal they claim is tied to Hillary Clinton, and the Democrats' funding for Fusion GPS, which compiled a "dossier" on Trump. The Democrats aren't virgins (Tony Podesta is under a cloud), but these issues don't distract from the main point: Mueller is aiming higher, he wants a classic prosecutorial domino effect.

TRUMP SURELY MUST UNDERSTAND THIS, and he must sense an increasing vulnerability to his inner circle; Mueller undoubtedly is chomping at the bit to bring down Jared Kushner. Indictments are easy to obtain from a grand jury in liberal Washington D.C. – and anyone who even had one email with Papadopoulos may be infected, as Mueller seeks indictments for perjury and tightens the vice, looking for plea bargaining and singing.

THE CASE FOR FIRING MUELLER: The prospect of indictments and trials lasting through 2018 and longer, possibly targeting Trump's family and the President himself, could push Trump over the top – he has to be thinking of firing Mueller. Could this lead to his impeachment in the House? Possibly. Could it lead to his conviction in the Senate? That's the key issue, and the answer probably is no, there aren't enough votes in the Senate to oust him.

WHAT ABOUT TRUMP'S AGENDA? It was pretty much in tatters before yesterday, with Congressional Republicans only caring about one thing – tax reform. Even that goal took two shots yesterday – 1.) A Bloomberg report that the tax cuts might be phased in, which apparently shocked the markets (even though we and others have reported for weeks that this option is under consideration). And 2.) a mild surprise from liberal GOP Sen. Susan Collins, considered a tax cut supporter, who said she could not endorse abolition of the estate tax or any tax cuts for those who make more than $1 million annually.

THE MUELLER HYSTERIA AND SPECULATION ABOUT SINGING may provide a convenient political cover for the tax writers, as we wrote yesterday; they want to steamroll the bill through the House before its flaws become more apparent. So Trump has a chance of success on this one great goal, but beyond that we envision an administration that will become increasingly bogged down by Mueller, who quite clearly is aiming for the top.

October 30, 2017

Indictments Could Obscure Huge Developments This Week

WEEKEND WHISPERING: The possibility of imminent indictments dominated this town over the weekend. Could it be Paul Manafort? Michael Flynn? Would the President consider pardons? Could he fire Robert Mueller? Are plea bargains likely? What about Hillary Clinton's alleged transgressions? This has transfixed Washington – potentially obscuring some very big items on Donald Trump's agenda, perhaps to his benefit.

TRUMP IS ANGRY: The President's legal advisors reportedly have urged him to refrain from tweeting about Mueller's probe, but Trump can't resist. His anger was palpable this weekend; he feels targeted by a witch hunt, and we do not rule out pardons or even the firing of Mueller. That would prompt massive Republican defections – and could provoke a Constitutional crisis. 

TRUMP'S ANGER THIS WEEKEND may have stemmed from his inability to dominate the news cycle – but we'll offer a very contrarian view: Mueller's action will provide cover for Trump on three huge issues that have the potential to generate more bad publicity than good... 

1. Tax reform: After months of secrecy, the House Ways and Means Committee will unveil its tax bill on Wednesday. It will immediately become a target, with opposition to changes in the state and local tax, 401(k) plans, the deductibility of mortgage interest and dozens of other provisions. And Democrats will howl that the bill favors the wealthy. So Chairman Kevin Brady wants this to move quickly through the House, and if Mueller is the dominant story, Brady's tax steamroller could get lost in the noise. 

2. Fed appointment: Our view on the Fed is very simple: If it's not broke, don't fix it. But Trump apparently wants someone new – probably Jerome Powell – which will produce inevitable criticism over firing Janet Yellen, who has presided over a roaring stock market and an economic recovery. If Trump is furiously tweeting about Mueller on Thursday, when his Fed decision is likely, Yellen's ouster may not get the attention it deserves. 

3. The Asia trip: Trump leaves for Asia on Friday and we think he may need cover as critics focus on deteriorating relations with China, his continued trade disputes and the inability of the U.S. to stop North Korea's missile tests. Perhaps Trump will exceed low expectations in Asia – but if he doesn't, the Mueller controversy could give him the media attention he craves.

WE'RE IN UNCHARTED WATERS: Not since Richard Nixon has there been such a furious president who genuinely believes he's the subject of a witch hunt (and has a solid core of supporters). Trump could take unpredictability to a new level. Indictments will take center stage in this circus, and everything else – unveiling a tax bill, naming a new Fed Chairman, and Asia – will be sideshows.

October 27, 2017

What We're Hearing From Clients

EVERY FEW MONTHS we run this feature, because we learn so much from talking with investors, both institutional and retail. So this morning we will pass on what we're hearing – the consensus of investors, who provide a refreshing contrast from the Beltway mentality. Here goes:

  • There's rising optimism over the economy, and virtually no one we talk with anticipates a recession any time soon. Not many investors are euphoric; they don't anticipate a boom but there's a strong belief that moderate growth is sustainable.

  • Donald Trump is widely mocked but his policies are praised. Most investors are savvy enough to divorce the Trump tweets – which are viewed as childish – from the generally pro-business climate in Washington, which is cited as a factor in the stock market rally.

  • Surprisingly, most clients don't expect tax cuts to affect them much personally. But they anticipate a major plus for business, with much lower corporate tax rates giving the stock rally another leg up. No one seems to care whether the tax cuts pass in December or March; investors simply want the process to advance.

  • There's growing unease over budget deficits. The $666 billion in red ink in the just-ended fiscal year is viewed with alarm, especially by retail clients. A surprising percentage worry that entitlement benefits – Social Security and Medicare – will eventually have to be curbed because of these deficits.

  • Intriguingly, a majority of investors would have no issue with higher interest rates; retail clients, eager for better yields, would actually welcome higher rates.

  • We never hear clients calling for Janet Yellen's ouster. She's associated with a roaring stock market and the economic recovery, so why fix what's not broken?

  • Business execs we talk with have been complaining for over a year that they can't find skilled labor, and recently they have lamented that they can't find enough workers who can pass a drug test. Trump's proposal to curb legal immigration is viewed with dismay.

  • There's widespread exasperation over the Millennials, who don't seem to accept the traditional pattern of getting a good job and buying a home. They have priorities that the older generations don't understand.

  • Retail investors age 40 and older are beginning to plan for retirement. Everyone in our industry had better have good retirement advice, because it's what clients increasingly want to discuss. This is a major priority at Horizon Investments.

