January 2018 - 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.

By Greg Valliere
Horizon's Chief Global Strategist

January 31, 2018

Quick Takeaways From Donald Trump's Best Speech Ever

VIRTUALLY ALL OF THE MAINSTREAM MEDIA ripped President Trump's speech last night – but we have to ask: what were they watching? It was the best speech of Trump's life, too long but well-written and well-delivered. A CNN poll showed that 48% of viewers had a very positive reaction and 22% had a somewhat positive reaction – so 70% liked it. Except the press.

REGULAR READERS KNOW I'M NOT SHY about criticizing this flawed president, but was dismayed by the tortured attempts to criticize everything he said. Virtually every analyst in The Washington Post found fault; no one would concede that it was a good speech. The most convoluted criticism came in a piece on the CNBC web site that complained Trump seemed "tired" and "reserved." Can't win – had he been bombastic, that would have been criticized.

HERE'S THE BOTTOM LINE: Trump's strong suit is so potent – a surging economy – that Republicans still have a chance to retain the House and Senate, especially the latter. Trump is a politician and a self-promoter, so of course he bragged about the economy and the stock market, of course he took credit for a boom that began with Barack Obama. Politicians do this; Ronald Reagan boasted about "morning in America" and won 49 states in 1984.

SPEAKING TO THE BASE: Was Trump's rhetoric on immigration too provocative? Yes, but he needs to cultivate his base – the 80% of Republicans who adore him but have reservations about a path toward citizenship for illegal immigrants. Trump will have to expend political capital, urging his base to accept a bill they won't like, so he amped up the volume on immigration last night, and his base undoubtedly loved it.

THE OPPOSITION PARTY: Looking sullen and partisan, the Democrats probably didn't win many new converts last night. Rep. Joe Kennedy seemed like an odd choice to deliver the response – a rookie from the heart of the party's establishment – but at least he showed a pulse rate, and he's well under 80 years old, an asset for a party that has to hand the reins to a new generation.

WHAT WASN'T DISCUSSED: There were two glaring omissions, in our opinion. First, soaring budget deficits – and the likelihood of another pig-out when a budget is finally passed – were ignored. Like most people in Washington, Trump doesn't seem to care about the deficit. Second, Trump will not address the outrage that Russia blatantly attempted to influence the last presidential election. This goes far beyond Robert Mueller's probe, still a looming threat to Trump.

THE NEW VILLAINS: Wall Street and the banks may be off the hook – they're being replaced as America's villains by the drug and health care industries. The stunning alliance of Amazon, Berkshire Hathaway and JP Morgan to curb costs may be the start of a trend, and now there's a fresh broadside from Trump on drug pricing. We're not sure what can be done legislatively, but the bully pulpit is a powerful force.

BOTTOM LINE: We stand by yesterday's assertion that like all State of the Union addresses, this one will be forgotten in a few days. But Trump's toned-down act – the Davos Trump – may represent a more lasting change; we'll see if he resumes his demagogic tweets. But make no mistake: the press won't acknowledge what a force Trump is, now with much to brag about, and we have to wonder if we're beginning to see the emergence of a crude version of Reagan.

January 30, 2018

Only One Thing Matters in State of the Union Address

STATE OF THE UNION, YAWN: The most over-rated, over-hyped snooze in American politics is the State of the Union address – nothing but hollow promises which are always forgotten within a day or two. We've said this for years, and would say it whether Donald Trump or Hillary Clinton was president.

ONLY ONE THING MATTERS: Will Trump get a polling bump from the speech? His advisers think the stock market rally and signs of economic strength can get the president to a 40% approval rating, but he needs a good speech – emphasizing accomplishments, sounding presidential, showing a kinder and gentler side. We'll see.

THE DISCONNECT: Trump will call for immigration reform, fair trade, an infrastructure bill, etc. but any legislative goals will run into the real dysfunction in Washington: Congress, which is hopelessly, pathetically unable to pass a budget as still another deadline – Feb. 8 – approaches.

ANOTHER EXTENSION? It’s not just the “dreamers” – there's no consensus yet on a budget, even though the fiscal year is one-third over. There are important implications: the Defense Department has deferred acquisitions and readiness, NIH cannot upgrade its opioid programs, and there still isn't hurricane aid, delayed for months in the stalled budget bill.

THERE'S NO CONSENSUS on the 2018 budget as fiscal hawks gag over an $80 billion spending increase for the Pentagon and a roughly equivalent hike in domestic spending, perhaps an increase of well over $60 billion. Even if there's agreement over spending in the next week – far from certain – there's no consensus over immigration as activists in both parties howl over the Trump proposal.

SO WHAT'S THE SOLUTION? Still another "kick the can" budget extension, perhaps lasting until late February, with the dreamers possibly moved into a separate bill. A comical, bizarre way to run a government – spending band-aids, confusing the defense industry and other contractors, as a truly important issue looms: extension of the debt ceiling by April. As of now, there are not enough votes to raise the debt ceiling, and the bond market will have to pay attention.

TO ADD TO THIS AIR OF DYSFUNCTION, the media is obsessed with a memo that is likely to show a bias at the FBI in its investigation of Hillary Clinton's emails; the probe into Russia's attempt to influence the 2016 election clearly has been politicized. But that's background noise for the markets, which will not focus on this issue until Robert Mueller indicts. Even then, it may not be a major concern for the markets.

THE BIG MARKET STORY, as we wrote yesterday, is the surging economy – which Trump obviously will brag about tonight. It should give him a little polling bump, especially if we get the Davos Trump instead of the angry tweeting Trump. Tonight is an opportunity for him, especially since Congress looks so dysfunctional.

January 29, 2018

The Booming Economy, Headed Higher

EVERYWHERE WE GO, retail investors ask us when the next recession might occur, even though there's no recession even remotely in sight. Yet there's a risk that virtually no one talks about: could the economy over-heat?

AT THE VERY LEAST, there's been a dramatic shift – the risks to the economy, which have been downside risks or balanced risks for much of the past decade – are now upside risks as massive stimulus from Washington and the markets heat up the economy.

STIMULUS EVERYWHERE: The stock market explosion has added about $7 trillion to U.S. wealth since the 2016 election. Tax cuts for corporations and most individuals will fatten their balance sheets. Repatriation of earnings from abroad hasn't even occurred yet. Everyone's 401(K) accounts have surged. Synchronized global growth is percolating. Deficit spending is back in vogue.

PRESIDENT TRUMP, in his well-received Davos speech, proclaimed that the U.S. is open for business, and he's correct (as long as an ill-advised attempt to weaken the dollar is abandoned). Trump thinks the economy can grow at 3% or better – and that's not out of the question as GDP gains momentum and more stimulus comes within a year from infrastructure spending and higher federal outlays generally.

A SECOND HALF SURGE? Brutal winter weather might chill GDP growth in the first quarter, but our fearless forecast is that the unemployment rate will fall well below the present 4.1% level by summer – finally producing decent wage growth. Consumers will have more money to spend, so retail sales should stay solid. The big new development will be business fixed investment, already starting to stir as tax cuts kick in. Yes, GDP growth of 3% or much better is entirely possible in the second half.

