Update 172 Recess Recap Trump’s Economic Policy Scorecard
When Congress returns at the end of the month, it confronts an expiring federal budget and the threat of a government shutdown on April 28, right before Trump’s 100th day in office. At that point, the administration may look legislatively stillborn.
A recap of economic policy developments in the first quarter of 2017 and a look at what awaits us after recess.
One of the subtlest but surprising developments of the year to date is the sense that Wall Street itself (the financial industry) is not as warm to the idea of repealing the law as Trump is. Several major firms and the Wall Street Journal — yes, even its masthead editorial page — have signaled caution when it comes to the president’s actions on Dodd Frank. More and more investors believe that the administration is unlikely to deliver any significant jolt to the economy.
As Trump vowed again this week to “do a number” on Dodd-Frank, it’s expected that the SEC, under Jay Clayton who will likely be confirmed, will soften enforcement and rules that the 2010 law put in place. That is not to say that rolling back Obama-era regulations will be easy for the SEC. Per the Journal: “The SEC doesn’t have the authority to revoke Dodd-Frank, which is an act of Congress.”
Given that the vast majority of rules and regulations from the Dodd-Frank Act have already been implemented, the best that the SEC can do is amend them or grant exemptions on a case by case basis. If legal objections were motioned as a result of the SEC’s actions, it would slow down the already drawn-out process.
It seems that the already difficult tax overhaul process just got a lot more complicated for Trump. The GOP in Congress are having trouble agreeing on a bill that Democrats won’t filibuster. This all started when two senior economic officials who served in the Obama administration, David Kamin and Brad Tester, published an article that found that the much talked about Border Adjustment Tax will not produce the kind of revenue the President has suggested. If their report is confirmed by, say, the CBO, then it would throw the whole tax agenda off because they would not be able to produce a bill that wouldn’t add to the debt.
The Trump administration is working hard to ensure a legislative success before the year is up. There are a lot of opportunities and a lot of road blocks (think Blue Dog Democrats and the Freedom Caucus). Recently, the President’s legislative director met with moderate House Democrats to propose working with them on the tax reform plan. One of the Democratic lawmakers who attended the meeting said that the legislative director declared the border adjustment tax dead on arrival. If that is the case, then Donald Trump’s protectionist campaign promises will be broken, a prospective trillion dollars in revenue will be lost, and tax reform, lacking a pay-for, will limp forward, or not.
There have been rumors this week that the White House is considering a carbon tax and a value added tax to make up for the loss of revenue that will be induced by the massive tax cuts Republicans are aiming for, both on the income and corporate side. If the carbon tax is in the bill, the Freedom Caucus had have reason to vote against it.
The White House has flip-flopped on the VAT and carbon tax, saying that it was considering them at first and soon after disavowed them completely. Given the collective lack of experience this administration has, their negotiation efforts are very transparent and their tactics are easy to dodge so far.
This flip-flop shows that the Freedom Caucus should have reason to be cautious of their trust in the House leadership to put forth a plan with their inputs taken into account. This is precisely why the plan is showing signs of ripping apart at the seams. This and the BAT may get debated extensively over the next few months. Don’t be deceived: they are dead letters in Congress.
For some reason, the administration decided to pick tax reform as its next big ticket item after the health care debacle, opting for the more difficult and partisan route. The president may once have had a shot at working with Democrats who have been asking for infrastructure investment for a long time, but it seems that Trump is ditching that train for now.
The president’s infrastructure plan might, accordingly, also be too ambitions. With a goal of a trillion dollars, Trump aims to pass large tax subsidies to investors willing to pour money into infrastructure investment. There are many reasons this plan is risky, one of which is that large firms will be getting nothing short of massive government handouts for investments they are probably going to make anyway.
Last year, Congressman Delaney came up with a plan that could give the president a pass around Democratic obstruction. His proposed infrastructure bill combines infrastructure investments, which Democrats have been eying for quite some time, and international tax reform, an issue that Republicans have been keen to tackle. And here’s the catch: it has strong bipartisan support with 40 Democrat and 40 Republican cosponsors.
By going with tax reform first and seeking more money than Obama’s stimulus package, this administration’s legislative agenda and self imposed August deadline suggests remarkable legislative incompetence.