  • The only politician who gets good grades – and whose reputation has improved this year – is United Nations Ambassador Nikki Haley, the near-certain successor to Rex Tillerson at the State Department.

  • Unfortunately, there's only tepid support for free trade, with a majority of clients in agreement that the U.S. has gotten fleeced, especially by China.

  • There's a surprising fascination with faux currencies like Bitcoin, especially from retail investors, many of whom think this is the start of something big.

  • There's little concern among clients over terrorism or ISIS or North Korea, but there's uneasiness that the U.S. – and the entire financial system – is vulnerable to cyberterrorism.

  • Among liberal clients, there's dismay that the Democrats have virtually no new ideas and an acute lack of fresh faces heading into the next presidential election cycle.

  • No one seems to care about the Russia probe. Despite strong antipathy toward Trump personally by a surprising majority of clients we talk with, very few favor impeachment.

  • Everyone hates Washington, it's almost the national sport. There's a genuine longing for bipartisanship but investors are resigned to the dysfunction and can live with it, perhaps as a form of entertainment.

THERE YOU HAVE IT, that's our summary of client attitudes. They're an optimistic bunch – not euphoric, but cautiously optimistic. Sir John Templeton famously said bull markets begin with despair and end with euphoria; investors we talk with are not euphoric yet, which persuades us that the rally will continue.

October 26, 2017

Can Republicans Overcome the Distractions And Pass a Tax Bill?

THIS IS NO TIME TO GO WOBBLY, as Margaret Thatcher often said, and that's good advice as Congress begins to infuriate just about everyone with tax proposals that curb some popular tax breaks. We think Republicans are prepared to make tough – and unpopular – decisions but they face one important obstacle: Donald J. Trump, who is already butting in, not showing the discipline required to get the bill passed.

GOOD-GUY KEVIN BRADY has a very difficult task – keeping his GOP colleagues focused on the overall goal of tax reform while getting a bill through the House by Thanksgiving. The Ways and Means Committee Chairman will have to scale back his proposal to kill the state and local tax break; his eventual compromise may may cost $500 billion in revenues he was counting on to pay for tax cuts. And he almost certainly will have to dramatically scale back any curbs on 401(k) contributions.

TRUMP IS LEADING THE CAMPAIGN against reforming these two tax breaks, second-guessing Brady, and this will have one major consequence: curbing these two reforms will reduce the amount of money available for tax cuts – and, ironically, this means Trump may not get a 20% top corporate rate; that might wind up at 22% or 23%. And the economic impact of the tax bill in 2018 may be diminished as many provisions are phased in gradually, because there won't be enough money for them to take effect immediately.

WE STILL THINK A BILL WILL WIN ENACTMENT BY LATE WINTER, but the distractions in this city – which is already afflicted with an Attention Deficit Disorder – will only intensify in the coming weeks.

THE BIGGEST DISTRACTION will be a bruising budget battle in early December, with Chuck Schumer becoming a dominant player, demanding action on immigration reform and aid to health insurers. He is just as partisan as Harry Reid but more affable and shrewd, and the tax debate may take a back seat for a couple of weeks as Schumer throws everything but the kitchen sink into a 2018 budget bill.

THE OTHER MADDENING DISTRACTION is the unending re-litigation of the 2016 election, with fresh charges daily about Hillary Clinton, the Donald Trump dossier, Wikileaks, and so forth. For most voters – and most of our clients – this is exceptionally annoying background noise; most Americans don't care. But this is red meat for the press, and Trump lacks the discipline to let it go.

THE REAL DISCIPLINE WILL COME FROM Paul Ryan, Mitch McConnell, Kevin Brady and others who are determined to get a tax bill done. It will be an imperfect bill, not as grand as Trump wants, but it will be a huge positive for business, which will get much lower tax rates and some badly needed clarity on issues such as foreign taxation.

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JOHN F. KENNEDY, BACK IN THE NEWS: In a city that overreacts to every distraction, there will be a doozy today: the release of sealed documents that probably will show collusion by the CIA and FBI to conceal information about the Kennedy assassination. 

Many of our readers weren't born when Kennedy was killed; those of us who remember know that the enormous distrust of government – so prevalent today – began with JFK's death and never subsided as Vietnam and Watergate and Iraq produced generations that simply do not believe politicians.

We know a lot of politicians, and you would be amazed that the vast majority are decent, religious, honest, patriotic, and monogamous. They work 18 hours a day and try to do the right thing. But this pervasive distrust of government, ignited by Kennedy's death, has led to a broken system and the policy paralysis that so afflicts Washington.

October 25, 2017

New Bombshell Gives Trump a Life Preserver; John Taylor – Fed Frontrunner?

CHRISTMAS IN OCTOBER: Stumbling through one of his worst weeks after a fight with the widow of a war hero and a smackdown from GOP dissidents, Donald Trump is the recipient of a surprise gift that will keep on giving. He can claim with some justification that investigations against him are witch hunts funded by Democrats.

A BOMBSHELL FROM THE WASHINGTON POST last night reported that the firm behind a mysterious "dossier" on Trump was paid by the Democratic National Committee and the Hillary Clinton campaign. Opposition research is shady stuff, but no matter – Trump will begin tweeting in the next couple of hours that there was a conspiracy against him. His base will agree.

AND TRUMP'S ALLIES IN THE HOUSE have begin a probe of a Russian uranium deal that was approved by the State Department when Hillary Clinton was Secretary of State. Clinton and others have insisted that she wasn't involved, but this story has infuriated Trump supporters; it's often the lead story on Fox News.

THESE TWO STORIES GIVE TRUMP just what he needs – a distraction, at the least, but more importantly it gives him continued massive support from his adoring base. The base views Sens. Jeff Flake, Bob Corker and John McCain as traitors; Flake had virtually no chance to win his GOP primary in Arizona next year.

AS LONG AS TRUMP HAS 75-80 PERCENT of GOP voters behind him, he's effectively inoculated. Most Republicans in Congress agree – in private – with Corker's scathing criticism, but they're afraid to speak out because they'll lose their next primary. Impeachment? Not gonna happen, even if Democrats take the House next fall, because Trump has enough Republicans in his pocket in the Senate, where he only needs one-third of the members to avoid removal.

THAT'S OUR TAKE ON THE POLITICAL NARRATIVE – but the legislative narrative is more complicated...