THERE ARE TWO OBVIOUS IMPLICATIONS AS THE ECONOMY SURGES: First, an ultra-tight labor market, with rising wages, could help Republicans keep the House and Senate this fall. Second, Jerome Powell has some work to do. We think the Fed Chairman will have to raise rates three times this year, with more in store for 2019.

THE GREAT MARKET WILD CARD may not be impeachment (unlikely), or a geopolitical crisis, or trade wars (a concern), or deficits (that's an issue for 2020), or an anti-GOP election tidal wave. The great wild card is the possibility of significantly higher interest rates a year from now because the economy is booming; history shows that an economic growth surge like this one is self-reinforcing.

POWELL'S TASK: He needs to dampen frothiness; if cryptocurrencies are a metaphor for a new era, that would be troubling. Powell obviously needs to raise the federal funds rate but he has one very important asset that could keep the 10-year bond yield from blasting off: even now, with a roaring economy and stock market, the demand for safe-haven U.S. Treasuries is remarkably robust.

SO WHEN WE TALK WITH RETAIL CLIENTS who worry that the economy could stumble, our response is clear: the economy is surging, and will stay strong for at least another year, probably longer. The risk, ironically, is that the economy could over-heat.

January 26, 2018

The Mueller Bombshell

WE STILL DON'T SEE 67 VOTES IN THE SENATE TO CONVICT DONALD TRUMP, which is the ultimate bottom line in the unending Russia investigation. But we're in uncharted waters once again with this very unpredictable president.

JUST AS WATERGATE WAS ABOUT RICHARD NIXON'S behavior after the crime, Trump seems unable to put to rest suspicions about perjury and obstruction of justice (collusion with Russia, hard to prove, may be a red herring). The New York Times bombshell that he ordered Robert Mueller's firing last June – if true – raises the question of what Trump will do when Mueller issues new indictments, which we believe are imminent.

YOU'RE FIRED !! We have predicted for months that Trump would instruct an underling tp fire Mueller if he indicts anyone in Trump's family – Donald Trump, Jr. or Jared Kushner. At the very least, indictments for perjury, easy to obtain in a liberal Washington grand jury, are quite possible. Accusations of money laundering can't be ruled out, either.

IF MUELLER IS FIRED, OR IF TRUMP PARDONS EVERYONE WHO'S INDICTED, that would increase chances of a Constitutional crisis. The House would consider an indictment; it takes a simple majority in the House to indict and there might be enough votes next January, after this fall's elections. Republicans are likely to lose 20 seats, possibly more, so the House could be virtually tied.

THAT COULD SET UP AN EPIC SENATE TRIAL next spring, but even if the Democrats have roughly 50 members, all willing to convict, would there be 17 Republicans votes to convict? Maybe Susan Collins and a couple other GOP moderates would vote to convict, but we don't see 17 Republican defections. Of course, we don't know what Mueller will come up with; he could win enough plea bargains to put together a compelling case against the president.

IF TRUMP REALLY WANTED MUELLER FIRED last June, and if more indictments are coming within a few weeks, Trump surely would reconsider the option of firing the special counsel. Trump may conclude that Republicans in Congress are too timid to bolt, especially since he has enormous support in the Republican base, which is convinced this is a witch hunt.

IF THE OPTION OF FIRING MUELLER is back on the table, this has the potential to crowd out other issues – an immigration deal, which has a chance; an infrastructure bill, which could unite both parties; a budget deal, which still needs work. Mueller is the great wild card of 2018; even if many Americans don't care, he's about to dominate the news in this city.

WILL THE MARKETS CARE? Corporate earnings are so spectacular that nothing else seems to matter for the markets. But faith in the U.S. among global investors could waver. There's already concern about a weak dollar policy and trade disputes, and here comes Mueller, who is a deadly serious threat to Trump's presidency. The dollar could continue to weaken.

January 25, 2018

A Serious Economic Misstep

THE FIRST SERIOUS ECONOMIC MISSTEP by the Trump Administration is the inexplicable decision to talk the dollar even lower. Combined with new trade tariffs – with more to come – an element of uncertainty has been injected into the global markets: why purchase U.S. assets if those investments may lose value because of a weaker dollar?

INFLATION IS THE LONG-RUN FEAR: Not this winter, maybe not even this year – but inflation is the logical outcome if foreign goods coming into the U.S. cost more because of the softer dollar. Past administrations realized this and resolutely advocated a strong dollar. Those administrations that pushed for a weaker dollar regretted it, as inflation erupted.

OUR OLD FRIEND LARRY KUDLOW has proclaimed for decades that "King Dollar" is a crucial element in attaining non-inflationary economic growth, with solid foreign investment in the U.S. Does Treasury Secretary Steven Mnuchin disagree?

WE SUSPECT MNUCHIN AND OTHER Trump officials got an earful yesterday from Wall Street types who worry about retaliation from countries alarmed at a "beggar thy neighbor" dollar strategy along with tariffs. Perhaps Mnuchin will walk back his comments, but the message seems clear – this is what President Trump thinks and wants.

SENDING A MESSAGE: The blunt U.S. advocacy of a weak dollar plus trade protectionism comes at the most symbolic venue possible – the Davos summit of global elites, who are about to get a taste of Trump's hard line. Americans at Davos reject the notion that the U.S. is sparking a trade war; they believe a trade war has been underway for years, with the U.S. as victim.

THE MONETARY POLICY IMPLICATIONS: European central bankers probably are alarmed to see the Euro get even stronger, so they may delay any return to a normal monetary policy that would raise rates – and, of course, raise the Euro even more. So interest rates may stay a little lower for a little longer in Europe. As far as U.S. monetary policy, a whiff of inflation – combined with strong economic fundamentals – may force new Fed Chairman Jerome Powell to raise rates more aggressively than he had been planning.

HIGHLY RECOMMENDED READING: We urge everyone to read the Wall Street Journal editorial today on efforts to diminish "King Dollar." This tactic never works. The good news is that the U.S. economy should grow by 2-1/2% or better this year, with unemployment falling below 4%. Why is it necessary to goose the economy even more?

THERE ARE THREE PROBLEMS WITH TRUMP'S GOAL OF 4% GDP GROWTH: First, there aren't enough workers to reach 4% growth, not when Trump wants to cut legal immigration. Second, retaliation from countries like China on trade complaints seems inevitable. Third, a whiff of inflation could worry the Fed and the markets. This is an economic mis-step, no question.

January 24, 2018

What's Surprised Us Thus Far This Year

IT'S STILL JANUARY, but we've already had a year's worth of surprises in Washington, where there's no script and no safe predictions. Some examples:

INEPT DEMOCRATS: Spoiling for a fight, eager for fall election victories, Democrats have shown breathtaking ineptitude in the past week, boxing themselves in on immigration. They don't dare repeat a shutdown, so they'll have to negotiate. Suddenly a wall with Mexico looks possible and sweeping protections for dreamers – favored by the public – looks less likely, as Chuck Schumer badly misplays his hand.

