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.
December 19, 2017
Holiday Wishes To All of You
We're winding things down, spending some time with family, and won't write for a while unless there's a big surprise on the tax measure – which seems highly unlikely; the GOP has the votes to send the bill to Donald Trump in the next couple of days. What a remarkable end to a remarkable year for Washington and the markets.
It's still great fun to cover policy issues and their impact on investors, largely because of the generous support we get from all of you. More fireworks are certain in 2018, but for now we just want to thank you and offer sincere wishes that you and your families have a joyous holiday season.
December 18, 2017
The Tax Bill Was Easy Compared to Looming Budget Battles
ONLY WASHINGTON’S ZEALOTS seemed to care about the mammoth tax bill; it will be signed into law within days by President Trump, a huge development for supply siders, accountants, lobbyists and the rest. But the threat of a government shutdown – now there's an issue that grips this city like a thriller.
SHOULD THE MARKETS CARE about a potential shutdown on Saturday morning at 12 a.m.? We suspect this will be over-hyped, as usual, by the media even though odds are against a shutdown this week; Congress is likely to kick the can down the road. The real fireworks are likely in mid-January when a lengthy shutdown is possible because both parties are miles apart on several key issues.
A NEW NUMBER IN THE SENATE: The landmark tax bill needed only 50 votes to pass in the Senate under reconciliation rules, but they won't apply to the budget and most other issues in 2018 – making Senate Minority Leader Chuck Schumer a pivotal player. He has the power to shut down the government, and we think he's willing to do that in January. He's hoping Republicans get the blame.
WHY DO WE THINK A SHUTDOWN IS POSSIBLE? The gulf between the parties is enormous – Republicans want a huge increase for the Pentagon, while Democrats reply that they want an equally large hike in domestic spending (which won't happen). The Democrats want a deal to protect "Dreamers" who fear deportation. Moderates in both parties want aid for health insurers. The Children's Health Insurance Program needs to be funded. There are several other issues.
COMPLICATING THIS BUDGET FIGHT are the major differences between Republicans in the House and Senate. Paul Ryan doesn't want to aid health insurers, but Sen. Susan Collins – a key vote on tax reform – was promised a bill. Ryan wants to approve the Pentagon hike now, without addressing domestic spending, which would never fly in the Senate.
ONE OF THE FEW AREAS OF AGREEMENT between both parties is frustration with the "sequester" caps on spending, which actually helped to reduce the deficit in recent years – but the caps will be scrapped in order to spend more money on defense and domestic programs; the issue is how much more. Another area of agreement is on hurricane aid, which has been stalled in the congressional morass.
THERE ARE ENOUGH ISSUES TO MAKE A MID-JANUARY SHUTDOWN a long one, which eventually could annoy the markets, which hate uncertainty, such as: a shutdown that could make the Fed less sure-footed on raising rates; a drag on defense company earnings; a negative for consumer confidence and spending; and an ominous sign that still another budget brawl – raising the debt ceiling by April – could get sucked into this budget fight.
BOTH PARTIES ARE ALREADY JOCKEYING FOR THE 2018 ELECTIONS, that's how Washington operates. The Democrats can blame Trump for presiding over a Republican Congress that can't pass a budget, while Trump will accuse Democrats of neglecting needs of the Pentagon. The impact on the fall elections will dominate every issue next year.
MEMO TO DONALD TRUMP: Enjoy the tax bill ceremony, it was a truly remarkable accomplishment to get the measure through Congress so quickly. Within days he will be mired in a huge budget fight amid speculation about more indictments from Robert Mueller, who appears to be on increasingly shaky ground but will not relent. Then comes the biggest domestic wild card of 2018 – more and more charges of sexual harassment.
ALL OF THIS HAS PERSUADED MOST OF WASHINGTON'S DEEP THINKERS that a "wave" election is imminent, driving the GOP out of power in both the Senate and House. We're not ready to make that call because the economy and the labor market could shift into an even higher gear in 2018 – unless the politicians botch it by refusing to compromise on budget issues that will come to the forefront starting late this week.
December 15, 2017
Sweating Out the Final Tax Vote
LAST-MINUTE SNAGS always seemed inevitable with this tax bill – and sure enough, the final outcome looks a little less likely today than it did yesterday. We still think the measure will pass next week, but that will require some wheeling and dealing that could raise the top corporate tax rate by another point, to 22%.
