The ongoing thoughts from Greg Valliere, the Chief Global Strategist for Horizon Investments, who has been a great resource to us with his insights to politics & the ramification on financial markets.
September 13, 2017
What We're Hearing From Clients
OVERVIEW: It's crucial to get outside of the Beltway and meet with real live clients – professional investors and retail clients, whose opinions we greatly value. Here's what they are telling us:
THE ECONOMY CONTINUES TO SURPRISE: For the first time in memory, we have encountered NO clients who worry about an imminent recession, none. There are two camps – those who think the economy will continue to grow moderately, and those who think it will accelerate. No one agrees with the dystopian view of Steve Bannon; the only missing ingredient to this Goldilocks consensus is the stubborn inability of wages to significantly increase.
AN UPTICK IN SUPPORT FOR DONALD TRUMP: Even his detractors agree that Trump had to do something last week, since Paul Ryan and Mitch McConnell weren't getting the job done. Trump's deal with "Chuck and Nancy" gets higher grades than we thought; instead of criticizing the president for abandoning GOP principles, the consensus is that he was elected to break logjams, and he's doing it. Plus, Trump gets good grades for leadership on hurricane relief.
WHAT'S IMPORTANT ON TAX REFORM: Virtually everyone we talk with wants tax cuts, but there's ambivalence if reform kills cherished tax breaks like the mortgage deduction. Many clients are apprehensive about big changes, but they're focusing primarily on the effective date. Most investors think it won't come this year, but they're unsure of what to tell clients about when – or if – tax changes will become effective, and that uncertainty is becoming an irritant.
FRESH WORRIES ON FISCAL DISCIPLINE: Clients have always been more alarmed by surging deficits than the Washington politicians or the bond market, and now there's genuine alarm that fiscal restraint seemingly has been abandoned. Retail clients in particular worry that the nearly $20 trillion national debt could threaten the bull market by the end of this decade. Trump is widely viewed as indifferent to deficits.
INTEREST RATES AREN'T MUCH OF AN ISSUE: There's no concern about the Fed's almost-certain announcement later this month that its balance sheet will begin to shrink. That move has been explicitly telegraphed to the markets. Many retail investors are hoping for higher interest rates, but the pros are beginning to wonder whether Janet Yellen will raise rates in December. There's a widespread belief in both camps that rates will rise only gradually in the next few quarters.
IMMIGRATION POLICY MAKES NO SENSE: A wide majority of investors agrees that there's an acute labor shortage that makes it difficult for business to find skilled and unskilled labor. The president's goal of reducing legal immigration makes no sense, most investors agree; how can economic growth top 3% when there aren't enough workers? Harvey and Irma have made the point – the country needs more workers to rebuild Texas and Florida, but there's a labor shortage.
WE CAN LIVE WITH KOREAN INSTABILITY: The pros agree that the greatest threat to the markets is a war in Korea, but they believe this will simply be an ongoing irritant, with occasional jitters as North Korea tests missiles and nuclear weapons. There's surprising complacency on Korea; retail and professional investors alike do not anticipate war.
THE RUSSIA PROBE IS WAY BENEATH THE RADAR: Everywhere we go, we hear the same refrain – the Russian probe is a waste of time, fueled by a media that hates Trump. Some retail clients in the San Francisco area or in New York City would like to see impeachment, but the vast majority of investors we talk with believe an impeachment threat is far-fetched. We'll see what Robert Mueller comes up with, but for most investors this dog won't hunt.
WHAT TO WORRY ABOUT: These generally upbeat attitudes are not without concerns. Trump's tweets are widely viewed as childish and un-presidential. There's widespread anxiety that retirement policy is shaky – Social Security faces a growing crisis, many corporate pension plans are underfunded, and several states face serious actuarial problems. And then there's an issue that has traumatized much of Middle America: heroin and fentanyl abuse, which seemingly defies a solution.
BOTTOM LINE: What stands out, when talking with investors, is the widespread optimism that economic conditions are improving. Yes, many investors think Trump is a jerk, but they look past him and focus on the fundamentals – and what's not to like, when great fundamentals have propelled the stock market to record highs?
September 12, 2017
Guess Who's Coming to Dinner; Debt Ceiling Surprise; Jerry Brown For President?
GUESS WHO'S COMING TO DINNER: President Trump has invited three moderate Democratic Senators to dinner tonight at the White House with a handful of Republican moderates. The topic: tax reform. Trump is impatient, he wants a tax bill this year, and he apparently thinks some Democrats will align with him.