WEAK DOLLAR IS GOOD? Wow – didn't see this one coming. Treasury Secretary Steven Mnuchin proclaimed at Davos this morning that a weak dollar is good for the U.S. First, Treasury officials never comment on the dollar. Second, we're not sure a weak dollar is a good thing; prices of imported goods would rise here. It might be good for U.S.corporate profits but the massive tax cuts would seem to be enough stimulus for business. Perhaps Mnuchin was suffering from altitude sickness.

FBI BECOMES THE ISSUE: More indictments are coming, but suddenly the FBI's reputation has been tarnished by reports of anti-Trump bias and mysteriously missing emails. The waters have been muddied – and now chances of impeachment by the House, always below 50%, have diminished. Chances of conviction by the Senate, always well below 50%, have diminished greatly. The FBI has given Trump's supporters a bloody shirt to wave.

THE GANG'S ALL HERE: The consensus at Christmastime was that there would be several major departures from the Trump administration – Gary Cohn, Rex Tillerson, Wilbur Ross, Jeff Sessions, etc. But, amazingly, there have been none. We think at least one of these four will leave soon, but this hardly looks like the mass exodus that was expected just a month ago.

TRUMP AND THE PORN STAR: Donald Trump is coated with an impenetrable layer of teflon. Some of the nation's leading evangelists have proclaimed that Trump should be forgiven, but we suspect Melania Trump may not be quite as generous. Regardless of his transgressions, real or alleged, Trump's base is solid; he can do no wrong with his adoring supporters. Trump on the ropes? We don't see it – still another surprise as 2018 begins.

A BUSY AGENDA? After the tax cuts passed, the consensus was that Trump would get very little else done. But – surprise!! – Trump is giving every indication of moving on infrastructure by summer, imposing tough trade sanctions, and pushing for a bill to ease regulatory burdens on small banks. In light of his victory on taxes, it may be unwise to bet against him. Even a wall, or something like it, can’t be ruled out.

January 23, 2018

Lessons We Learned as the Shutdown Ended

WE THOUGHT THE SHUTDOWN was going to last longer. A fierce battle still looms later this winter on immigration, but some new dynamics are now in play; we learned some big-time lessons over the past weekend:

1. Mitch McConnell, clever guy: The Senate Majority Leader realized instantly that he could win the spin battle. "Democrats care more about illegal immigrants than keeping the government open," was his message. Game, set, match. We wrote yesterday that McConnell would have to find a way out of the morass, and all he had to do was cut a deal to fund the Children's Health Insurance Program (CHIP), which was inevitable, and promise an immigration vote by Feb. 8.

2. House Republicans, not on board: McConnell will allow a vote that may result in a centrist Senate immigration bill which will be rejected by the House, where there's insufficient support for the likes of Lindsey Graham, Susan Collins and Dick Durbin. Hard-liners want to curb legal immigration, they want to fund a wall, they want to end "chained immigration," etc. Chuck Schumer apparently overlooked the likelihood that the House will stay far to the right of the Senate.

3. The liberals are seething: Not only do they distrust McConnell, they distrust Schumer. Anyone planning to run for the party's presidential nomination in 2020 is veering sharply to the left, parroting the Hispanic Caucus line. This may not be a prescription for electoral success – certainly not for the 10 Democrats who have to run this fall in states that Trump carried in 2016.

4. Trump, properly managed: Someone got to Trump – perhaps the savvy chief congressional lobbyist, Marc Short. Instead of tweeting provocative taunts, Trump largely stayed out of the fray this past weekend, far from the dizzying details that CEOs usually ignore. This strategy worked.

5. Defense Contractors still have to worry: On Feb. 8 there may be still another continuing resolution which would fail to set clear spending levels for a fiscal year that's one third finished. This is becoming a major irritant for defense contractors and the Pentagon; they will eventually get a huge budget increase, but there's continuing uncertainty over the timing.

6. On to the next issue – trade protectionism: Trump doesn't like being out of the limelight for long, and he's looking at a public relations doozy: his upcoming meetings at Davos after a clear sign that his administration will embrace protectionist trade policies. Yesterday's steep tariffs on washing machines and solar panels are just the first of many U.S. trade complaints that may lead to retaliation. We expect Trump to take a hard line in Switzerland.

7. What's wrong with the FBI? The next big political issue will once again have the Republicans on the offensive: how could the FBI lose five months of emails and text messages between two top FBI officials accused of having an anti-Trump bias? This will be a very hot issue for Fox News, which has more fodder for its claims of a cover-up among those investigating Trump.

8. The next fiscal issue: Everyone is relaxing in Washington, at least for a few days, now that the shutdown is over. But there's a looming budget issue in April that may exceed this one – expiration of the debt ceiling. There aren't enough Republican votes to pass it, and Democrats are not inclined to help them.

January 22, 2018

The Center May Not Hold

A FATAL FLAW: About 20 earnest Senate moderates worked all weekend on a compromise, as did Mitch McConnell and Chuck Schumer, but they there's a fatal flaw – the ideologues in both parties aren't on board, and they can veto any centrist compromise.

EVEN IF THERE'S A DEAL THIS NOON that would reopen the government until Feb. 8 (unlikely but not out of the question), that would simply guarantee another crisis as Feb. 8 approaches because the divisions over immigration are enormous. The moderates can come up with compromises, but the activists won't agree.

A FUTILE EFFORT: A possible deal involving Lindsey Graham, Susan Collins and Dick Durbin doesn't appear to have enough support among the three blocs that really matter:

Activist Democrats, who reflect the fierce anger of their base, and are aghast that Schumer put "The Wall" on the table this weekend. They have boxed Schumer into a corner – he has to side with the Hispanic caucus – and they will not compromise on issues like "chain migration."

Activist Republicans – egged on by talk radio – want no path to citizenship for the dreamers, which they believe would reward illegal immigration and, they believe, would eventually lead to a new block of Hispanic voters that would give the Democrats the electoral votes in Texas and Florida for the foreseeable future.

And the White House, which looks especially dysfunctional; President Trump, oblivious to the details, is eager for a deal – any deal – to end the shutdown. But his top advisers, including Stephen Miller and Chief of Staff John Kelly, are hard-liners who have reigned in the President.

THIS CRISIS COULD DRAG ON: Even if there's a deal this week to end the shutdown, that won't mean much. These three factions we listed above are deeply suspicious of an immigration deal, which seems unlikely by Feb. 8 or the March 5 DACA deadline established by Trump. Largely overlooked are hard-liners in the House, who voted to keep the government open but almost certainly would reject any immigration deal that has Susan Collins' fingerprints on it.

WHAT DOES THIS MEAN FOR THE MARKETS? As we have written, the immediate economic impact should be modest, but a lengthy impasse could have a real impact on defense contractors and, perhaps eventually, on the macro economy.

THE GREAT UNKNOWN is whether the markets – especially the dollar – may begin to worry about the utter chaos in Washington. The president is in over his head on the complex issue of immigration and the two parties have to fear the ferocity of their activists.