A THIRD "NO" ON THE TAX BILL? Trump may have the bully pulpit, but his narrow Senate majority means the GOP can afford to lose only two votes on the tax bill – and now it's possible there will be three in opposition: Corker, Flake and the quirky Rand Paul. Dealing with the enormous egos on Capitol Hill is tricky, and there are no signs that Trump can play that game. Congressional Republicans don't trust or like him, and that will be an ongoing problem.

LET'S VOTE FOR FED CHAIRMAN !! One of the most bizarre developments in an utterly bizarre day on Capitol Hill yesterday was Trump's call to Republican Senators to raise their hands on whether John Taylor or Jerome Powell should be the next Fed Chairman. Taylor apparently won. We've thought for the past week that the Stanford professor is the favorite; Taylor once was a dark horse but now probably is the frontrunner. 

IF JANET YELLEN HAS FALLEN OFF THE RADAR, that's a big deal for the markets, which have enjoyed her accommodative policies. Taylor is an outspoken iconoclast who would shake up the Fed – but we envision an eventual clash between him and Trump; once Taylor starts raising rates, this President who breaks all the rules will squawk publicly about his hawkish Fed Chairman.

October 24, 2017

Trump Second-Guesses the Tax Writers; We're Changing Our Call on the 2018 Elections

DONALD TRUMP WANTS A VICTORY -- any victory -- but he's complicating the cause of passing a tax bill by butting into the process.  We never thought there was a chance to curb 401(k) plans, but Trump waded in yesterday in opposition to any change, a clear sign that he will intervene as the tax bill begins to move.

WHAT'S NEXT?  Trump apparently has sided with Steve Bannon on the issue of tax treatment for "the rich." So we think the tax writers will add a top bracket -- perhaps for couples with annual earnings of $1 million or more -- that will be close to the 39.6% current top rate. And it's possible Trump will second-guess the House if it votes to totally abolish the estate tax.

THIS ANNOYS REPUBLICANS on Capitol Hill, many of whom were stunned when Trump said over the weekend that the bill could be completed by Thanksgiving. That sets them up for criticism if the bill is nowhere close to enactment in late November, which seems likely. Most of the Republicans we've talked with want Trump to butt out; he's already micro-managing the state and local tax debate.

THE GREAT CHALLENGE for tax writers is squeezing in enormous tax cuts that need to be paid for with some revenue-raisers, which no one -- including Trump -- wants to do. This impossible task has prompted GOP lawmakers to look at many options: 1. phasing in the tax cuts gradually; 2. allowing them to expire after a few years, thus daring a future Congress to let them lapse; 3. defying Trump's demand that the corporate tax rate must fall to 20%; 4. scaling back the individual tax rates as well. These are very unappetizing options.

THE OBVIOUS CONCLUSION is that the final product will not be as grand as Trump has advertised.  We still think a tax bill, probably enacted by late winter, will be well received by the markets because the corporate rate will fall from 35% into the low-20s, with lots of other pro-growth provisions such as lower taxes for pass-through corporations, repatriation of foreign earnings, more generous depreciation, etc. But many Americans won't see much of a change in their take-home pay.

THIS NOON'S LUNCH with congressional Republicans and Trump won't resolve much. Many of the lawmakers want details from Trump on taxes and health care, but we think the session will be little more than a pep rally. The tax writers will plow ahead, but most Republicans worry that a fresh distraction from Trump could erupt at any moment; controversy over Sgt. La David Johnson's death has dragged on for over a week, and now there's a furor over U.S. objectives in Africa.

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CHANGING OUR CALL ON THE 2018 ELECTION: We have predicted for months that the Senate and House would remain under Republican control after the 2018 elections but it's time to change that forecast. There are so many vulnerable Democrats in the Senate that the GOP should maintain control there, but the House now looks like a tossup.

DEMOCRATS NEED A 24-SEAT PICKUP in the House, which looked like a long-shot because so many gerrymandered districts aren't competitive. But one thing has changed: money, a tidal wave of contributions from angry Trump opponents to the Democrats, who have outraised Republicans in district after district, according to a detailed report in Politico this weekend.

WHY THIS IS IMPORTANT: Angry activists want Trump out; they will insist on impeachment proceedings in the House, where a simple majority is sufficient to indict. A conviction in the Senate requires a two-thirds vote, a very, very high bar to clear, but the "I" word will complicate the legislative agenda if it looks like Democrats have a reasonable shot of taking the House.

October 23, 2017

Tax Writers Face a Big Complication in December

PASSING A BUDGET RESOLUTION WAS EASY, now comes the hard part – the Ways and Means Committee has to write a tax bill in the next couple of weeks, and the details will prompt an uproar from lobbyists; a battle has started already over 401(k) accounts. And then there's the likelihood of a titanic budget fight when a continuing spending resolution expires on Dec. 8.

SO – CAN THEY FINISH A TAX BILL THIS YEAR? A budget resolution will be completed later this week with no need for a conference committee. Then Ways and Means Chairman Kevin Brady will unveil a 1,000 page tax bill – finally – in the week of Oct. 30, with markup in his panel by early November and a bill on the House floor before Thanksgiving. "This is when things get dicey," a tax lobbyist friend tells us.

WHAT WILL HATCH DO? Senate Finance Committee Chairman Orrin Hatch probably won't have his bill out until late November, and there undoubtedly will be major differences with the House on issues ranging from 401(k) reform to the state and local tax break; the former is probably safe but the latter tax break could get curbed for very wealthy taxpayers.

SO WITH THESE AND DOZENS MORE DIFFERENCES, ALONG COMES A BIG COMPLICATION: Government funding will expire on Dec 8; that was the deal cut between Donald Trump, Nancy Pelosi and Chuck Schumer. This sets up a donnybrook, with Schumer using a 2018 funding bill as leverage for his pet causes: aid to health insurers, a "Dreamers" immigration bill, and the Democrats' spending goals. Schumer and his allies don't want to talk publicly about a government shutdown, but it's an option.

MEANWHILE, THE SENATE HAS TO FINISH ITS VERSION OF A TAX BILL around Dec. 8, which would barely give enough time for a conference committee to iron out a tax compromise by Christmas. "Very hard to do," our lobbyist friend says. In addition to the uproar that Chairman Brady's loophole closers will provoke, there's a new furor in Washington – just what, exactly, is the U.S. goal in Niger?