BUT THERE ARE TWO HUGE PROBLEMS: First, there's no bill !! No bill from the White House, no bill from Paul Ryan, no bill from anyone. How Congress can pass a tax bill by December when there's no legislation pending is a mystery to us. Second, even moderate Democrats are reluctant to endorse a tax bill unless it's modest, revenue neutral, aimed exclusively at the middle class, and relatively stingy on business tax cuts.
TRUMP'S CHANCES OF GETTING A TAX BILL that he likes will depend on Republicans, not Democrats. This dinner will send a signal to the plodding GOP that they could be bypassed if they don't start moving, but the differences between the two parties on taxes border on the theological. Trump may wheel and deal with Democrats on spending issues, but a tax deal is much less likely; he probably will have to wait until spring until Republicans finish work on his tax bill.
DEBT CEILING SURPRISE: Mitch McConnell has been on a losing streak, but he still has a few tricks left. He apparently inserted a provision in the three-month budget extension passed last week that would give the Treasury Department flexibility to juggle accounts and avoid hitting the debt ceiling for several months past the Dec. 8 deadline set in the just-passed measure.
McCONNELL TOLD THE NEW YORK TIMES yesterday that his provision will take a debt ceiling showdown off the table in December, depriving the Democrats of a trump card in budget talks just before Christmas. There still will be fireworks in December over a 2018 budget and funding for a wall with Mexico, amid the usual hollow threats of a government shutdown, but Trump will deal with the Democrats again if he has to.
FOR THE MARKETS, a budget train wreck looks much less likely this year; another debt ceiling crisis could emerge in the spring but give Trump credit – he understands the public's frustration with this issue, which creates uncertainty for business, investors and consumers. So he will cut more spending deals, bypassing hard core conservatives in the House who want fiscal discipline.
JERRY BROWN FOR PRESIDENT? Sick of seeing the nation's largest state reduced to irrelevancy in picking a president, California lawmakers will strike back. A bill making California's primary the most dominant in the early voting season – just after Iowa, New Hampshire, Nevada, South Carolina etc. – is expected to pass this week and Gov. Jerry Brown has indicated he will sign it.
WHOEVER WINS THE CALIFORNIA PRIMARY would be in the catbird's seat for the nomination, so this naturally has fueled speculation on who will run. Three names keep popping up: Sen. Kamala Harris, almost certain to run and the insiders' pick to become the nominee; Los Angeles Mayor Eric Garcetti, who also is a near-certain entrant and Brown, who is fit but 79.
BROWN HAS TOLD ASSOCIATES that he hasn't ruled out running. He's easily one of the most fascinating, different politicians in the past several decades – derided as "Governor Moonbeam" for his eccentric views as he became California's youngest governor ever, Brown is now considered a pragmatist as the state's oldest governor ever; he's well to the right of the state's very liberal legislature. Brown is a no-nonsense, disciplined, tough-talking professional politician – and for the media he is very, very good copy.
September 11, 2017
The Spigots Open in Washington
WHAT A PERFORMANCE BY FEMA AND FLORIDA OFFICIALS: As of this writing, there was only one confirmed fatality from the ferocious Irma; everyone from Donald Trump to local first responders gets huge credit. Now comes the hard part – rebuilding damaged, mold-filled homes from Houston to Miami, which will cost billions of dollars.
AS WE WROTE LAST WEEK, FISCAL HAWKS HAVE BEEN ROUTED: They ground the House to a virtual halt with their demands that the debt ceiling increase must be accompanied by big new spending cuts. Trump is an impatient man, and it became clear to him that aligning with Democrats – even temporarily – would break the gridlock. That, of course, is why he got elected in the first place.
NEXT COMES AN ASSAULT ON SPENDING CAPS: Regular business on Capitol Hill will be suspended today because of the storm, but by mid-week Congress will debate scrapping the rigid spending caps known as the sequester. The impetus will come from defense hawks, led by Sens. John McCain and Tom Cotton; they want to authorize $640 billion for the Pentagon in fiscal 2018, an astonishing rise from $549 billion this year.
McCAIN ALWAYS ASKS FOR MORE THAN HE GETS, but there's little doubt that to get even a smaller number for defense, the budget caps will have to go. And in the new Washington climate, Democrats will join in the negotiations, pushing for relief from caps for domestic programs.