OUR BOTTOM LINE IS THAT McConnell is appalled that Schumer has overplayed his hand – and McConnell is equally appalled that Trump has suggested a change in the 60-vote Senate filibuster rule. But McConnell's main focus is on the fall elections, and he wants a deal. If there's a path out of this morass, McConnell will have to find it.

January 19, 2018

A Shutdown Message – There's a New Sheriff in Town...

AND HIS NAME IS CHUCK SCHUMER: The voting dynamics have changed significantly in the Senate, which only needed 50 votes to pass tax cuts under the budget reconciliation process. Now we're back to regular rules, in which 60 votes are needed to move legislation – making Chuck Schumer the most important player in the Senate; he needs only 40 votes to filibuster, and he has 49 Democrats.

THUS WE MAY BE IN FOR A LONG SHUTDOWN: It's possible that Congress could pass an emergency extension before midnight tonight, but both sides are hopelessly divided – and there's no coherent leadership from the White House – so any last-minute reprieve would be exceedingly temporary. Both sides have already moved on to the blame game.

AS WE WROTE YESTERDAY, a relatively brief shutdown will have a modest impact on the economy. The real stakes, at least initially, are political – who gets the upper hand as the spin battle begins ahead of the fall elections. Both parties can't wait to blame each other; this is how Washington thinks.

AMID THE CACOPHONY that is likely today, two major themes stand out: first, both parties are hopelessly divided on the core issues – basic spending levels in a budget for fiscal 2018, which is nearly four months old, and they’re even more hopelessly divided on the treatment of the "dreamers." A 2018 budget deal will eventually be reached, spending a LOT more money. But the immigration issue defies any solution as long as President Trump insists on a wall.

THE SECOND MAJOR THEME is that Republican leaders in Congress cannot count on Trump to have their backs. He has repeatedly undercut their initiatives this week and seems unable to tell them just what he wants on immigration. Is he a moderate or a hard liner? Who knows – he can't even agree with his Chief of Staff. Mitch McConnell, increasingly exasperated, basically said yesterday that Trump is in over his head on policy.

SCHUMER, MEANWHILE, IS SENDING A SIGNAL: All legislation will have to go thru him, even though several incumbent Democrats worry about their re-election prospects this fall if the shutdown is a long one. The majority of Senate Democrats are seething; they're determined to show that Trump cannot govern or negotiate. They'll even be content with a draw that shows Washington is dysfunctional – a "pox on both your houses" mood would hurt the party in power, Democrats believe.

SO THAT'S WHERE THINGS STAND: We're headed for an ugly fight between the huge egos in Washington, seemingly overlooking children whose health coverage will be threatened and other children who may face deportation. No matter – there are political points to be made.

January 18, 2018

A Government Shutdown? The Bark is Worse than the Bite

IN SELF-ABSORBED WASHINGTON there's a sense that a government shutdown would be an epic event with far-reaching consequences. But the more we look at the impact of a relatively brief shutdown, the more we think it would have an exceedingly modest impact on the country as a whole.

MUCH WOULD BE EXEMPTED: Social Security checks wouldn't be affected. Air traffic controllers and TSA screeners would continue to work. FEMA would react to natural disasters. The Centers for Disease Control would stay open. Federal prisons and VA hospitals would not be affected. The Postal Service would deliver the mail. Military readiness would not be affected. And Robert Mueller's probe would continue. This is just a partial list.

THE OPTICS OF CLOSING NATIONAL PARKS: Trump Administration officials recall that in previous shutdowns, every newspaper and TV station in the country showed shuttered national parks – so this time there may be a presidential proclamation keeping them open, according to the Washington Post. Even the National Zoo would stay open, albeit without guides.

ONE CAVEAT: A lengthy shutdown, lasting for several weeks, would have an economic impact as up to 800,000 non essential federal workers – half of them civilian defense employees – wouldn't get paychecks. Once a shutdown ends, they would be paid retroactively, but a long shutdown could have an impact on consumer and market confidence. And there would be irritants, such as failure to renew passports. The Smithsonian museum would be closed.

SO – WILL THERE BE A SHUTDOWN? A last-ditch plan from Paul Ryan – kicking the can until Feb. 16 – has a chance to pass today or tomorrow in the House; it's a close call. But Democrats aren't on board; they're furious over Trump's stance on DACA and immigration, and chances are below 50% that the Ryan plan can prevail in the Senate. So a shutdown still seems likely; both parties can’t wait to blame each other.

THE ULTIMATE ARBITER may be the financial markets, which are largely oblivious to the threat of a shutdown; the Wall Street "meltup" roared ahead yesterday. At some point, a protracted shutdown would have a negative impact on defense contractors and perhaps even the macro economy – but for now, our take is that when it comes to a shutdown, the bark may be worse than the bite.

January 17, 2018

Paul Ryan Has a Plan; Green Light for Trump to Run Again?

CHANCES OF A GOVERNMENT SHUTDOWN faded a bit last night, as Paul Ryan introduced a cunning plan that would fund the Children's Health Insurance Program for six years in exchange for still another "kick the can" extension, this one lasting until Feb. 16. Ryan doesn't have the votes yet in either house, but he's close.

RYAN SHOWED HIS CARDS, sending a signal that the Republicans really, really don't want a shutdown; they always get blamed when there's a government closure, even though a case can be made this time that the Democrats are itching for fight with Donald Trump.

THE CHIP PROGRAM got a major boost when the Congressional Budget Office ruled that it would save more money than other health care alternatives; thus it will get extended one way or another. Ryan would attach this to a bill that also would delay some Obamacare provisions, including the device tax and the so-called Cadillac tax. And his plan would fund missile defense programs immediately. So there's something for everyone in his plan, but there are three major flaws.

FIRST, THERE'S NO CHANCE THAT ALL HOUSE REPUBLICANS will vote for it; the conservative House Freedom Caucus is not on board. Second, a Continuing Resolution lasting for at least another month infuriates defense hawks, some of whom may not vote for this plan. Third, the Ryan plan won't touch the issue of DACA, giving lawmakers more time to negotiate ahead of a hard stop in March. That delay may not fly in the Senate, where nine Democrats are needed to break a filibuster.

THE WHEELING AND DEALING WILL CONTINUE until Friday, with the possibility of a one month extension. But it's impossible to overstate the deep political acrimony in Washington, so we still think a shutdown is coming – if not on Friday night, then later this winter. Why? Both sides are hopelessly deadlocked on DACA.

GREEN LIGHT FOR TRUMP? An astonishingly upbeat assessment of President Trump's health reinforces our belief that he will run again in 2020; his doctor essentially proclaimed that Trump is fit enough. We reiterate a major theme: there is no one – not Mitt Romney, not John Kasich – who has any chance of denying Trump a second GOP nomination. Only Robert Mueller or a health problem would make a difference, and the latter just faded as an issue.