BOTTOM LINE: It's been smooth sailing for a budget resolution, and tax writers are furiously working on a bill – but there are potholes ahead, especially as trial balloons like 401(k) changes needlessly complicate the process. Yet investors still should focus on the likelihood of eventual enactment of a tax bill, probably by late winter, quite possibly after Vice President Pence breaks a 50-50 tie.

BUT INVESTORS SHOULD NOT COUNT on a controversy-free process in the next two months, leading to enactment this year. There are simply too many controversial tax issues to be resolved, and the budget fight in early December promises to be super-messy and time-consuming. Chuck Schumer is in no hurry to pass a tax bill; he will insist that it favors the wealthy, which will make establishment Republicans squirm as they prepare to face populists on the right and left in next fall's elections.

October 20, 2017

A Surprise on Tax Cut Timetable; Handicapping the Fed Candidates

A SURPRISE ON THE TAX CUT TIMETABLE: Yesterday's Senate vote to pass a budget resolution was widely expected, and there's no doubt that the House will go along. The real eye-opener was the assertion by House Republicans that a conference committee may NOT be required to finalize a final budget resolution – and that would save at least two weeks, allowing debate to begin quickly on a tax bill.

THE TIMETABLE: House Ways and Means Committee Chairman Kevin Brady hopes to introduce a tax bill within two weeks; his panel could pass it before Thanksgiving. Full House approval is likely by early December. The plodding Senate could pass its measure before the holidays, setting the stage for a House-Senate conference committee to finish a bill in early 2018. 

WE'VE BEEN PREDICTING ENACTMENT of a bill by spring; now we think late winter is possible. These folks are serious – they want a victory, and they want it fast. Avoiding a House-Senate conference committee is a strong signal that they plan to steamroll a bill through Congress ASAP.

HANDICAPPING THE FED CHAIRMANSHIP: President Trump has now met with all five contenders for the Fed Chairmanship; he sat down with Janet Yellen yesterday and plans to announce his decision before leaving for an Asia trip on Nov. 2. Here's our handicapping:

Jerome Powell – 2-to-1 odds: He’s a solid central banker with a great resume, a moderate Republican and the strong favorite of Treasury Secretary Mnuchin. Powell would easily win Senate confirmation. Market impact: He's viewed as a Yellen clone on monetary policy, thus would be a slight negative for the dollar, a plus for the bond market and stocks.

Janet Yellen – 3-to-1 odds: Still in the running, despite her Jackson Hole speech late this summer that strongly endorsed Wall Street regulations; needless to say, that was not well received in the White House. Market impact: Status quo, obviously, with the same impact as Powell.

John Taylor – 5-to-1 odds: The crusty Stanford professor's chances have improved recently; his pro-growth, anti-regulation arguments have impressed Trump and his inner circle. The famous "Taylor rule" would imply a fed funds rate at least twice the present level, which could give Trump second thoughts. Market impact: dollar much higher, interest rates higher, stocks fine after an initial hiccup. 

Kevin Warsh – 8-to-1 odds: Similar to Taylor. A former Fed governor who wants regulatory reform, Warsh has strong backing from the Wall Street Journal editorial page, but he may have pushed too hard for the job. Market impact: Taylor lite. 

Gary Cohn – 10-to-1 odds: The early frontrunner has not recovered from his blistering Financial Times interview; he ripped Trump for his reaction to the Charlottesville riot and Trump, of course, never forgets a slight. Cohn understands markets; he's a Goldman Sachs guy, which is a liability in Trump's base. Market impact: roughly the same as Powell.

BOTTOM LINE: Yellen has detractors, but the overall market reaction to her re-appointment would be strongly positive; she would be a popular pick everywhere – but not among Trump's base. The only contender who would truly shake things up would be Taylor, who surely must appeal to Trump's maverick style. Taylor is our dark horse favorite.

October 19, 2017

The Stock Market – a Political Football; Sobering News on Pensions

THE NEW NORMAL: If Gold Star families can become controversial, if the NFL can become controversial, so can the stock market – suddenly a political football in the battle over tax cuts.

TREASURY SECRETARY STEVEN MNUCHIN went where his predecessors have rarely gone: he told Politico’s Ben White this week that the stock market would sell off sharply if tax cuts aren't passed. In effect, he sent a warning to opponents of the bill – if it dies and stocks crash, you are to blame.

AN "ABSOLUTE GUARANTEE" THAT A TAX BILL WILL PASS BY YEAR-END: Mnuchin further raised eyebrows with his assertion of an "absolute guarantee" that the bill will become law this year. We expect more progress today as the Senate passes a budget resolution, but it may take another two weeks before a House-Senate conference committee agrees on a resolution. Then action on a tax bill will begin.

BUT A TAX BILL BEFORE YEAR-END? We don't see it, and cannot figure out why Mnuchin keeps raising the bar; he proclaimed, absurdly, this spring that the tax bill would be completed by August. Our take is that Mnuchin is a smart man who is totally out of his comfort zone when it comes to dealing with Congressional and legislative complexities. He has very little clout on Capitol Hill.

A BIGGER ISSUE IS MNUCHIN'S PREDICTION OF HOW THE STOCK MARKET MIGHT REACT if tax reform doesn't move. He's probably correct that a sell-off would be likely, but blaming opponents for a potential sell-off suddenly makes Wall Street a player in this issue – and little good can come if the stock market becomes a political football.

SOBERING NEWS ON PENSIONS: A study from S&P Global Ratings,summarized on the CNBC web site this morning, looks at an issue the politicians will not confront – not enough money has been set aside by states to pay for pensions and other benefits. The worst states: New Jersey, Kentucky, Illinois, Connecticut. The best: Wisconsin, South Dakota, New York, Tennessee, North Carolina. Despite the soaring stock market, pension reserves fell in all but two states last year. States have funded, on average, only 68% of money needed to meet obligations. 

FOR ALL OF US involved with securing decent retirements for our clients, it's increasingly clear that neither the federal government nor states – nor corporations – have set aside enough money to pay benefits. There's no government solution here, in our opinion; the solution is more aggressive investing that rejects the ill-advised reliance by many retirees on fixed income. 

TWO OTHER ISSUES THIS MORNING: The health compromise that the president seemingly has rejected isn't quite dead yet – the key is convincing Trump and House Republicans that the deal is not a bailout for insurers . . . And the truth may never be known in Donald Trump's latest battle, with the widow of a slain U.S. soldier. But the ambush in Niger will become the next Benghazi – still another distraction for an administration that doesn't need any more.