HARVEY AND IRMA ARE THE CATALYSTS: Legislation to raise the debt ceiling, increase spending, protect the Dreamers, etc. will be tied to hurricane relief – and who wants to oppose hurricane relief ?? The House Freedom Caucus, hard-liners on spending, has been routed; a new majority consists of all Democrats and most mainstream Republicans – and Turmp, who is savvy enough to sense what the public wants. The public wants action, not gridlock.
TRUMP MANIPULATES THE MEDIA ADROITLY, despite his scathing criticism of the press, and he got it right last week by cutting a deal with "Nancy and Chuck," his new allies. He even called both Nancy Pelosi and Chuck Schumer to remind them that the press coverage was great after their deal. So there will be more such deals.
THERE WILL BE THE INEVITABLE DRAMA THIS FALL, as Congress moves tentatively toward a debt ceiling deal, a fiscal 2018 budget, and a budget resolution; the latter, which would authorize tax cuts, could come within a month. The overriding theme will be an abandonment of fiscal restraint, as Trump and the Democrats – neither of whom care much about deficits – transform the political landscape in the wake of Harvey and Irma.
September 08, 2017
The Collapse of Fiscal Discipline
DEFICIT HAWKS ARE STUNNED, abandoned by Donald Trump, and now they face an odd alliance between the president and Democrats – who will extract a price for cooperation, and that price will a surge of new spending. The budget deficit, already climbing, is headed dramatically higher.
TRUMP HAS NO BIG ISSUE WITH DEBT, and why should he? With inflation still tame, the Treasury 10-year bond yield has plunged to nearly 2%, a message to him that deficits aren't a crucial issue – yet. He believes that tax cuts and infrastructure spending that lose money are acceptable if they stimulate economic growth.
THAT ATTITUDE PLACES TRUMP IN ALIGNMENT with most Democrats, who agree with the Steve Bannon view that forgotten Americans in places like Youngstown, Ohio, need not just jobs but jobs that pay well. Without rising wages, the fallback is Keynesian spending and tax cuts for the middle class – music to the Democrats' ears.
CONGRESSIONAL REPUBLICANS ARE HORRIFIED, and once again there's speculation about Paul Ryan's tenure as House Speaker; he could lose an incredible 100 GOP members in today's debt ceiling/hurricane aid vote that should pass because of overwhelming support from Democrats and Trump.
HOUSE DEFICIT HAWKS HAVE AN EVEN GREATER WORRY: They may lose one of the few instruments to restrain spending – the debt ceiling bill, which they thought would contain some curbs on outlays. But Trump, amazingly, hinted to Nancy Pelosi and Chuck Schumer that he could support an elimination or modification of the debt ceiling approval process.
LET THE DEAL-MAKING BEGIN !! Trump will get his huge boost for the Pentagon, the Democrats will wiggle out of spending caps for domestic outlays like NIH funding, and Trump will further alienate his base by capitulating on the dreamers, who will not face deportation. But he needs something in return – funding for border security, assurances on infrastructure and, of course, tax cuts.
THE SHORT-TERM ISSUE FOR THE MARKETS isn't deficits; interest rates may not respond for another year or two, as red ink approaches $800 billion annually by 2020 in an essentially full-employment economy – not a comforting scenario if you worry about inflation. But that's a long-term concern; the short-term issue is what all of this means for tax cuts.
DESPITE RYAN'S BRUISED EGO, he knows that a significant tax bill is still possible – even though he may not like all of the details if Democrats get involved; significant tax cuts for the wealthy look much less likely. But Ryan needs a win, Trump needs a win, and the Democrats need a win.
THIS BIZARRE MARRIAGE OF CONVENIENCE will have its limits (leftist Democrats don't trust Schumer) but the big new policy trend in Washington – even less discipline on spending – could provide enough money for everyone to enjoy a pork-filled tax cut, with something for everyone – except the deficit hawks, who just got rolled.
September 07, 2017
The Stunning Bromance between Trump and Democrats – Five Implications
INCREDULOUS MEMBERS OF BOTH PARTIES are ripping up their playbooks in the wake of Donald Trump's deal with Democrats yesterday that kicked the can for three months on the debt ceiling and a budget. Republican lawmakers wanted an 18-month extension; now they have a pre-election albatross that Democrats will exploit relentlessly.
TRUMP AND CHUCK SCHUMER reportedly shared an awkward man-hug in the Oval Office yesterday, and that sent shock waves through this town, where the mere suggestion of bipartisanship is derided as naive. Five huge implications:
1. Tax Reform Just Got Tougher. By delaying huge budget issues until a new Dec. 8 deadline, proponents of a tax bill will get a little time this fall to at least come up with a legislative text. But the idea of enacting a tax cut by year-end, always far-fetched, is dead. The President's point man, Steve Mnuchin, was humiliated yesterday – cut off by Trump virtually in mid-sentence; how can Mnuchin credibly deal with Republicans on a complex tax bill when they know he might get undercut at any moment?