TRUMP AND THE MEDIA: The president will make news today with his "Fake Media" awards, which will be like catnip for his base. The great irony is that the press – in particular "Morning Joe" and CNN – eagerly gave Trump saturation coverage in the spring of 2016, as his candidacy blasted off. He was a regular TV guest, usually by phone, sometimes two or three times a week, because his outrageous shtick was good for ratings. He used the media, and the media used him.

January 16, 2018

Who Wants a Shutdown? Actually, Lots of People Want One

WHAT AN EMBARRASSMENT: Leaders in both parties huddled this weekend – not to iron out an immigration deal, but to figure out whether Democrats or Republicans may have more to gain from a shutdown. We may get to find out.

IT'S ALL ABOUT THE BASE: President Trump needs to keep his GOP base intact as indictments loom from Robert Mueller. Trump's coarse talk about immigration is generally well received in his base, and he has rejected a bipartisan compromise. The Democrats worry about nearly a dozen of their Senate seats this fall – mostly in conservative states – which makes them leery of embracing a shutdown strategy. But the party's base – and firebrands who want to advance their presidential aspirations – want a shutdown.

WHAT'S BEEN OVERLOOKED, as the media focuses almost exclusively on the DACA issue, is that there are major differences on spending; the Democrats are insisting that if the Pentagon gets a huge spending increase – which is virtually certain – domestic spending should get an equally generous hike.

IF THIS WAS JUST ABOUT SPENDING, Paul Ryan probably would be able to prevail with something like a 30 day Continuing Resolution, even though defense hawks are increasingly opposed to extensions. But this is about far more than spending, and we simply don't see enough votes, as of this morning, to keep the government open past midnight on Friday the 19th. Both sides are dug in, itching for a fight; if that fight doesn't come at the end of this week, it will come later this winter.

THE INVESTMENT IMPACT: As we have written previously, a brief shutdown probably wouldn't have much of an impact on the markets, but a lengthy shutdown – which is possible – would begin to have an impact on confidence: investor confidence, consumer confidence and business confidence.

BACK IN THE REAL WORLD: December's core inflation data, released with the CPI last Friday, showed the type of increase the Fed has been hoping for – a 0.3% rise, the most in 11 months. December retail sales jumped by 0.4%,leading many forecasters to hike their GDP estimates for the fourth quarter. The Fed's tightening path this year seems to be on track.

SMALL BANK RELIEF: Interesting article in this morning's New York Times about efforts to scale back regulatory burdens on small banks, which most experts believe were treated too harshly in the Dodd-Frank measure. Activists are adamantly opposed to any regulatory relief, but some type of legislation – easing things like stress tests for small banks – could move this spring, largely because moderate Democrats may cooperate.

January 12, 2018

With Both Parties in Disarray, Shutdown Looms

THE PLOT THICKENS: Republicans in Congress face an internal rebellion from defense hawks, while Democrats can't agree among themselves on immigration proposals, which means a budget deal including those issues by the the Jan. 19 deadline looks virtually impossible. The threat of a government shutdown a week from now has risen significantly.

WHAT'S DIFFERENT THIS TIME is that rank-and-file members in both parties are unwilling to pass still another "kick the can" extension by late next week. Paul Ryan apparently thinks another extension is the best option, but defense hawks are adamant that another "continuing resolution" would be a negative for the Pentagon and defense firms. Among the Democrats, there's disarray over what – if any – immigration plan should pass.

EVEN IF THE TWO PARTIES MANAGE TO UNIFY INTERNALLY, there's no imminent prospect of a bipartisan deal on immigration; Donald Trump's appalling remarks yesterday did not help. And there's no agreement between the parties on spending, since Democrats won't vote for huge defense spending hikes without a major boost for domestic spending, which is a non-starter among GOP deficit hawks.

SO THAT'S WHERE THINGS STAND as a long holiday weekend approaches – no agreement within the parties, no agreement between the parties. Lawmakers will return to Washington next Tuesday without the votes to keep the government open – complicated, frankly, by a White House that seems utterly incapable of providing any leadership or even a grasp of the policy issues involved.

SHOULD THE MARKETS CARE? The big story for investors obviously is the strengthening economy and continued solid corporate earnings, we get that. But a prolonged shutdown – which is not out of the question – could have an impact on consumer, corporate and investor confidence. How could anyone have confidence in Washington right now?

January 11, 2018

Why Everyone Hates Politicians

YOU CAN'T MAKE THIS STUFF UP: Just when it looked impossible to become even more cynical about politicians, along comes a string of events this week that strain credulity. Consider:

FLORIDA OIL DRILLING: Well, guess what state will get an exemption from the new offshore oil drilling proposal? Florida, home of Mar-a-Lago and a politically ambitious Republican governor. Energy Secretary Ryan Zinke proclaimed that the state's tourism and beaches puts it in a special category – apparently unlike, say, Georgia or North Carolina. The ridicule is deafening; this has made a mockery of the oil drilling proposal, which seems destined to die.

THE RETURN OF EARMARKS? As we wrote yesterday, President Trump and many Republicans want to revive "earmarks," the metaphor for out-of-control pork barrel spending. Meanwhile, sanctimonious politicians who rant about budget deficits are about to approve staggering new spending increases.

NO BUDGET DEAL THIS YEAR? Mitch McConnell and other Republicans are considering not even passing a budget this year, because some of the choices – entitlement reform in particular – are so unpopular that no one wants to be associated with them ahead of an election.

GOVERNMENT SHUTDOWN: Regardless of what they say in public, many Democrats – in private – would welcome a government shutdown this winter. They think the divided Republicans would get most of the blame, and they want to curry favor with the Hispanic Caucus and liberals who want more domestic spending. A government shutdown to make a political point? Well, yes.

TIME TO LEAVE? Not surprisingly – in light of these and other hypocrisies – the anti-incumbent mood is still very much alive; Trump has not drained the swamp. So there's an increasing chance of a "wave" election this fall, with Republicans losing control of both the House and Senate. Two GOP veterans in California announced their retirements this week in districts that are likely to shift to the Democrats.

THERE ARE NOW 29 OPEN GOP SEATS, with a few more to come, compared to 14 open Democratic seats. And eight GOP House committee chairmen are stepping down – a sign, perhaps, that they have no interest in working for House Speaker Nancy Pelosi in 2019. Since FDR, the party that controls the White House has lost, on average, 23 seats in the first midterm election. The Democrats need a net gain of 24 seats to recapture the House – now within striking distance.

THE SENATE APPEARED TO BE AN EASY CALL for the past few months, with the Democrats looking vulnerable in up to 10 states; they have to defend 25 seats compared to only 8 held by Republicans. Even this now looks close, with the GOP still the slight favorites to maintain their slim 51-49 seat majority, perhaps adding a seat or two – not the possible five or six seat gain Republicans had been hoping for.

THERE'S NO GREAT LOVE FOR DEMOCRATS, who still don't have much of an agenda other than "we hate Trump." They desperately need fresh blood, but Democrats have one very big advantage – a highly motivated, angry base that will turn out to vote. Chances of a "wave election" continue to grow.