October 18, 2017

Donald Trump Faces Four Huge Decisions

A LONELY JOB: The stress of the presidency is affecting Donald J. Trump, according to multiple sources who report that his mood shifts rapidly – at times brooding or furious or bombastic. He's now in another self-inflicted controversy, over what he said to the widow of a U.S. soldier, but within a few hours he will say something new and controversial that will dominate the news. Trump likes to dominate the news.

BUT TRUMP NEEDS TO PUT HIS FEUDS ON HOLD and make some very big decisions in the next week – decisions that will have a major impact on the markets and the rest of his presidency. Here are four huge looming issues:

1. The Federal Reserve: Trump will meet with Janet Yellen tomorrow and apparently will announce his pick before leaving for Asia on Nov. 3. This is a president who loves low interest rates and happy markets, so this decision should be easy: Yellen, a no-brainer. But he also hates regulations, and must realize that Dodd-Frank reforms are going nowhere in the Senate, which means the Fed will have to lead the fight to kill regulations. 

Can Yellen convince Trump tomorrow that she wants to loosen regulations? Maybe not, which is why conservative Stanford Prof. John Taylor has suddenly become a frontrunner. But Taylor is a monetary hawk who would raise rates more quickly than Yellen; if he's nominated the dollar would rally, interest rates would move higher and the stock market would miss Yellen's highly accommodative policies.

2. Populist or Establishment on Taxes? Steve Bannon has rattled the White House and the GOP with his assertion that the tax bill favors the wealthy and corporations at the expense of the middle class. Congress will soon complete work on a budget resolution, paving the way for a tax bill – but what kind of bill? Will Trump abandon his goal of reducing the top rate from 39.6% to 35%? That's a major decision for him that will have implications for the 2018 election; a perfect storm will loom if a tax bill stalls. 

3. The Hot Stove – Health Care: How many times will the GOP touch the hot stove of health reform? They own the issue but can't fix it. Trump has to decide soon whether to enthusiastically support a compromise bill from Sens. Lamar Alexander and Patty Murray that would give states more flexibility in exchange for restoration of funding for health insurers. 

The reaction yesterday to this bill was lukewarm at best from the GOP – so if Trump really wants it he will have to decide whether to spend political capital and lobby for it. Will he really support a plan that essentially preserves Obamacare? We're watching this issue carefully because it will signal whether Trump can accept the details of bipartisanship, not just the concept.

4. Free Trade or Protectionism – Time To Choose: NAFTA talks broke up this week with no apparent breakthroughs, and will resume in about a month. We wrote last week that the treaty is on thin ice and we have no reason to change that view. There's no enthusiasm for free trade on the left or among conservative populists, and Trump seems willing to pull the plug on NAFTA, but we think that's for show. Watch his Asia trip – we think he will decide to endorse free trade, on his terms. 

THERE WILL BE OTHER DECISIONS to come this winter – whether to fire Robert Mueller, whether to keep Rex Tillerson, whether to ratchet up the temperature with North Korea and Iran, etc. But in the short-run the four issues we listed above have one thing in common: the markets want Trump to take one path, while the right wing populists want him to take another.

October 17, 2017

There's a Plan B For The Tax Bill

RUNNING OUT OF TIME: President Trump and Mitch McConnell, seemingly on the same page yesterday, said in so many words that there may not be enough time this year to pass a tax bill. Enactment by Christmas is still their goal, of course, but much of the time between then and now will be devoted to budget issues. What if it looks like a tax bill might not pass until spring, or later – is there a Plan B?

YES, THERE'S AN ALTERNATIVE SCENARIO: We keep hearing on Capitol Hill that if a tax bill bogs down, GOP leaders are prepared to move quickly on tax cuts – leaving a more complicated and time-consuming tax reform bill until after the 2018 elections. That would be a huge disappointment for Paul Ryan and the Wall Street Journal editorial page staff, but a stand-alone tax cut for businesses and individuals would be acceptable for the White House, which is desperate for a win.

THE GOOD NEWS, IF YOU WANT A TAX CUT, is that the Senate appears poised to pass a budget resolution within the next few days, which would lay the groundwork for a $1.5 trillion tax cut. A House-Senate conference committee is expected to iron out a final budget resolution by early November.

BUT THERE SIMPLY ARE TOO MANY OBSTACLES to passing a tax bill this year. First of all, there still isn't an actual bill – neither from the White House nor the House Ways and Means Committee. Second, there are enormous issues that have to be resolved – what to do with the state and local tax break, whether to make tax cuts less generous for wealthy taxpayers, etc. Third, even passage of a budget resolution won't resolve the need to pass a fiscal 2018 spending bill, which will provide plenty of fireworks, especially over aid to health insurers.

THE MOST OPTIMISTIC SCENARIO WE'VE HEARD would have the Ways and Means Committee pass a tax bill right after the Thanksgiving break, with full House passage in mid-December. But virtually no one on Capitol Hill thinks the glacial Senate can pass a bill this year; even if it does, a House-Senate conference committee probably wouldn't finish until late winter.

BOTTOM LINE: We still think a tax bill will win enactment by spring; our odds are on the low side, at 55-45, because two Senators – Rand Paul and Bob Corker – may vote no, which could produce a 50-50 tie that would be broken by Vice President Pence. It's that close. The effective date probably would be retroactive to Jan. 1, 2018. 

BUT WHETHER IT'S JUST TAX CUTS or tax cuts plus reform is also a very close call – the Republicans are desperate for a high-visibility victory ahead of the 2018 elections, and if it looks like this could drag on and on, they will cut bait and go for the tax cuts first and work on the reform portion later.

October 16, 2017

Ruthless Move on Health Insurers Could Produce Trump Victory

GIVE DONALD TRUMP SOME CREDIT: Unable to get Congress to abolish and replace Obamacare, President Trump has shown a ruthless streak – he's willing to sabotage the shaky Affordable Care Act in an attempt to drive both parties to the negotiating table. And this hardball strategy just might work.

TRUMP WANTS A DEAL, PERIOD: He will never get deep into the weeds, but Trump knows his supporters want Congress to do something. He also knows that he and the Republicans now own the issue of health care. So we recommend paying careful attention to a compromise bill that will be released this week from Sens. Lamar Alexander and Patty Murray.

THE ALEXANDER-MURRAY BILL WOULD restore funding to insurers while adding some reforms such as state flexibility in implementing the ACA and the encouragement of health savings accounts. We agree with our friend Paul Heldman of Heldman Simpson Partners that Congress is likely to pass – and Trump is likely to sign – this bill. Trump will get his deal, and a potentially serious health crisis could be avoided.

