Below, we look at the odds of a meaningful fiscal stimulus, debt ceiling solution or a budget and tax reform bill in the Trump DC.
Politics and Markets
Like most all of us, we at Signals Matter are pretty tired of the DC swamp in general and politicians in particular. After all, we’re market guys, not lobbyists. Theoretically, at least, we should be looking at the normal forces of supply and demand, price discovery and risk management, right?
Unfortunately, the normal forces of markets, like the normal forces of Washington, are a distant memory. Like it or not, traders, investors and every-day Joes need to think about politics, because politics—from an errant Federal Reserve to a GOP in disarray—are going to impact economies/markets, and thus each and every one of us.
Numbers Matter: America is Broke
Red or blue, we all know our national balance sheet is a mess. That is, the country is broke. Total personal government and corporate debt sits at $66T, unfunded liabilities at $200T, and our current deficit treads water at $20T. As I wrote elsewhere, that’s more debt than there is money on the globe.
Pricing in Political Promises
Today’s markets, drunk on 9 years of Fed stimulus (steroids) and 9 months of a Trump market rally, have priced in the campaign promises of a Reagan-like new era of 1981-like tax cuts or 1986-like tax neutral “reform.”
Unfortunately, and for reasons expanded upon in prior blogs, there is nothing about today that even remotely resembles the Reagan era. That is, macro conditions (i.e. massive debt and flat GDP) make it painfully clear that Trump America is not Reagan America.
But even if we pretend macros don’t matter, today’s political players, in and of themselves, make any chance of meaningful tax reform (and hence national and market prosperity) pretty hard to “price-in.”
In fact, as the DC circus becomes a DC tragedy, what was “priced-in” to these irrational markets could be dramatically priced out—that is: painful for long-only investors.
It’s Not a Partisan Thing—We’re Just Confused
It’s worth further caveating that we’re not here to play one party or personality over another. As I’ve written elsewhere, there’s plenty of disillusionment to go around, whether you’re a donkey, elephant or outlier.
What we of all political stripes can agree here is that there is too little agreement in DC, among parties and within parties. And as we will consider below—this political problem portends to be a market problem.
Whether you follow tweets, blogs, headlines or an amalgam of the same, you can’t deny that Trump (be he a hero, a disrupter, a demagogue, a victim, an opportunist, a visionary or a twit) is not doing a masterful job (so far) of “cohesion building” within the GOP or the White House.
Whether you think all or none of these folks or groups deserve this intra-GOP beat-down, it does not change the fact that national governance is collapsing in public display, from tweets to NY Times printed name-calling. Capitol Hill looks more like a kindergarten recess of bullies fighting brats than a trusted guide post toward a greater America.
What Can We Expect from a Discordant DC?
In this backdrop, how can we expect much from our Congress and Senate? Our GOP “majority”? How can we control spending, reform taxes and maintain confidence in a bubbly DC and even more bubbly securities market?
Or to be more blunt, how do we deal with that pesky ol debt ceiling I wrote about in July but which was can-kicked to December?
Remember that Debt Ceiling?
The debt-ceiling deadline arrives on 12/08 (unless postponed again to March), and yet we still have no foreseeable plan nor a FY 2018 budget resolution, and hence no reconciliation agreement between the House and Senate GOP, let alone a tax bill anywhere in sight…
What we do have is a tax plan authored by two ex-Goldman (Democrats), Mnuchin & Cohn (who paid the very same Hillary engagement/speaking fees that Trump so publically denounced before hiring them from the same bank). Their plan is fairly simple and boils down to this: raise taxes on the middle class to pay for corporate tax cuts.
Corporate Tax Cuts—A Non-Starter for Fly-Over America
As for us, we are not totally convinced that a corporate tax cut is a solution—but it will help the C-suites, which means the markets they trade in—at least for a tiny bit.
Without detouring here into the tax maneuvers of well-lawyered mega-caps, let me just say (with an admitted bias as a recovering corporate attorney) that the key motive for companies like Cisco, Facebook, Oracle, Dell, Apple, Microsoft et al going overseas was never taxes. Let’s be blunt: it was cheap labor costs. Think, India…
So if Democrats and/or Republicans like Mnuchin and Cohn somehow believe that slashing corporate tax rates from 35% to 20% is going to mean more American jobs, they’ve forgotten the nuts and bolts of labor-cost arbitrage. The only wealth this tax cut is going to create is for the Executive Suite. Not Main Street. And guess which of those two groups has the most K-street lobby support?
It’s sad. Today’s trickle-down story is just that: a story. The Apples and IBM’s of our great American Dream will continue to outsource labor overseas while enjoying tax cuts (and Ex-Items fiction) here in the States. In short: the stimulus will not stimulate the very fly-over America that elected this administration.
Political Egg in the Face Leads to Bad Legislation
Regardless of this cynical reality, the stalemate and daily stories from the DC swamp continue to embarrass our elected bubble heads on both sides of the aisle. They look inept—even to loyal donors, who are fading.
But problems run deep when politicians look dumb. This forces the GOP (as well as the donkeys) to ignore caution and come up with something—anything—to save face in a political party (and climate) that keeps slapping itself (and others) in the face.
In short: my GOP is craving for any kind of legislative achievement, especially in the humiliating wake of the failed “repeal and replace” of Obama care.
And “anything” is not always better than nothing.
What we see thus far is fairly desperate. The Senate resolution purports to cut $5T in spending over the next 10 years, yet completely ignores any discussion of entitlement reform, which means the baseline spending and interest on debt payments for the next decade amount to $40T. This number, seemingly “bla, bla, bla” in a world accustomed to the word “trillion,” is, in fact, staggering.
More Clever Math—i.e. Lies.
The politicians know it too. And like the Fed or the BLS, they do what many DC insiders do when the facts get too, well, staggering. That is: they pretend they don’t exist.
In the same magical way the Fed and BLS shamelessly lie about CPI and Inflation by omitting the data, the current Senate Resolution pretends to balance the budget over 10 years by fudging the numbers. That is, they are excluding $20T in “off-budget” spending from the balance sheet—i.e. they’re just ignoring miscellaneous little matters like social security costs and most of Medicare to make the budget appear balanced.
That’s cheeky. It’s also nonsense.
This kind of Washington math is no different than omitting all the C’s and D’s from your kid’s report card and focusing solely on the A he got in Gym Class. In short: a total joke.
Biting the Hand that Feeds You
Assuming McConnell, Ryan and others can sneak this resolution through a splintered GOP, the chance of it becoming a bill has even less hope than the Obamacare repeal and replace. Remember, Trump has not made many friends within the GOP, from Corker to McCain. Budget hawks within the Freedom Caucus will see right through this.
In plain speak, Trump has been biting the hands that can feed him a passable bill… enter Fiscal stimulus
Do you think he can get consensus heading into a long DC winter?
Even Budget Director Mulvaney is at times speechless, attempting to solve this obvious budget lie with the even bigger lie (or at best, desperate delusion) that the continuing debt & spend policies of this proposal can be solved by future “growth.”
Ugh. Ugh. Ugh.
Growth in the backdrop of the greatest debt figures in history? That’s like saying the tooth fairy will keep markets up. That, or a war…
And all of this is just our blunt way of saying to you, as we’ve said before: Be weary of the so called “Fiscal Stimulus” coming out of DC and into a brokerage account near you. The Trump Rally may not turn out as promised from the bully pulpit.
In other words, politics do affect markets…
One response to “Trump, Biting the Hands that Feed Him? Questions on Fiscal Stimulus”
October 10 2017