THE NUMBERS: As we all know, the GOP's 52-48 majority means that they can lose only two votes; a 50-50 tie would be broken by Mike Pence. This uncomfortably narrow margin has been complicated by the illness of GOP Sens. John McCain and Thad Cochran, but we expect both to be on the Senate floor next week, voting for the bill. But then there are wavering members.
THE BUZZ YESTERDAY focused on Marco Rubio, who was outraged that more tax reduction for the very wealthy was approved earlier this week – without a sufficient increase in the child credit, according to Rubio and Sen. Mike Lee, also a potential holdout. We think their concerns will be addressed with a more generous credit – quite possibly paid for by speeding up the "sunset" of some of the tax bill's provisions, or by setting the corporate rate at 22%. If Rubio and Lee are satisfied, are there any other holdouts?
ALL EYES ON THREE OTHER SENATORS: Susan Collins still has objections over tax cuts for the wealthy and a lack of support for a bill to aid health insurers. Bob Corker still objects to the cost of the bill, as does Jeff Flake. But Flake is an ardent tax cut proponent, which leaves Collins and Corker as the likely holdouts.
SO WE THINK A 50-50 TIE is a real probability as Collins and Corker vote no, with Pence casting the deciding vote. Two major points: the GOP leadership and the White House will move heaven and earth if they're one vote short; no request will be refused, and no concession will be too outlandish. Second, this absolutely has to get finished in December, because the addition of a Democrat from Alabama in the first week of January could dramatically complicate things.
PRESIDENT TRUMP'S SIGNATURE BY LATE NEXT WEEK is still the best bet, but don't expect this to get wrapped up today when conferees unveil their package. That's a fake-out, like all of the positive developments this week that the markets treated like catnip. What really matters is the Senate vote on the conference report, which is likely by the middle of next week.
PERSONNEL MOVES: Lots of vague speculation yesterday about Paul Ryan leaving Congress after the 2018 election, which makes sense on many fronts; he's tired and wants to spend time with his family, he will get his tax bill, and Ryan is contemptuous of Trump. So a year from now, Ryan may be writing a book, making some money and mulling a future presidential bid.
THE MORE IMMEDIATE PERSONNEL MOVE will be the ouster of Rex Tillerson as Secretary of State; the Washington Post, citing numerous sources, reports this morning that Tillerson's free-lancing on North Korea and other issues has infuriated Trump's inner circle. So in the finest tradition in this city, Tillerson's detractors leaked en masse to the Post in a crude effort to force his resignation. If he won't jump, he'll get pushed.
December 14, 2017
A Spectacularly Successful Week for the GOP Establishment
NOT AN ACCURATE PORTRAYAL: The media is describing the Republican Party as torn apart by a civil war, losers in the tax debate, facing huge setbacks in next fall's election. Actually, this has been a spectacularly successful week for the GOP establishment.
FIRST AND FOREMOST: Defying most of the analysts (including us) who thought it would be well into the winter before a tax bill passed, the Republicans have moved with astonishing speed and discipline to get this sweeping bill to within days enactment. There could be a snag or two – especially if the official "scoring" requires some nipping and tucking – but this bill is on schedule for President Trump's signature by the end of next week.
AND WHAT A CELEBRATION THAT WILL BE: This huge bill undoubtedly has fueled the stock market rally, it will provide a booster shot for an already-strong economy, and it makes U.S. companies far more competitive globally. Yes, the provisions for individuals are a net wash for many taxpayers, but a majority will get a reduction. Many objectionable provisions such as denial of the exemption for health costs have been killed in the final bill, and provisions like the mortgage deduction seem to be fair compromises.
EVEN THE COMPLAINTS ABOUT HIGHER DEFICITS seem to be overdone by people who hated the idea of a tax cut in the first place. The true arbiter of this is the bond market, which doesn't seem to have a problem; the 10-year Treasury yield has been stuck at just under 2.40% for months, hardly a sign of panic over the bill's cost.
SO THIS IS SHAPING UP AS A DRAMATIC GOP VICTORY, the fulfillment of Paul Ryan's great goal of lower taxes and business tax reform. He didn't get everything he wanted, and the final bill has plenty of flaws, but our bottom line is that while the exact impact on economic growth cannot be accurately predicted, this bill sure looks like an insurance policy against a recession for another few years.