BUT NOTHING IS EVER SIMPLE in Washington, and this will require both houses to reassert their power over health care purse strings. It's possible that this restoration of funding will be inserted in a budget deal that has a deadline in early December (which probably will get extended until mid-December). If funding stalls, Democrats could threaten to not pass a budget, which would lead to threats of a pre-holiday government shutdown.

SO THIS IS HIGH-STAKES, with Trump willing to antagonize governors in both parties, many of whom said over the weekend that millions will lose coverage while premiums sharply increase if the subsidies aren't restored. But the argument that health insurers don't need a bailout has tremendous appeal among House Republicans. 

IN THE FINAL ANALYSIS, this issue – and many others – are tied to next year's House and Senate races, which are shaping up as much closer calls (especially the House) than appeared just a few weeks ago. Trump needs a deal – any deal – on health coverage, and there's one shaping up that he can have for the asking. We expect him to sound upbeat about his legislative prospects after meeting today with Mitch McConnell.

TAX REFORM, STILL ALIVE: Perhaps lost amid all of this weekend's noise on health care was an important statement from Sen. Susan Collins. She is likely to vote for the Senate budget resolution, which should pass in the next several days and ultimately should win approval by a House-Senate conference committee in early November – laying the groundwork for a tax cut, which Collins apparently will support. 

IT'S STILL A CLOSE CALL, but we think a yes vote from Collins improves chances that a tax bill will win enactment in early 2018 – a potentially huge victory for Trump, who still must grapple with NAFTA, dreamers, Robert Mueller, Iran, Korea etc. But he's willing to play hardball – and that generates fear and respect on Capitol Hill.

October 12, 2017

Whatever Happened to the Democrats?

GO FIGURE: You'd think that with Donald Trump's job approval ratings stuck in the mid-30s, with a new Twitter uproar almost daily from the president, that the Democrats would be ascendant. But they aren't – their elderly leadership, devoid of any new ideas, has approval ratings lower than Trump's.

INCREDIBLY, THE BIG POLITICAL BATTLE in Washington is not Republicans vs. Democrats – it's among Republicans: the GOP establishment vs. the Steve Bannon populists. The Democrats have been reduced to props, used occasionally by Trump to prod the GOP into acting lest he deal with the enemy instead. It's finally dawning on Chuck Schumer and Nancy Pelosi that they were used by Trump during a brief flirtation with bipartisanship.

PERHAPS THE BIGGEST PROBLEM for the Democrats, frankly, is the age of their leaders. At this early stage the party's apparent frontrunners for the 2020 nomination are Bernie Sanders, 76, and Joe Biden, nearly 75. With the exception of Schumer, a spry 66, the party's leadership is elderly – reflected in the re-election bid announced this week by Dianne Feinstein, 84.

NO NEW IDEAS: The Democrats' main theme seems to be "we hate Trump," which didn't exactly work well for Hillary Clinton, who still loses to Trump in polling matchups. The only idea the party seems passionate about is a single payer national health insurance program, which will be a virtual litmus test for its candidates in 2018 and 2020 – an idea that does not poll well in Middle America.

PROSPECTS FOR THE DEMOCRATS in the next two elections aren't as good as they should be, considering Trump's failures. The GOP has a chance to actually add a seat or two in the Senate, and the Democrats seem a little short in their goal of a 24-seat pickup in the House, which would give them control. As for 2020, we and most oddsmakers think Trump has at least a 50-50 chance of prevailing in the Electoral College, even if he again loses the popular vote.

THE PREVALENT MOOD IN THE PUBLIC toward Washington is still toxic for incumbents. Voters want real change and haven't gotten it, largely because of Trump's terrible start and his inability to heal GOP divisions – but the Democrats aren't viewed as the answer. The Harvey Weinstein scandal is an embarrassment for the Democrats, many of whom – including Clinton – were slow to return Weinstein's contributions.

WHAT'S THE ANSWER FOR THE DEMOCRATS? The party needs an outspoken, feisty leader – Barack Obama is filling this role to a certain extent, but he can't run again. Sanders and Biden are popular with the base, but could either of them win a general election? Elizabeth Warren, an electrifying demagogue, could unite the party but she's the candidate Trump would most like to run against.

SO THIS MYSTERY MAY PERSIST: Why haven't the Democrats capitalized on such a rich opportunity? We've spent quite a bit of time in Middle America lately, and while the mood is turning against Trump, there's no enthusiasm for the Democrats – and there may not be until the radioactive Hillary Clinton fades from view.

October 11, 2017

Why the Markets Have to Worry About Bob Corker

WHY THIS MATTERS: Most of the Washington Twitterstorm is irrelevant, just noise in the Reality Show that has overtaken this city. But the bitter fight between President Trump and Bob Corker is different – it jeopardizes the entire tax bill, to be blunt.

IT'S ALL ABOUT THE VOTES: Just as the Obamacare replacement bill died when three GOP Senators announced they would oppose it, a budget resolution later this fall and a tax bill sometime this winter could die if only three Republicans defect. It's that close – and it's why we lowered our chances for a tax bill from 65% to 55% last week.

INSIDERS BELIEVE maverick Sen. Rand Paul of Kentucky is a likely no vote on the budget (he abhors defense spending increases, and there will be plenty in the bill). Paul also has lambasted the tax bill, which he believes rewards the wealthy and provides modest – or no – tax cuts for many in the middle class.

ANOTHER DEFECTOR could be John McCain, but we think he's more inclined to vote for a tax bill than he was for the Obamacare replacement. Since McCain may win an astonishing $700 billion for the Pentagon in fiscal 2018, he's a likely yes vote on the budget. But other potential defectors loom – Susan Collins of Maine and Lisa Murkowski of Alaska in particular.

SO THAT LEAVES CORKER: Trump lets no criticism pass, and yesterday he was reduced to mocking Corker because . . . he's short. We have left meetings with Corker tremendously impressed by his smarts, his candor, his likability, and his common sense. He's among the most popular and respected members of the Senate.

IN ADDITION TO HIS BITTER FEUD with Trump, Corker has a substantive issue with the bill – even proponents admit the tax cuts will lose at least $1.5 trillion over ten years, even when using using optimistic "dynamic scoring." Corker is an increasingly rare deficit hawk (where have they gone?) and he says he won't vote for a bill that loses $1.5 trillion.