Despite being able to check off submitting a statutorily required budget to Congress from his to-do list, Trump can hardly consider this any sort of accomplishment at this point. As it was not even dead on arrival — Congress will not consider or even hold hearings on it — and grossly increased the deficit, there is nothing to see here as an accomplishment.
What the GOP Might Do
The biggest obstacle to a sweeping tax reform is the Democrats in the Senate, who could easily filibuster a bill if it adds to the national debt. The reason for that is that tax legislation that adds to the debt cannot be passed by a simple majority vote as per the reconciliation process that passed the budget resolution earlier this year. That said, there are still ways around the filibuster with a model similar to the Bush Tax Cuts which passed in 2001.
Per the Washington Post: “Republicans could avoid Democrats in the Senate altogether by putting forward a plan that would expire after 10 years, the approach they adopted when they reduced taxes under President George W. Bush. They could also rely on a different set of estimates than those produced by the JCT if that agency’s analysis is unfavorable to their plan.”
The budget resolution passed earlier this year through a reconciliation process could give the GOPu some leverage in the legislature. While it may miss on major reforms, the administration could push through several smaller tax reforms that could pave the way for the president’s infrastructure plan. If Trump were serious about infrastructure, Republicans could look to Congressman Delaney’s plan and set a less ambitious goal than $1 trillion.
In regard to repealing Dodd-Frank, Republicans are having a much harder time than they had anticipated. As noted, the intricate law has recently picked up an unlikely supporter base: Wall Street itself. The industries main newspaper has cautioned against repealing the law, and several key players have joined the Dodd-Frank chorus. That won’t stop Republicans, however, from at least seeking to chip away at some parts of the law.
This is just the beginning of what is going to be a drawn out process, with several wins and many losses. The question is can the president pull a rabbit out of a hat and pass tax reform or will this administration be legislatively stillborn come August recess? Money can buy many things and every administration has a learning curve but it is already beginning run out of the one thing it keeps trying to buy: time.
Update 166: SOTU Spectacular — Anything to see here?
Tonight at 9 pm ET, Millions will be drawn to the TV as Donald Trump makes his first presidential address to Congress. The anticipation reflects the ongoing and increasing uncertainty about the administration’s policy, which has been eccentric, fluid, and vague on issues of national concern like job creation and the debt to an almost unnerving degree.
We took a look yesterday at the record-breaking Wall Street rally as a proxy for public sentiment regarding the administration. Policy expectations have created trillions of dollars of market value in three months. Think of this SOTU as a quarterly report to investors by the CEO.
Today, we offer a way to stay interested in President Trump’s Joint Address tonight even if you don’t consider yourself an investor.
The uncertainty surrounding the Trump administration’s policy specifics are back of mind for many watching tonight. If the president wants to preserve precious goodwill among his supporters and big business across the U.S., then he should address all the unanswered questions lingering over policy. If, however, Trump opts to leave uncertainty in the air, then expect the stock market rally to end.
Market Perspective and Consequences
The S&P now trades at around 27 times earnings, above its long-term average of around 16. Additionally, It trades at 17.6 times expected earnings, the highest level since June 2004. The S&P is now 9 percent higher than its 200-day average, often a signal that a correction is ahead.
Traders and market analysts say investors are now treating stock prices like a cut in the corporate tax rate to 20 percent or lower this year is all but guaranteed.
For now the unshakable view around Wall Street trading floors is that Trump will deliver tax cuts and unshackle corporate America from regulation and nothing else matters.
Per Steve Massocca of Wedbush Equity Management, “next year, there are 13 Democratic senators up for reelection in reddish states. If you get eight wins by the Republicans, and now we have a filibuster proof majority in the Senate, then the market could double.”
What Trump Won’t Tell You
Or can’t. The president is set to talk about issues ranging from healthcare to infrastructure, but there is a lot that he will leave out, partly because the policy is too rudimentary or Trump doesn’t yet have a position at all.