THE REPUBLICANS HAVE MORE TO CHEER: As the tax bill raced toward enactment, the GOP got still another early Christmas present: the party avoided the spectacle of an accused pedophile joining their ranks in the Senate. Forget about talk that the GOP is in the midst of a civil war – the vast majority of Republicans were happy to see Roy Moore lose, and are inclined to dismiss Steve Bannon as a fringe player.
MITCH MCCONNELL AND RYAN will always generate opposition from the talk radio echo chamber, but the fact is that these two Republican leaders are major beneficiaries of the tax bill's passage. Talk is cheap, but getting complex legislation through the congressional maze should always be the goal.
HUGE CHALLENGES LOOM, OF COURSE: A nasty budget fight is coming – only temporarily deferred by another continuing resolution that will allow everyone to go home for Christmas. And Robert Mueller, suddenly looking vulnerable, will hit back hard with more indictments. But the prevalent media view that the Republicans are headed for an electoral disaster next fall overlooks the biggest theme of all: the economy is surging, and the Republican tax cuts will get some of the credit.
December 13, 2017
Alabama Vote Ratchets Up Pressure to Finish Tax Bill; Early Christmas for Kirsten Gillibrand
THERE WERE PLENTY OF RUMORS YESTERDAY, propelling the stock market higher, that the tax bill could be wrapped up in the next couple of days. It can't – and that puts enormous pressure on conferees to finish by next week, because voters in Alabama just sent a loud message on two fronts.
FIRST, THE GOP'S SENATE MARGIN will shrink to 51-49 by early January; Democrat Doug Jones will be seated a couple days into the new year. Republican tax conferees – already worried about defections from Susan Collins, Bob Corker or even Marco Rubio – can't afford to wait until Jones is seated; they need to pass the tax bill soon.
THE SECOND MESSAGE involves political capital, and Donald Trump just lost a whole bunch of clout – he's an unpopular president backing an unpopular tax bill – and once the measure passes, Republicans will abandon him in droves because they have the 2018 election to worry about. Trump is a liability for most of them.
SO REPUBLICANS ARE WORKING OVERTIME to get the tax bill done now; they're close to several major deals – a top corporate rate of 21%, a top individual rate of 37%, a split-the-difference deal setting the mortgage deduction at loans up to $750,000, an easing of state and local tax curbs, etc. They could have a compromise ironed out within 24 hours. The Joint Committee on Taxation then would score the bill and a final vote could come by early next week in each house, which must approve the conference committee deal.
THIS PROCESS THUS WILL TAKE SEVERAL MORE DAYS, amid the usual speculation about who might defect. Sen. Collins doesn't want the top rate to fall and reportedly is upset by the apparent last-minute move to lower the rate to 37%. And she wants assurances of a vote to help health insurers. Corker still objects to the bill's costs. And Rubio is a last-minute obstacle because he wants a higher child care credit.
SO THERE ARE STILL POTENTIAL SNAGS, but the most likely scenario is that Trump signs the measure by the middle of next week – not a moment too soon, as the climate is about to worsen for the GOP in Congress. Let's not even get started on the looming budget brawl.
ALABAMA REALITY CHECK: Please excuse us for not joining the Washington euphoria over last night's Alabama results. A creepy extremist who's an alleged pedophile still came very close to winning, hardly a sign that Democrats are about to dominate in upcoming races where Republican candidates will be relatively normal, unlike Roy Moore. We still think the GOP can hang on to the Senate and the House in 2018, although both obviously are in play.
WAKE-UP CALLS CAN BE PRODUCTIVE, and the Republicans got a major one. They're losing support in suburbs; African Americans are motivated to vote; Steve Bannon and Trump can rally the base but not the general electorate; Democrats seem to have more energy; the issue of sexual harassment is now dominant, and Republicans have a real problem with women. But one very odd election in Alabama will not crush the GOP's 2018 prospects – not with the economy surging.
MERRY CHRISTMAS, two weeks early, to Sens. Cory Booker and Kirsten Gillibrand. Booker campaigned hard in Alabama for Jones, and now seems poised to enter the top tier of potential 2020 presidential candidates. Gillibrand, who is highly respected by colleagues in the Senate, was slimed by Trump yesterday in an email that sunk beneath his usual low standards – and suddenly she is a national player also. Quite a gift for a party that desperately needs fresh blood.