January 10, 2018

Two Important Signals From Donald Trump

SIGNS OF LIFE: Donald Trump quieted his detractors – at least temporarily – with a performance yesterday that was important on two levels: he was clearly engaged at a White House meeting on immigration, and more importantly he indicated a willingness to compromise, even if it angers his political base.

IT'S COME TO THIS: The whispering about Trump had become so worrisome that his advisers allowed cameras to record an hour of give-and-take on immigration, showing the president is willing to negotiate. His tenuous grasp of the issues prompted some Republicans to gently correct him on key points, but viewers saw a president who was engaged. So that very low bar was cleared.

SPENDING POLITICAL CAPITAL: One of our favorite themes is political capital and the need to spend it strategically. Trump indicated yesterday that he's willing to "take the heat," and the heat came fast and furious from his conservative base after the meeting. The loudest voice, as usual, was from Ann Coulter, but other immigration hard-liners were outraged that Trump will consider a "Dreamers" deal and is no longer wedded to the idea of a wall along the entire U.S.-Mexico border.

TRUMP UNDOUBTEDLY KNOWS that he will have to alienate his base on several issues in the coming weeks. A budget deal will require votes from Democrats, who will win more domestic spending increases. A debt ceiling hike – going well past $20 trillion – will outrage House hard-liners, but it will pass with support from Trump and many Democrats.

SO WE THINK TRUMP WILL SHOW SIGNS OF FLEXIBILITY: He literally stated yesterday that he would sign any bill that lands on his desk. He will agree to domestic spending hikes in exchange for a huge increase in defense spending. And in the clearest sign that he can wheel and deal like any politician, Trump dropped plans for oil drilling along the coast of Florida; Republican Gov. Rick Scott got a major victory and if he wins his likely Senate race, Scott will be a vote Trump can count on forever.

TRUMP'S WILLINGNESS TO DEAL may even extend to the issue of "earmarks," which have been banned, sort of, by lawmakers who were embarrassed by the amount of pork that found its way to their home states. But Trump indicated yesterday that he could favor a return of earmarks, which might help get deals done. As we wrote yesterday, there's virtually no discipline on spending; deficits will soar, especially since no one wants to address surging entitlement costs. That issue effectively is dead.

BUT FOR AT LEAST A DAY, a mood of compromise was in the air. The outrage from the right and left wings over the specifics on immigration was actually refreshing, because a compromise won't satisfy the activists. As for Trump, he's back in the game – but the good vibes may only last until his next tweet, or until Friday, when a new controversy could erupt if he refuses to allow the release of his health scores after his physical exam that day.

January 9, 2018

What We're Hearing on Capitol Hill

CONGRESS IS BACK after spending time with constituents for nearly three weeks, and there's a new mood. Not surprisingly, it focuses on the fall elections, which now look like a major threat to Republican dominance in Congress. Here are some themes we're picking up:

CHUCK SCHUMER IS THE PLAYER TO WATCH: Criticized by activists for not being aggressive enough, Schumer now has the votes to get his way on a wide range of issues. He can block a budget and other bills with a filibuster, which requires 60 votes to end, and Schumer has nine votes to spare.

SCHUMER HAS RESERVATIONS ABOUT A GOVERNMENT SHUTDOWN, but activists in his party are demanding an immigration deal by the Jan. 19 deadline. We don't expect a breakthrough at the White House today; an immigration deal is unlikely any time soon as Donald Trump insists on a wall with Mexico and Democrats demand blanket amnesty for "the dreamers."

WITH NO DEAL ON IMMIGRATION and a wide gulf on spending issues, there either will be still another "kick the can" budget extension on Jan. 19 or a shutdown; the latter is looking more likely. "A train wreck is coming, whether in January or later this winter," a Hill staffer tells us.

NO BUDGET WITHOUT DEMOCRATS: The Republican base will roar when it becomes clear that no budget – or debt ceiling extension – can pass without votes from Democrats. That's because of Schumer's clout – and because 30-40 House Republicans will oppose any budget deal. Democrats will cooperate, providing the votes needed to pass these bills – for a price, which of course will be more spending.

NO ONE REALLY CARES ABOUT THE BUDGET DEFICIT: Fiscal hawks want to curb the magnitude of spending increases, but they can’t stop with huge hikes for the Pentagon and moderate increases for domestic outlays. As for looking at entitlement reform or actually cutting spending, there's no stomach for that. Long-term debt is a ticking time bomb; most members of Congress know it but they will not embrace the prescriptions required.

THE MOST HEAVILY LOBBIED ISSUE on Capitol Hill right now involves trade, as President Trump seeks to impose tariffs on China and, more importantly, re-write or kill NAFTA. The Chamber of Commerce, farm groups and other beneficiaries of NAFTA are furiously lobbying for it, but we continue to believe it's on thin ice. Recommended reading: this morning's Wall Street Journal editorial on NAFTA.

CONGRESS HASN'T GIVEN UP ON INFRASTRUCTURE, it's a popular idea as roads and bridges crumble. But even Republicans are confused by recent comments by Trump – in public and private – that he doesn't like the idea of a government-private sector arrangement. But this has wide support (New York City airports reinforce the need for a private sector rescue), and we don't rule out some progress later in 2018.

REPUBLICANS ADRIFT: Paul Ryan won a life-long goal of sweeping tax cuts, but sources report he knows that there's insufficient support for his other goal, entitlement reform. So Ryan, not surprisingly, is weighing retirement. His Senate counterpart, Mitch McConnell, who turns 76 next month, is focused primarily on keeping GOP majorities in both houses this fall. There's a malaise factor within the GOP leadership.

THE GREAT UNKNOWN: Talk with Republicans about policy issues and they often finish sentences with "of course, this all depends on what Mueller does." There's a widespread consensus that more indictments are coming, probably reaching into the President's inner circle. Mueller and the FBI have been stung by charges of bias, but he's still an enormous wild card as elections approach.

GENERIC POLLS give Democrats a 10 or 11 point lead in congressional races, perhaps enough for them to capture both houses, and eight GOP House chairmen have announced their retirements. Both houses clearly are in play; Republicans, who have largely stuck with Trump, concede he is an albatross in many districts. GOP candidates are hoping that the economy will be surging this fall; they will credit tax cuts – but right now the tax bill generates a tepid reaction from constituents.

AND FINALLY, TRUMP: There were enough inaccuracies in Michael Wolff's book to question his motives, but maybe half or even two-thirds of the book seems true. When you talk with people in both parties on Capitol Hill, they roll their eyes and shake their heads when it comes to Trump – but they respect his rock-solid support in the GOP base, and they don't think he will be removed, either via impeachment or the 24th amendment, which has gotten more publicity than it deserves, people on Capitol Hill say.

TRUMP'S GREATEST POLITICAL RISK may not be Mueller – if may be from Republicans, who got what they really wanted – huge business tax cuts. The name of the game in Congress this year is getting re-elected, and if Republicans have to abandon Trump, they say in private that they will. Democrats we talk with, meanwhile, are furious and energized – and their constituents will turn out in huge numbers, as we've already seen in Virginia and Alabama.