2. Trump Really Isn't a Republican. Party veterans, conservative activists, fiscal hawks and foreign policy hardliners are grappling with this stunning revelation: Trump really isn't a Republican and has virtually no loyalty to GOP lawmakers, who he regularly mocks. The public thinks the Republican Congress is dysfunctional, and Trump is happy to reinforce that impression – so the party's electoral prospects in 2018 and beyond will continue to deteriorate.
3. The Democrats Have Been Rescued from Oblivion. We thought Chuck Schumer was in the witness protection program this summer, virtually absent from the fray – but now he and Nancy Pelosi have a seat at the table. Trump might understand real estate deals, but he's a rube when it comes to dealing with Congress. The Democrats want more spending, no tax cuts for the rich, and protection for the "Dreamers" – and those goals now look attainable in a mega-deal this winter.
4. What Other Issues Go Bipartisan? We're reluctant to proclaim that Kumbaya now reigns; Schumer is mindful that activists in his own party will rebel if he gets too close to Trump. But we have to conclude that Trump's inner John Maynard Keynes will emerge in spending deals, with a renewed focus on infrastructure pork in 2018. A Dreamers deal is likely, and a trade-off could emerge on taxes: Democrats will agree to cuts and reform for business, but the individual tax relief will go almost entirely to the middle class. Cherished tax breaks will survive.
5. McConnell and Ryan – Humiliated Again. We have to wonder, in all seriousness, how much longer they can continue as Republican leaders. Like most Congressional Republicans, they loathe Trump and the feeling is mutual. Trump has a perfect foil; Ryan and McConnell are on notice that they have to produce and will be mocked and abandoned if they don't.
BOTTOM LINE: The American public doesn't care about Inside the Beltway maneuvering; the public wants results and bipartisanship. Trump understands this, and he is fully prepared to cynically reject his own party. If this breaks the legislative log-jam, that would be a huge plus for this embattled president. He could win some badly needed style points, even if Democrats prevail on policy.
BUT THERE WILL BE A PRICE TO PAY: Increased policy uncertainty, never a plus for the markets, is certain. Trump really doesn't care about policies; he cares about victories for Donald J. Trump. And for the hapless GOP congressional leadership, they now know Trump will abandon conservative principles whenever it's politically convenient.
September 06, 2017
Two Hurricanes Will Have a Dramatic Impact on Policies
TWO OF THE MOST DESTRUCTIVE HURRICANES in recorded history, Harvey and Irma, will have a major impact on many of America's most pressing issues – extending the debt ceiling, spending levels, immigration, regulations, and climate change. Our quick take:
DEBT CEILING: A potentially serious crisis for the financial markets – the threat of a federal debt default – probably will be avoided as a debt ceiling increase is attached to hurricane relief. How convenient !! Members of Congress who had vowed to resist raising the debt ceiling now have cover – who could possibly block spending for hurricane victims? The irony is that Treasury Secretary Steve Mnuchin, who adamantly demanded a "clean" debt ceiling hike, will get his increase in a bill that has amendments.
SPENDING: The need for $100 billion – or more – in federal aid for both hurricanes has pretty much blown the lid off any semblance of spending restraint. Hard-line conservatives who want spending cuts will fail, and the annual deficit as a percentage of GDP will soar to 4% or higher – well over $600 billion – in fiscal 2018. Ironically, generous aid to Texas will help residents in a state that is rethinking its rigid opposition to federal spending.
IMMIGRATION: The job of rebuilding Houston, Beaumont, and probably much of Florida will require hundreds of thousands of new workers – except there's a dramatic shortage of construction workers, according to the National Association of Home Builders; 77% percent of its members report acute shortages. Yet policies from the Trump Administration seek to chill immigration – legal and illegal – at a time when shortages of workers is becoming a significant impediment to economic growth. Trump's goal of 3% GDP growth cannot be achieved without more workers – and the hurricanes will reinforce that point.
REGULATIONS: Everyone seems to like the idea of reduced regulations – until there are specific examples that question lax enforcement policies. Exhibit A is the Arkema chemical plant, which had fires in its Crosby, Texas, plant when chemicals became unstable after Hurricane Harvey. EPA is rolling back regulations of such plants, which may enjoy reduced compliance and disclosure despite the hurricanes. Is a toothless EPA really a good idea?