A FOND FAREWELL: We'll be watching Janet Yellen's final press conference today for clues on how many times the Fed will have to raise rates next year – but also to get one last tutorial from this remarkably underrated policymaker who has presided over a sustainable recovery and one of the great stock market rallies in history – all while beginning to wind down the Fed's balance sheet. When we're asked who gets the most credit for this Goldilocks economy, the answer is easy.
December 12, 2017
Why Alabama Matters; The Tax Conferees Have Issues
IT'S EASY TO GET SICK OF THE CRINGE-INDUCING Alabama Senate race which will end, mercifully, tonight. Our guess is that Roy Moore is the very slight favorite, but what should we make of yesterday's Fox News poll showing Democrat Doug Jones ahead by 10 points? Once again, polltaker methodology – cell phones vs. land lines, measuring likely voters, etc. – is controversial.
THIS RACE IS IMPORTANT for two major reasons. First, a win by Jones would shrink the GOP Senate margin to 51-49, making it virtually impossible for Mitch McConnell to get much done next year – Obamacare abolition, infrastructure spending, entitlement reform, etc. Why? Because GOP mavericks Susan Collins, Bob Corker and others are likely to stray, knowing that their votes will be even more important with a reduced Republican majority.
SECOND, TONIGHT'S RESULT will send an important signal about voting patterns – are Republicans really losing a significant portion of suburban white women? Donald Trump's base seems to be a little less firm now, and if it's wavering even in Alabama, there are implications nationwide. If Moore loses, GOP leaders will blame the disastrous influence of Steve Bannon, and they will worry that the sexual harassment issue is a raging fire that threatens to engulf even Trump.
REGARDLESS OF THE OUTCOME TONIGHT, the Democrats will put a ribbon on the results. If Democrat Jones wins, it will influence the 2018 agenda. If Moore wins, the Democrats will tell suburban women that while their party punishes its own – Al Franken, John Conyers, etc. – the Republicans will have an accused child molester in the Senate. Allegations of sexual impropriety is the great X factor – in politics and the private sector – heading into 2018.
TIME TO WORRY YET ON THE TAX BILL? Conferees said yesterday that they haven't resolved any of the key issues – the effective date and the top rate for corporate taxes; the estate tax; a flaw in the treatment of long-term vs. short term capital gains; all the pass-through tax details; the state and local tax exemption; whether to kill the Alternative Minimum Tax, etc. There are at least a dozen other major issues that also are unresolved.
THE CONFEREES ARE STILL WRITING THE BILL, and it looks like this will take at least another week. The goal is to complete the measure by Dec. 20, but most members of Congress are resigned to staying in town through Friday, Dec. 22 – or even Saturday, Dec. 23. We think they can finish the tax bill by then – but as of this morning, they cannot make the numbers add up within the straightjacket they have imposed. Something will have to give; we still think the top corporate rate will slide back to 22%.
COULD THE BILL HIT A SERIOUS SNAG if Collins, Corker and others object to shoddy scoring and deals that aren't kept? Can't rule out a few more days of drama – or enactment just after Christmas – but we've come too far for this to fall apart.
December 11, 2017
The Winter of 2017-18: Some New Themes Will Emerge
FIRST THINGS FIRST: We want to write this morning about new themes, but there's tax and budget issues that must be resolved. Final approval of the sloppy tax bill is a week away, and with Sens. Susan Collins and Bob Corker still question marks, a 50-50 tie in the Senate may have to be broken by Vice President Pence to pass the final conference committee bill. Chances of enactment: 80%. Chances of enactment before Christmas: 70%.
THE LATEST EXTENSION OF THE 2018 BUDGET BILL probably cannot be finished by the Dec. 22 deadline – so still another stopgap measure is likely then. That's a complicated issue, because many Republicans don't want further delays on higher defense spending, and Democrats want protection for "dreamers." The 2018 budget will be a mess for weeks to come, with a government shutdown not out of the question – 40% chance – right after New Year's.
AS THESE TWO ISSUES MUDDLE ALONG, several new themes will become dominant this winter...
1. Could the economy overheat? A rate hike is certain this Wednesday amid speculation about what the FOMC will say about the economy in 2018. Unemployment is likely to fall below 4% by spring, as tax cuts add rocket fuel to the economy. If wages begin to rise above the mediocre 2.5% level now, new Fed Chairman Jerome Powell will have to hike interest rates at least three times next year. The surging economy will be a dominant story in 2018, with Donald Trump's poll numbers inching higher.