January 8, 2018

What Happened at Camp David?

UNDER THE RADAR SCREEN: All the media coverage of the Camp David summit focused on Steve Bannon, and Donald Trump's assertion that he's a "stable genius." There was less focus on signs of deep uncertainty among Republicans on policy, but the logical path is becoming clear – after winning a landmark tax bill, it's time to play defense.

WHAT'S THE BIG POLICY THEME? That seemed to stump the GOP leadership, which met with Trump on Saturday and part of Sunday in the frigid woods of northern Maryland. Infrastructure? Trump has major reservations about a public–private partnership. Entitlement reform? It polls very poorly. Immigration? The deals we're hearing about won't satisfy the right or the left. Trade protectionism? That enrages the GOP's pro–business and pro–agribusiness wings.

SO WHAT'S THE THEME? The two areas where this administration can generate publicity and appear to be doing something is regulatory and geopolitical. But the regulatory policies – offshore oil drilling, further weakening of Obamacare, cracking down on marijuana, issuing new tariffs, etc. – are enormously controversial, even among Republicans. The really big stuff on regulations came last year.

AS FOR GEOPOLITICS, foreign countries are so exasperated with the U.S. that they're moving on their own – even, incredibly, North and South Korea. This is a good thing.

PLAYING DEFENSE: With no sign of agreement between the President and Congress on most issues, there's one logical result for the White House – playing defense, reacting to deadlines as they arise, rather than unveiling new policy initiatives. And the deadlines will come fast and furious in the next few weeks – deadlines on the budget and debt ceiling, deadlines on the Iranian nuclear deal, deadlines on the "dreamers," etc.

THE BIG PENDING DEADLINE: There has been no significant progress on the two core issues that must be resolved in time to avoid a government shutdown. Democrats are willing to consider a faux–wall, but Trump wants a real one, so the immigration issue is still stalled. Second, the Republicans want to exceed spending caps by $54.4 billion for defense in this fiscal year, and Democrats won't agree to a budget unless they get something close to that level for domestic spending.

THUS WE STILL THINK A GOVERNMENT SHUTDOWN is likely – let's say a 60% chance – on Jan. 19. It's not entirely because Trump is digging in his heels; we think he will embrace a deal by Jan. 18. But there's another part of this equation: Chuck Schumer, Nancy Pelosi and the Hispanic Caucus are itching for a fight, and they know at least a third of Republicans won't vote for a deal that funds a wall or dramatically hikes spending.

NO ONE COUNTER–PUNCHES LIKE TRUMP, and he could make Schumer and Pelosi foils if the government shuts down and no one – including the markets – pays much attention. Perhaps playing defense this year, as the economy expands and unemployment falls, could be the smartest strategy for Trump. He needs to stop threatening to ban books; he needs to defend an economy that looks better now than if Hillary Clinton had won the election.

January 5, 2018

Stunning Oil Drilling Proposal Could Have Political Implications

OIL DRILLING: Washington is obsessed with "Fire and Fury," a book that won’t change many votes this fall. But a regulatory proposal, under the radar screen this week, may have a bigger impact on the election. Interior Secretary Ryan Zinke has proposed a breathtaking increase in offshore oil drilling, virtually guaranteeing a fierce political blowback in states like Florida and North Carolina, where Republicans now face a fresh vulnerability.

THE PROPOSED DRILLING INCREASE could become the largest in U.S. history, potentially covering 90% of all offshore waters. A fierce blowback – and litigation – is certain from states like California, but this has upset Florida's Gov. Rick Scott and Sen. Marco Rubio, both Republicans. Never mind the worldwide oil glut, this makes no political sense – it violates the "not in my back yard" concept, and suddenly Florida 29 electoral votes are very much in play.

PRESIDENT TRUMP MEETS WITH GOP LEADERS at Camp David this weekend amid tentative signs of optimism over immigration. Delicate negotiations between both parties have produced a consensus that some protections for "dreamers" can be incorporated into a deal that would beef up funding for border security – perhaps even including a fence or a partial wall in areas along the Mexican border. If Trump can compromise on the wall, a deal could come quickly.

THIS WON'T GUARANTEE A BUDGET DEAL BY JAN 19: We still think the differences over spending are so enormous that either a government shutdown or still another extension is likely when the Jan. 19 deadline hits. Trump and the Republicans will insist that another funding delay would jeopardize the defense sector, but the only way Schumer will deal is if domestic spending also gets a major boost.

HANGING OVER THE CAMP DAVID MEETING is the new allegation that Trump instructed a White House attorney to pressure Jeff Sessions to not recuse himself on the Russia probe. If true, this bolsters the argument that there was an attempt to obstruct justice. Trump has to convince GOP leaders to attack Robert Mueller's credibility as more indictments loom.

PUSHBACK ON WOLFF: Stuck at home with a flu, we'll read "Fire and Fury" this weekend; got little else to do. But we're mindful of Michael Wolff's very controversial reputation of getting facts wrong and imposing his own views on his narratives. Wolff says most of his White House interviews are on tape; we'll see.

WHAT STANDS OUT THUS FAR is Trump's refusal to let any controversy die. By threatening legal action and basically going berserk over this book, Trump simply gives it more publicity – and more readers. How ironic: we'll probably get another decent jobs report today and the Dow is over 25,000; Trump is correct – this doesn't get the publicity it deserves. But that's because he steps on these great narratives with his unhinged tweets, which get more publicity than the great economy.

January 4, 2018

Steve Bannon, Washington Pariah

STOP THE PRESSES? There isn't much new in the "Fire and Fury" book. Everyone knows President Trump doesn't read – or even skim – briefing reports, everyone knows he loves french fries, everyone knows there are more indictments coming from Robert Mueller. Yup, it's not a real tight ship at the White House – this is news?

THE BOOK gave Trump an excuse to cut ties forever with radioactive Steve Bannon – while making Mitch McConnell and Congressional Republicans very happy. Limited downside for Trump with this story, and significant upside. We have heard for the past year that Bannon leaked constantly and indiscriminately, always trying to make himself look good. And now he's a pariah.

THE NEXT CRISIS: The economy is likely to survive the brutal winter and a potential government shutdown (little progress on that front yesterday), but there's growing unease in this city over Trump's extraordinary tweets that seemingly dare North Korean hothead Kim Jong-un. Trump's latest tweetstorm took his foreign policy advisers by surprise and prompted more than a few insiders to ask: Does Gen. Kelly have any control over Trump?.

KOREA AND IRAN GET ALL THE HEADLINES, but the next troubling geopolitical story may be trade; two highly recommended articles this morning on growing protectionism, one on the CNBC website, the other in the New York Times. Tariffs against China appear imminent, and another crucial trade deal – NAFTA – appears to be on thin ice as talks resume on Jan. 28. Canadian Prime Minister Justin Trudeau says shaky NAFTA prospects keep him awake at night, and they should.