SO BY OUR COUNT, there could be at least two no votes, which would produce a 50-50 tie that theoretically would be broken by Vice President Pence. Yet there are another two or three Republicans whose votes are not certain. Could some Democrats who face rough re-election fights vote for tax cuts? Maybe, but bipartisanship has faded after Trump's hard-line proposal on immigration reform, which landed like a lead balloon on Sunday.

BOTTOM LINE: We still expect a House-Senate conference committee will pass a budget resolution in November, laying the groundwork for a $1.5 trillion tax cut. A final tax bill will come into focus by late winter, as details are resolved on issues like the deductibility of debt, repatriation and personal exemptions. 

THEN THE REAL SUSPENSE WILL BEGIN – Can the GOP keep defections to two or less in the Senate? Corker is a key, and mocking him as "Liddle Bob" does not advance the cause of tax cuts. Trump specializes in self-inflicted wounds and – incredibly – his juvenile tweets are now jeopardizing his signature legislative initiative.

October 6, 2017

A Dozen Big Stories – In Just one Day

YOU CAN'T MAKE THIS STUFF UP: We took yesterday off, perhaps not realizing how dramatically things can change – in just one day – in the political world. We wrote on Wednesday that chances for tax reform have slipped to only 55%; here we are on Friday with a whole new set of stories that have Washington buzzing:

1. Those battling Republicans: Add Sen. Bob Corker's name to those who think the tax cut is too expensive. And the fights over killing the state and local tax break – and not killing the estate tax – are just heating up.

2. A budget fake-out: The House passed a budget resolution yesterday, one small step toward setting the groundwork for a tax bill – but the Senate will never agree to the deep entitlement spending cuts in the House bill, so a time-consuming conference committee fight looms in November.

3. Who said I hated regulations? Janet Yellen, who may be trying to save her job, has endorsed curbing regulatory "red tape," seemingly reversing her pro-regulatory proclamations at Jackson Hole just a few weeks ago.

4. Separatism – all the rage: It's not just Catalonia, it's seemingly everywhere in Europe – Venice, the Basque Country, Scotland, Wallonia, etc. Good piece on this on the CNBC website this morning. You think the Euro will stay strong? Maybe not.

5. Forgive Puerto Rico's debt? Never mind. President Trump, speaking impulsively without his Teleprompter, stunned his aides with this one, but the White House reversed the boss within hours. More aid to Puerto Rico? Yes. Debt relief? Not from this Congress.

6. Trump loves a good headline: we're in "the calm before the storm," he said yesterday while meeting with U.S. military leaders. What the hell does that mean? "You'll find out," he said. One thing seems certain: U.S.relations with Iran are deteriorating rapidly.

7. Democrats are old and out of touch, a leading Democrat said yesterday. Rep Linda Sanchez, the fifth-ranking Democrat in the House, urged Nancy Pelosi to consider stepping down. No plans to quit by the House troika of Pelosi, 77, Steny Hoyer, 78, and James Clyburn, 77.

8. Good grief – someone hacked into the cellphone of White House Chief of Staff John Kelly.

9. The daily soap opera: So Rex Tillerson did not actually deny that he called Donald Trump a "f–-ing moron." Tillerson will be gone by Christmas.

10. Memo to disgraced Rep. Tim Murphy: if you're militantly anti-abortion, it's not wise to suggest to your married pregnant girlfriend that having one would be a good idea.

11. Democrats are scrambling to abandon Harvey Weinstein, accused of decades of sexual harassment. You want Hollywood or NRA money? Be careful what you wish for.

12. And the man bites dog story this week is the NRA agreeing to a gun regulation. Like everyone in this city, where narratives change by the minute, the NRA can read the polls.

THE ONE CONSTANT: As these stories broke over just one news cycle, one constant remained – the stock market continues to rise because the economic fundamentals are so uniformly good. What could derail this market? There's no recession on the horizon, tax cuts will be a long slog but they're still alive, and a war in Korea, while not out of the question, still seems unlikely.

October 4, 2017

Lowering Our Odds for Tax Cuts

WE STILL THINK TAX CUTS WILL PASS, sometime next spring, but the initial reaction to the GOP proposal has been so lukewarm – even among Republicans – that we have lowered our odds of enactment from 65 percent to 55 percent.

IT'S ALL ABOUT THE VOTES: Stop us if you've heard this before – the Republicans, who need 50 votes for a tax bill, face possible defections from John McCain, who would rather spend money on defense, and Rand Paul, who has been scathing toward the new plan. This means the GOP cannot afford to lose one more vote – a scenario eerily similar to the Obamacare replacement debacle.

WE ARE ASSUMING THAT NO DEMOCRATS WILL BACK THE GOP TAX CUT, although Trump is actively wooing Democrats who are facing tough re-election fights next year. The Democrats are adamant that the bill should not contain any tax cuts for the wealthy, as the new proposal clearly does.

SO WHY DO WE STILL THINK A BILL WILL PASS? It will be re-written in coming weeks to address two major issues: the state and local tax break will have to be retained, at least partially, or a huge chunk of House Republicans from high-tax states will defect. Second, the bill will have to be less generous for the wealthy – the top rate may stay at 39.6%, and abolition of the estate tax looks less likely.

STEVE BANNON'S REVENGE: We all knew the Democrats would be virtually unanimous in their opposition; what's changed is the anger over tax cuts to the rich from the Steve Bannon populists. We think retaining a high top rate will defuse this rebellion, but some Republicans still have another major complaint – the huge revenue losses and the resulting surge in the federal deficit, even when using optimistic scoring.

FOR NOW, WE ARE BETTING that Paul Ryan and Mitch McConnell will whip their troops into voting for a budget resolution in about a month and then voting for a tax package this winter. But these two leaders have a mediocre track record this year, to put it mildly, and there's enough GOP dissent to make this a close call.

THE FALLBACK: If this effort bogs down during the winter, we think there's a good chance that something will pass – perhaps a scaled-back tax cut for individuals and corporations that leaves much of the work on reform until after 2018, when the Republicans could add two or three seats in the Senate. 

SO WE THINK WILL A YEAR FROM NOW, businesses will have a top rate in the low-20s, pass-through corporations will have a top rate in the mid-20s, repatriation will be a reality, and individual taxes will be modestly lower – and perhaps all of this would be enough to add a few tenths of a percent to GDP growth by the second half of next year. An improving economy in the second half could help the GOP at the margin in House and Senate races next fall; then the next Congress could tackle reform.