2. Infrastructure reform, still alive: The idea of cutting entitlements does not poll well; infrastructure reform polls very well. Even though no one can figure out how to pay for upgrading highways, railways, utilities, etc., the White House will roll out a proposal in January, hoping that local governments and the private sector can help fund the bill. A key: will the final tax bill keep alive the break for private activity bonds?
3. Is Mueller's probe tainted? The drumbeat is getting louder – not just in the Fox TV echo chamber – that Robert Mueller's team is filled with pro-Clinton, anti-Trump zealots who are feeding the media, which has been embarrassed by numerous inaccuracies in recent weeks. The investigation is becoming increasingly politicized, and if anyone in Trump's family gets indicted, Mueller's inevitable firing would electrify Trump's base.
4. Congressional races in the limelight: Alabama tomorrow will highlight the two great themes in 2018 House and Senate races. First, the Democrats need higher turnout, especially among African Americans, and turnout is a risky bet in mid-term elections. Second, a large percentage of the key races next fall will be in conservative states and districts that Trump carried last year. Chances the Democrats can recapture the House: 45%. Chances they can take the Senate: 40%.
5. Chuck Schumer, power broker: We're about to head into a new climate in which 60 votes will be needed in the Senate to pass bills, and Schumer will block virtually all legislation – other than an inevitable Supreme Court nomination in 2018 – unless he gets his way on domestic spending, immigration, aid to health insurers, etc. Spending is headed higher.
6. North Korea's new weapon: A chilling article in this morning's Washington Post describes potential advances by North Korea in the production of anthrax and other biological weapons. We have argued for the past year that the markets are too sanguine about Korea, and we still think that's the case. "We'll take care of it," Trump said after the last North Korean missile test. The issue of biological weapons ratchets up the stakes.
7. Free trade on the ropes: A sleeper theme that may emerge before spring could be the demise of NAFTA, ushering in increased trade friction between the U.S. and Canada that could hurt several U.S. sectors such as agriculture – the only dark cloud in an otherwise solid economic climate.
FINALLY, A WORD OF SUPPORT TO OUR FRIENDS IN SANTA BARBARA: As a massive fire threatens a city of 100,000 people, we were stunned this weekend to see the national media spend more time on the Alabama Senate race and a modest snowstorm. Nearly one million people live in Santa Barbara and Ventura Counties, which are covered in several inches of ash, with zero prospect of rain in the next week. It's genuine crisis, far from the East Coast media spin.
December 7, 2017
The Next Huge Issue – Reforming the Welfare State
MOVING ON TO THE NEXT HUGE ISSUE: Republican leaders still need another couple of weeks to iron out a final tax bill, and they will need a two week extension – at least – to reach a budget deal, but they're already gearing up for the next major issue: fundamentally reforming the welfare state.
ALL EYES ON PAUL RYAN: The House Speaker has dreamed of a two-step process – massive tax reform and then the restructuring of entitlements. He will get tax cuts and modest reform, but restructuring the safety net is tricky because key elements don't poll well. And there's an election next fall that Republicans are already worrying about.
SO WE THINK THE INITIAL FOCUS ON WELFARE REFORM will not be on cuts to Social Security or Medicare; rather, the White House will target spending on programs like welfare and food stamps with a simple message – you won't get any government assistance unless you're willing to work. That polls well.
THE REAL COST SAVINGS, OF COURSE, would come from Social Security, Medicare and Medicaid, but we simply don't see enough votes – especially in the Senate – to make even a minor dent in those programs. Democrats would fiercely resist, and President Trump's populist base wouldn't approve; the Steve Bannon crowd objects to entitlement cuts.
MOST REPUBLICANS WE TALK WITH are already focusing on next fall's elections, and they worry that Ryan is naive, too eager to take on an issue that could hurt the party. His mere presence on Mitt Romney's ticket in the 2012 presidential election may have doomed the party in Florida. The tax bill's tilt toward business and the wealthy polls very poorly, and slashing entitlements polls even worse.
WE'RE SOLIDLY IN THE CAMP that deficits will rise dramatically in the next few years, possibly to $1 trillion annually by early in the next decade. Perhaps that's acceptable when the economy is in recession, as it was when deficits surged in 2007, but the red ink that's coming will be in a nearly full employment economy – a bad combination for the bond market.
THE GOOD NEWS IS THAT THE BOND MARKET can live with high deficits for now; the far greater variable for interest rates is inflation, not deficits. But as the nation's total debt soars well past $20 trillion in the next few years, we don't see much of a chance for traditional medicine – major spending reduction or tax hikes.