CLIMATE CHANGE: The clear rise in global air temperatures – 2016 was the warmest year in recorded history – has obscured a significant increase in ocean temperatures. Studies from the Lawrence Livermore National Laboratory show a rise of 1-1/2 degrees in ocean temperatures between 1880 and 2012, with a likely sharp increase in ocean temperatures since then.
THE BOILING WATERS in the Atlantic, Caribbean and the Gulf of Mexico provide the rocket fuel for these hurricanes; scientists believe the increase of hurricanes with winds in excess of 150 mph – with astonishingly low barometric pressure – is a direct result of the warmer water. These two monsters, less than a month apart, speak volumes about the role of much warmer ocean temperatures.
BOTTOM LINE: These two incredible storms are having dramatic impacts on policy in ways we don't fully appreciate this morning. They are changing thinking on key policy issues, especially immigration, in ways that no one could have predicted a month ago.
September 05, 2017
How Donald Trump Might Prevail – as Seven September Threats Loom
THE MEDIA IS BREATHLESSLY PROCLAIMING that the fall agenda could doom Donald Trump's presidency and rock the stock market, as his woefully understaffed administration fails to cope with seven major threats. So let's take a contrarian view this morning and look at how September could actually be an opportunity for Trump.
TRUMP HANDLED ONE HURRICANE WELL and now faces another big one. He can build on a solid performance not just with hurricanes, but with seven crucial issues – many of which just might break his way:
1. A threat of war. Chances of U.S. strikes on North Korean missile sites have increased, but in private Trump's generals are urging patience. The president still has cards to play – this morning's Wall Street Journal editorial details several measures short of war that he should take. We think he will embrace those measures.
2. The threat of a federal default. Trump could win a major victory, but he will have to expend political capital – telling his base that a debt ceiling increase must pass. He also could tie the debt ceiling to hurricane aid, as we predicted last Tuesday, which would win enough votes from both parties to swamp opposition from the House Freedom Caucus. Trump is never shy about taking credit, and the inevitable debt ceiling hike could be a victory for him.
3. The threat of a government shutdown. A relatively easy one. Trump can sign a deal just before the fiscal year ends on Sept. 30, relying on a continuing resolution for 2018 spending levels that will prevail until mid-December. Does Trump want a victory on this – or a wall with Mexico, which doesn't have the votes in either house? It's up to him; we'd guess he would take an easy victory on Sept. 30, then look for a deal later in the fall.
4. The threat of more White House dysfunction. The grumbling is getting louder in the Trump inner circle that new Chief of Staff John Kelly has soured on Trump – and vice versa. Trump needs to cool it – Kelly is very solid – and he needs to patch relations with Gary Cohn. Again, whether Trump looks good on this issue is strictly up to Trump.
5. The threat of a breakdown in relations with Congress. Trump has meetings with congressional leaders today and tomorrow, and we think he will reach an understanding with Mitch McConnell and Paul Ryan. He will encourage them to come up with compromises on DACA and budget issues – he'll take a deal, any deal – and we think Kelly will get him to tone down the insults. Hurricanes Harvey and Irma have given birth to a little bipartisanship.
6. The threat that tax reform may die. Another issue where there's upside potential. Since many insiders on Capitol Hill think tax reform is near death, Trump's advisers could breathe life into the fallback – corporate and individual tax cuts, with substantive reform later. Trump needs to show some leadership on this issue, and we think he will later this fall.
7. The threat that the Mueller probe could intensify. Several Trump allies are scheduled to testify at congressional hearings this fall on Russia's involvement in last fall's election. The president needs to clam up on these hearings; whether Kelly can curb Trump's tweeting is doubtful. In any event, impeachment talk has faded, for now.
OF THESE SEVEN ISSUES, there's a potentially decent outcome on fiscal policies, if Trump is willing to work with Congress. But it's difficult to make a case that the Mueller probe will turn out well for Trump – the investigation has intensified, quietly, and while it may not lead to impeachment, it could cripple Trump next year.
THE MARKET IMPACT: The same fundamentals apply – decent GDP growth, tame inflation, steady interest rates, a healthy labor market, and solid corporate earnings. The markets have set a low bar for Trump; they just need him to show a little leadership. If he does, September might not be a disaster – but if North Korea continues to lob missiles toward Japan and Guam, investors may have to confront the unthinkable.
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.