READER BLOWBACK: We got a half dozen emails yesterday from readers who think the Democrats have a solid stable of candidates ready for the 2020 presidential election; a couple of you were incredulous that we think Trump could win the GOP nomination and the presidency again, facing a weak field. Okay – so which Democrat can beat him?

ARE THE DEMOCRATS REALLY CONSIDERING Bernie Sanders or Joe Biden? Would Elizabeth Warren be too fiery for the electorate? How many voters know who Kirsten Gillibrand or Kamala Harris is? The Democrats, now represented in budget talks by Nancy Pelosi and Chuck Schumer, desperately need some fresh blood.

WHO'S THE MOST POPULAR PERSON IN THE PARTY who hasn't already served eight years? Michelle Obama, who has more sizzle than her husband, isn't afraid of Trump, and polls very very well...Trump vs. Obama – that would be one hell of a campaign to cover.

January 3, 2018

Low Expectations for Budget Talks Today; Romney Vs. Trump

TOP CONGRESSIONAL LEADERS AND WHITE HOUSE AIDES will discuss options for keeping the government open past Jan. 19, but we expect very little progress today. Both sides are preparing their best sound bites, eyeing the polls, and Jan. 3 is way too early to expect a breakthrough.

TODAY'S SOUND BITES: Democrats will focus on immigration; party leaders will promise to stop deportations of young "Dreamers." Donald Trump apparently will double down on a wall with Mexico, which is a non-starter for all Democrats and perhaps a third of Republicans. But Trump is eyeing his base, which expects him to keep his promises. He has a fallback – more money for border security – but he's not ready to play that card yet.

WHAT DOES THIS HAVE TO DO WITH THE BUDGET? Not much, except a 2018 funding bill is "must-pass" legislation and therefore has attracted all sorts of amendments – immigration, children's health insurance, hurricane aid and other issues are must be resolved before Congress sets spending targets. There's no consensus whatsoever on the level of domestic outlays.

ALL OF THIS WILL TAKE TIME, and we think it can't be done by the latest deadline, Jan. 19. Perhaps there will be another extension, but the "kick the can down the road" strategy, which was so popular last fall, has fewer supporters now. We got a couple of emails yesterday from readers who think Congress is crying wolf once again on a government shutdown, but we think this time may be different.

ROMNEY VS. TRUMP? The Utah seat now held by retiring Sen. Orrin Hatch is Mitt Romney's if he wants it, and he apparently does. This has led to hyperventilating in the past 24 hours that Romney could become a potent rival of Donald Trump – perhaps even a presidential candidate. Good luck with that.

THE IDEA THAT ROMNEY COULD WIN THE GOP NOMINATION is preposterous. He's a good guy centrist, pro-business and thoroughly establishment – the kind of Republican Donald Trump has for breakfast. We often hear from moderates who like John Kasich but we have to point out that Kasich lost EVERY ONE of his primaries against Trump, except in his home state of Ohio, which Kasich barely won.

THE SIMPLE FACT is that Trump has no serious challenger for the nomination – if he wants it and his health is good. His job approval rating among all voters is abysmal but among Republicans he still looks unbeatable. Could Trump win a second term? Based on an early look at the Democrats' candidates – mostly elderly or unknown – we think Trump is still underestimated as a political force.

January 2, 2018

Dessert First, Now a Plate of Broccoli

HOW TO TOP 2017? It's a rare year that combines monetary accommodation, the promise of huge business tax cuts and sweeping regulatory reform – all while overlooking the deep political dysfunction that grips this city. An encore may not be forthcoming.
WE'RE NOT BEARISH – THE ECONOMIC FUNDAMENTALS are still damned solid; GDP and employment may surge further. But it strikes us that the good stuff – tax cuts and regulatory reform – has been factored in, while the political climate is unusually unstable, for one major reason: it's an election year, and big threats to the Trump revolution are coming, starting in a few days.

A WINTER BUDGET SHOWDOWN LOOMS, perhaps as early as Jan. 19 – no bluffing from Congress this time, as government funding runs out. Several key issues must be resolved in a budget package that looks hopelessly gridlocked, and Chuck Schumer – a very big player in 2018 – needs only 41 Senate votes to block action, unlike the 50 vote threshold that allowed tax reform to pass. Schumer will have 49 votes this year.

TOP WHITE HOUSE AIDES AND CONGRESSIONAL LEADERS will meet tomorrow, amid signs that the "Dreamers" issue is crucial for keeping the government open. This refers to Deferred Action for Childhood Arrivals (DACA), which has unified the Hispanic caucus and the left, which are furious with Schumer for not shutting down the government earlier. They will insist on action – all while Trump demands a wall with Mexico.

IN ADDITION TO THIS ISSUE ARE DISPUTES over spending levels – will the huge defense outlay hike get matched by a similar domestic spending increase? – plus a controversial bill to aid health insurers, the need to fund the Children's Health Insurance Program, a measure to give intelligence officials continued domestic surveillance authority and hurricane aid – still stalled. It's entirely possible that the government will be largely shut when Trump delivers his Jan. 30 State of the Union address.

EVEN IF THESE ISSUES ARE RESOLVED QUICKLY, which looks unlikely, still another enormous budget issue looms in March – raising the debt ceiling, which cannot be accomplished without help from Democrats.

SHOULD THE MARKETS WORRY ABOUT A SHUTDOWN? A brief one wouldn't be a big deal, but a lengthy closure, lasting for weeks, could affect consumer and business confidence, especially corporate planning in sectors like defense. And for the Federal Reserve, which is planning on two or three rate hikes this year, a long shutdown could complicate monetary policy.

BIPARTISANSHIP? WE DON'T THINK SO: In this hyper-partisan climate, it's difficult to imagine a bipartisan deal on something like infrastructure. Some Democrats think they can get Trump to spend more money for bridges and highways, because by spring he will be desperate for a deal as Robert Mueller dominates the headlines.

MUELLER WILL NOT GO AWAY: Mueller has been wounded by charges of bias, but he isn't a showboat like James Comey; he's methodically building a case and almost certainly will issue more indictments for perjury and obstruction of justice. We continue to believe that Trump will fire Mueller or issue pardons if the probe reaches the President's family or his inner circle, which seems inevitable.

SO THIS IS THE BACKGROUND LEADING UP TO FALL ELECTIONS: Surveys don't mean a lot now, but Democrats have a huge lead in generic polls, indicating that both the House and Senate are in play. We think it will become clear by summer that Trump's tax cuts helped boost the economy, but that isn't the public view now; the tax cuts are an albatross for most Republican candidates.

WHAT THE MARKETS HAVE TO WORRY ABOUT: The markets can live with a brief shutdown; the markets can live with two or three rate hikes; the markets probably can live with geopolitical issues (Iran may be a greater threat than North Korea). But a GOP bloodbath this fall, with both houses falling to the Democrats, will lead the activist left to demand impeachment proceedings in 2019.
EVERYONE IS PLOTTING AND SCHEMING IN THIS TOWN – from Schumer to the outwardly loyal Mike Pence – because they are fully aware of what's really at stake in this year's elections. The brinkmanship begins anew this month.

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.