THE ANSWER TO THIS AND MANY OTHER PROBLEMS is dramatically higher economic growth that would drive federal revenues higher. President Trump said yesterday that once tax cuts are in place, GDP could grow by up to 6% – a seductive pipe dream except for one crucial factor: Trump dislikes even legal immigration, so the country is running out of workers, or at least people willing to work.
THUS THE FOCUS IN 2018 will be on forcing able-bodied recipients of federal aid back into the labor force; it’s an issue Trump and the GOP can win. Reforming Social Security or Medicare is an entirely different issue, one where the public likes the status quo.
December 6, 2017
Real Reason Behind Shutdown Threat; Tax Bill Not Done Yet; Two New Mueller Angles
WHY THE SHUTDOWN THREAT? Here we go again – a phony crisis over a shutdown this weekend that obscures the real controversy, which is government spending. Democrats are manipulating the issue that up to one million young "dreamers" will be deported unless there’s an amendment to the 2018 funding bill, but the deadline for deportation is months away. The real issue in the spending bill is that will contain enormous increases for defense and, probably, domestic outlays as well.
THIS HAS OUTRAGED the conservative House Freedom Caucus, which has re-emerged as an irritant to Republican leaders. The caucus will not vote for a bloated spending bill, so GOP leaders have no choice but to seek votes from Democrats, who will extract a concession: more domestic spending. All the moving parts in this bill cannot be resolved soon, so still another extension – until Dec. 22 – is likely, even if President Trump agrees in principle with Chuck Schumer and Nancy Pelosi to keep the government open.
EVENTUALLY THERE WILL BE A FINAL BUDGET DEAL, but the issue of "dreamers" will have to wait, and a serious look at spending discipline – including the explosive issue of entitlement reform – will have to wait until debate over a debt ceiling extension in the spring. There's one huge difference between these spending bills and the tax measure: Republicans will need votes from Democrats, who will have the leverage in both houses to extract concessions. Spending is going up up up.
TAX CONFERENCE HAS ITS HANDS FULL: There's been such an uproar over retaining the despised Alternative Minimum Tax that conferees may have to re-write this entire provision. And they need to tinker with the mortgage deduction, state tax exemptions, effective dates, etc. As we wrote earlier this week, this is not a typical conference committee – the bill is still being written.
IS THE TAX BILL IN TROUBLE? Not really, it will pass within a few weeks; critics will get whatever they need. The measure even can survive fresh objections from Sen. Susan Collins, who thought her support would guarantee a bill to aid health insurers, keeping premiums from exploding next year. That bill now looks far from likely. Other objections to the tax bill revolve around the impact on high-tax states. But the big issue is the AMT, which needs to be fixed; the likely trade-off is a higher corporate tax rate than 20%, which even President Trump is willing to accept.
TWO NEW MUELLER ANGLES: Conservatives are focusing on the lack of impartiality in Robert Mueller's probe, but that will not affect his sweeping scope. Two new issues are emerging: intense scrutiny of Donald Trump's finances, which may get to the heart of this issue, and whether Mike Pence was really oblivious to all that went on with Mike Flynn.
OUR SENSE is that this probe is entering a very dangerous phase for the White House. The argument that Trump is inoculated from this – that he has "plausible deniability" on collusion – hits a brick wall when it comes to his finances, which could unlock this entire puzzle. Did he do anything impeachable? Too soon to say, but as Trump's family gets dragged in, we think he will become increasingly tempted to fire Mueller – which would backfire spectacularly.
COULD PENCE BE IN TROUBLE? His halo could slip; at the least, he will get deposed by Mueller’s pit bulls, who seemingly can get a perjury indictment whenever they want from a liberal D.C. grand jury. Do you think Paul Ryan, third in line for the presidency, thinks about this stuff late at night?
December 5, 2017
Bah Humbug From Both Political Parties
GO FIGURE: Republicans are on the verge of passing a landmark tax bill and Democrats have a chance for major political gains next fall. Yet both parties are in a funk, divided over strategy and unable to capitalize on major opportunities.
TALK WITH REPUBLICANS and they express satisfaction with the tax bill but they admit the sloppy Senate measure is deeply flawed and has been poorly sold to the public. More importantly, most Republicans are aghast over the inept Trump legal team, and the president's refusal to stop his obsessive tweeting on Russia, which appears to be hurting his case. Instead of celebrating, many Republicans see a very tough election next fall – with both the House and the Senate potentially in play.