THIS WILL BE A ROCKY ROAD: Virtually every Republican agrees that lower taxes are a good idea, but there's less agreement on the details. It will take only three GOP Senators to scuttle a bill, and two or more have issues with the latest proposal. So businesses planning for next year may conclude: let's see how the initial proposal is re-written before counting on anything. We'll probably get a bill – a re-write will improve chances – but this is looking like a very close call.

October 3, 2017

Donald Trump Didn't Expect This

THE PRESIDENCY BRINGS UNFORESEEN CHALLENGES, as Donald Trump is discovering. He needs to portray empathy – he needs to console people in Puerto Rico today and those who lost loved ones in Las Vegas. He has to tone down the bombastic tweets, at least temporarily, and focus on healing- but this new role will detract from his agenda, which was losing momentum even before recent tragedies.

TRUMP HIT ALL THE RIGHT NOTES yesterday in a sincere expression of condolences, and we expect him to hit the right notes in Puerto Rico today and Las Vegas tomorrow. Then things will get much tougher…

TRUMP WILL FACE FIERCE CALLS FOR GUN CONTROL, with the public overwhelmingly supporting background checks and curbs on semi-automatic assault rifles. Congress won't pass anything, of course, but it might ignore a bill to allow silencers. The National Rifle Association has convinced its members that any type of gun control, however timid, would lead to the slippery slope of gun confiscation, and the NRA will not lose. But this issue could give Trump a major headache when he wants to focus on tax reform.

IN ADDITION TO THE DISTRACTION OF GUN CONTROL, Trump faces a deepening – and extremely serious – probe from special counsel Robert Mueller. We're hearing that Mueller's pit bulls have issued subpoenas to virtually everyone at the White House; depositions would be a minefield, with perjury charges the obvious risk. We'll leave it at that.

STILL ANOTHER DISTRACTION will be Trump's trip to Asia later this fall, which has been complicated by his stunning repudiation of Rex Tillerson's attempts to begin back-channel talks with North Korea. This caught Trump’s advisers off-guard, and surely will hasten the departure of Tillerson, who has told colleagues that it's unlikely he will be in the Cabinet next year.

NONE OF THIS MEANS TAX REFORM IS DEAD, but the recent tragedies and mixed reaction to the GOP tax proposal most definitely have slowed the pace on Capitol Hill. We had thought there would be House-Senate agreement on a budget resolution in October, setting in motion the tax debate, but it could be November before a budget resolution is ironed out in a conference committee; opposition to increasing the deficit is a major issue for GOP fiscal hawks.

WHEN ANALYZING THE POLITICAL CLIMATE, we always point out that Trump's base is solid, but even that is less certain in light of Steve Bannon's ferocious populist revolt, which threatens to further scramble Republican unity. Bannon says he supports the president, but insiders report that no one in the White House leaked more than him, in an effort to keep Trump away from any concessions to the GOP establishment. 

SO NOW THE BASE MAY BE SOURING on a president who has not drained the swamp or gotten much done; the last thing Trump needs is growing disenchantment from his supporters – and going after football players may not be enough of a distraction. "Who knew it would be so difficult?" Trump proclaimed earlier this year. He surely must think, in light of Puerto Rico and Las Vegas, that the job isn't what he expected.

October 2, 2017

Tax Cuts and the Fed – Much Depends on Whether Yellen Stays

SHAKEN BY MASS MURDER IN LAS VEGAS, our response is to write what we had planned to write this morning; speculation about motives and responses is useless at this early hour.

SO WE WILL FOCUS ON A KEY ISSUE that clients ask us about frequently – how would the Federal Reserve respond to a big tax cut next year? Would the central bankers become less accommodative, taking away the punch bowl, once a tax cut takes effect?

WE POSED THIS QUESTION to two of our favorite economists, Diane Swonk, founder of DS Economics, and Stuart Hoffman at PNC bank – two veteran experts and TV talking heads who specialize on the intersection of the economy and monetary policy. 

WE STILL EXPECT A TAX CUT TO PASS, although there clearly will be changes to the current proposal in the next few months, probably making it less generous to the wealthy. Congress is now moving on a budget resolution that will clear the path for a $1.5 trillion tax cut, but we continue to believe it will be late winter or spring before a bill is enacted, perhaps retroactive to Jan. 1, 2018.

THE RISK OF A BIG TAX CUT: Swonk and Hoffman see two potential risks in the long run – inflation and higher interest rates. "An unfunded tax cut this late in the cycle could easily generate unwanted inflation instead of wanted inflation," she said. 

REGIME CHANGE: This could provoke new officials who will be joining the Fed; Swonk anticipates the appointment of more hawkish governors who have criticized the Fed's unconventional policies and favor more rate hikes than current members. She anticipates "the largest regime change at the Fed in the shortest period of time since 1936."

THE COST: "There is no way a tax cut of this size will pay for itself through sustained real GDP growth of 3 percent-plus starting this late in an economic cycle with tight labor markets," Hoffman said. The large amount of excess real capacity will buy time before unwanted inflation (above 2% for at least one year) materializes, Hoffman said. In the meantime, he said, "wage inflation should surpass 3%, so real after-tax incomes – especially with lower individual tax rates – should make the economy feel better."

YELLEN PROBABLY WOULD CONTINUE her gradual rate hikes and slow balance sheet shrinkage if she's still Fed chairman, Hoffman said. "Monetary policy will not be materially less accommodative in 2018 and 2019," he said, adding that if Yellen is not the Fed Chair, "it's much tougher to predict, although Trump probably would appoint a Chair friendly to his views." 

A WILD CARD: One reason why an immediate acceleration of the interest rate hikes may be unlikely is "distortions in growth and inflation" from the hurricanes, Swonk said, especially if Maria triggers mass migration from Puerto Rico and the U.S. Virgin Islands. This could lead to weaker GDP and higher inflation as workers are displaced and must be absorbed with schooling, shelter and care, she said.

OUR BOTTOM LINE is that tax cuts surely will reinforce a bias toward tightening, but it could be a year or longer before a tax cut prompts a material change in the rate hike path or in the Fed's "dots." Gradual tightening is still the likely scenario, but a new Chairman (Kevin Warsh perhaps?) might be more disposed to speeding up the pace of rate hikes – especially if a tax cut begins to heat up the already-tight labor market.

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.