TALK WITH DEMOCRATS and they express frustration over their inability to deal with the "dreamers" or stop the Republicans' juggernaut. They wish Hillary Clinton would go away, and they're unhappy with Nancy Pelosi's statements on sexual harassment, and they worry that Chuck Schumer could lead the party off a cliff on a government shutdown this month. And in private, most Democrats moan that the party has virtually no new ideas and is burdened with an elderly group of candidates who look less than formidable in the 2020 presidential campaign.
WHAT UNITES BOTH PARTIES is the deep antipathy they generate from the public; the anti-incumbent mood is alive and kicking, the swamp has not been drained. The optics of special interest favors in the tax bill, which seemingly favors business and the wealthy, has angered the electorate. Talk of a shutdown will reinforce an image of dysfunction.
BUT THE ISSUE TO WATCH is sexual harassment – if Matt Lauer and others in the private sector can be instantly fired without much due process, why can Congressional scoundrels hang on with virtually no accountability? This reinforces a belief that the politicians play by a different set of rules than the rest of us.
THE MOST IRONIC POLITICAL STORY OF ALL is that Donald Trump is the most popular politician in Washington, with the possible exception of the ailing John McCain. Trump's ratings among Republicans are in the stratosphere, which keeps most GOP lawmakers from attacking him publicly (even though, in private, they are scathing). With no obvious challenger for the 2020 nomination, Trump is the favorite to be the GOP standard bearer, assuming his health is good.
WHAT COULD CHANGE THIS OUTLOOK is events, and three in particular could transform the narrative. First, we believe the economy is poised to accelerate from an already-solid base, with unemployment falling well below 4% and interest rates finally rising. Second, the Mueller probe is entering a dangerous new phase, with likely indictments of some very big White House players. Third, geopolitics – whether it's Korea or ISIS terrorism – has a habit of transforming the landscape.
TRUMP SHOULD CAPITALIZE on a booming economy and his popular stance against terrorism, but leaders of his own party believe he may stumble into an impeachment crisis. Trump can rally his base against "fake news," and what he sees as a political witch hunt by Mueller, but that will not stop the probe – or the Democrats, who are at risk of overplaying their hand because their activist base wants Trump ousted. This is why Republicans are less than euphoric despite the tax bill – they know a Constitutional crisis can't be ruled out in 2018.
December 4, 2017
What Comes Next? Fixing the Tax Bill, Keeping the Government Open, More Indictments
NO LET-UP IN SIGHT: After the past extraordinary weekend, what comes next? In the short-run – a House-Senate conference committee to fix huge problems in the tax bill, a Fed rate hike, and a potential government shutdown. In the longer-term, more indictments are coming, victorious Republican lawmakers plan an assault on the safety net, and the demise of free trade looms. Let's take a deeper dive –
CLEANING UP THE TAX MESS: Veteran tax lobbyists were incredulous this weekend over the Senate-passed tax bill, hastily patched together with enormous unintended consequences. The major one was the retention of the corporate alternative minimum tax, which effectively would kill the research and development tax credit and the preference for muni bond income. The best summary of this weird development is a piece in today's Wall Street Journal by Richard Rubin.
THIS PROVISION HAS TO BE FIXED, and President Trump has indicated that he could accept a 22% top corporate rate to pay for this and other changes. The conferees, who will start work today, have an enormous number of issues to resolve: are the individual provisions permanent or will they expire in 2025? Will the top individual rate stay at 39.6%? Will the mortgage deduction get a haircut? When do the corporate rate cuts begin – 2018 or 2019? Will the estate tax get liberalized or eventually repealed?
THIS REALLY WON'T BE A TRADITIONAL CONFERENCE COMMITTEE, in our opinion. The tax writers have moved too fast; the bill is still being written and corrected; the numbers don't add up; the lobbyists are likely to win more victories – all sorts of provisions have been tucked into the margins of the bill, benefitting banks, oil producers and car dealers. There will have to be more transparency before the final bill is passed, probably by year-end. Then comes the next big policy issue...
ASSAULT ON THE SAFETY NET: Republican leaders, led by Paul Ryan, have made no secret about their next goal. It's not infrastructure (no one can figure out how to pay for it) but rather it's the beginnings of major reform of the welfare state. Ryan wants to curb the growth of Social Security, Medicare and Medicaid – all under the gun as deficits rise. Democrats, eyeing the next two elections, are salivating.
FED NEXT WEEK: With a solid jobs report expected this Friday, the stage will be set for a rate hike when the FOMC concludes its Dec. 12-13 session. It's probably premature to assert that the economy is overheating, but it increasingly appears that the economic risks for the Fed are now upside risks – and another three rate hikes in 2018 seems like a safe bet.
A GOVERNMENT SHUTDOWN? Here we go again. The government could shut down this coming Saturday, as a temporary funding bill expires. Democrats are demanding an immigration deal on "dreamers," but there's no real deadline on this issue until the end of the winter. Our best guess: we'll get a two two-week extension, keeping the government open until Dec. 22 – at which time still another extension is possible. The press will hyperventilate over a shutdown later this week.
MORE INDICTMENTS: We expect more this winter. What a circus – self-destructive tweeting by Trump, more leaks, and almost certainly more bombshell indictments. We still don't see an impeachment and a conviction, but one development could change that outlook: if someone in Trump's family – Jared Kushner or Donald Trump Jr. – is indicted, that could infuriate the president, who could fire Robert Mueller. That would lead to a Constitutional crisis.
DUMPING FREE TRADE? Lost amid all of these spectacular stories is the growing likelihood that NAFTA is in real trouble. Our friends in Canada view this with great alarm, since a trade breakdown could weaken their economy and their currency. It would hurt several U.S. sectors, including agriculture, but Trump may need a distraction in the next few months – and he could precipitate a trade crisis unilaterally, without Congressional approval.
WHAT ALL OF THIS MEANS FOR THE MARKETS: It's a wild climate inside the Beltway and the media is in overdrive – but let's take a step back and ask: what does all of this mean for the markets? Well, a sweeping tax bill is about to pass, Congress probably will avoid a shutdown, and impeachment is not imminent. And this is still a mighty market driven by fabulous fundamentals.
BUT A SUSPICION GROWS that volatility could become a major market theme in 2018, with the issue of tax cuts resolved, with the Fed picking up the pace of rate hikes, and with North Korea seemingly itching for a confrontation. And, as developments this weekend confirmed, the chances of impeachment are not zero.
December 1, 2017
Three Scenarios as Tax Bill Hits a Snag
IT'S A LITTLE LATE for deficit hawks to suddenly get religion – they hadn't seen all the other projections that the tax bill would lose a ton of money? Actually, yesterday's new estimate from the Joint Committee on Taxation showed the measure would lose less than some other projections. But it shook up wobbly Republicans and the bill has hit a snag.
SO – IS THIS A DEAL-KILLER? No, the momentum for a bill is still strong. Instead of a runaway locomotive, it now looks more like a commuter train, with stops and starts, but headed toward the advertised direction. So here are the three scenarios:
1. The bill fails: Unlikely. Failure to pass a tax bill – even one as flawed and hastily patched together as this one – would be a virtual death warrant for the Republicans, and they know it. If failure looks even remotely likely, they'll go back to the drawing boards.
2. The bill passes along the lines of the Senate Finance Committee version: Highly unlikely. Everyone knew there would be changes to the committee's bill, so this snag isn't a huge surprise. But some surgery is necessary and the measure is likely to become less generous for business.
3. The bill is scaled back a bit: Likely. Senators were scrambling through the night to accommodate Bob Corker and a couple other deficit hawks. We ranted yesterday about the clumsy "Corker trigger," a terrible idea, and enough Senators now agree with our assessment. So what will satisfy Corker? A less expensive bill that would have to scale back some of the tax breaks. We still think the top corporate rate will be north of 20%.
A SCALE-BACK OF SOME BUSINESS PROVISIONS, which seems likely, could anger Donald Trump, who has been insistent on getting a 20% rate. Would Trump's opposition kill the bill? Nope, most GOP Senators have tuned him out; they're desperate for a bill and view him as an irritant. So this is the likely scenario: water down the bill, get some cover on the deficit and send the measure to a conference committee – or hope that Mitch McConnell's strategic wizardry can somehow avoid a conference committee.
WHAT COULD GO WRONG? The GOP still needs 50 Senate votes for the tax bill; we think they will do whatever is necessary to get those 50 votes – but as of early this morning they're not quite there. High drama indeed in the next few days, but we still think a tax bill will pass.
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