Repeal and replace Obamacare has been the rallying cry in Republican offices since election day last year, but over three months later, we have yet to hear about their replacement plan. Speaker Ryan has sketched out a rough blueprint, but so far we’ve mainly just heard about the components of the ACA that they will keep, like coverage for pre-existing conditions and so forth. News on this front from Trump tonight would dominate several cycles.
What you won’t hear tonight is how the president aims to make up for these massive tax cuts or that these companies will be getting handouts at the taxpayer’s expense.
Trump can fritter away his political capital, and lose the support of the capital markets — that’s his fan section; his national approval rating is south of 40 — and the repercussions could be more than political if he doesn’t clarify his legislative goals and strategy soon.
Update 165: Trump Markets on SOTU-Eve — Rhetoric, Rally, and Reality
Amid the vote and another Dow close at a record high — for a 12th straight session — and with President Donald Trump’s maiden State of the Union speech tomorrow, the feeling of rubber meeting runway on some major economic policy positions and proposals from the new administration was palpable in Washington today. No doubt tomorrow’s wonk Super Bowl that is SOTU in Washington for D.C. will also be watched closely by an excited market and a more apprehensive public hungry for concrete proposals.
Will the animal spirits that have pushed capital market indexes to rapid gains and record highs since Election Day be vindicated in the end? Or will the skeptical analysis provided below turn out to be more prescient?
Market Rally and Reality
Since Donald Trump’s victory just over three months ago, we have seen a market rally on Wall Street that has pushed the Dow Jones Industrial Average past the 20,000 mark, a record. The President will point to the rally as an early sign of his success.
An excited stock market can be notoriously fickle. This one is driven by the expectations of a tax-slashing, deregulatory regime. But there are signs of growing impatience in town halls and on Wall Street as the administration had kept private counsel regarding its legislative program for tax reform, infrastructure and investment, and the fiscal balance.
The Reflation Play
The expectation of a large fiscal stimulus through Trump’s trillion–dollar infrastructure plan caused investors to sell bonds and buy stocks instead. Investors bet heavily that a fiscal stimulus from the new administration would turbo charge growth, and maybe inflation.
This bet, known as a reflation play, should — and may well — be second-guessed soon. Investors know that inflation is gathering steam and it is likely to accelerate (the degree depending largely on independent monetary policy). But they risk assuming that the president’s upcoming and continuously postponed fiscal policies will be enacted and will produce the promised four percent growth economy.
The changing patterns of growth in the bond market versus the stock market shows an internal debate amongst investors, some of whom are more tepid in their expectations of am impending higher growth rate. Contrary to December, 2016, the bond market has seen a turn since the post election reflation rate, signaling that the stock market is potentially engaging in very risky behavior. And a rising bond market is a clear sign that some investors subscribe to a more skeptical analysis.
This Has Happened Before
We are seeing the most significant market rally in 30 years, we should look at the parallels between 1987 and 2017. The recovery from the 1980s recession saw rapid economic growth, which ended in a smooth transition to stable expansion and lower inflation. As a result, the stock market rallied in 1987 and reached a high of 2,722 points, which was a significant increase of 44% compared to the previous year. What followed in October of that year, known today as Black Monday, should serve as a warning sign for stock investors today. A crash starting in Hong Kong and echoing around the world resulted in the Dow dropping over 500 points, or 22 percent.
While it may not mirror the world wide crash of 1987 or end in tears for other reasons, we may see a sharp or longer-term decline in the stock market as time passes and the political process or just the administration fail or delay getting results (read: jobs).
The State Of The Union
We’ll look more closely at this important speech tomorrow, only to note for now its relation to the foregoing. The reason for the post-election stock market rally can be summed up in three key expectations of Donald Trump’s administration:
In tomorrow’s State of the Union address, Trump is expected to outline many key economic proposals, ranging from tax policy to infrastructure policy to deregulation. Every major investor will be watching and the Wednesday market open should give us an indication of how robust the Trump rally is. Per today’s the Wall Street Journal, “Mr. Trump’s speech to Congress could move the markets, if he provides fresh details on budget, tax, and infrastructure plans.”
Real Economy vs. the Capital Markets
It’s expected universally that the Obama recovery, bequeathed to Trump, will continue, as unemployment remains below five percent and wages have started rising. What would a massive and untimely stimulus mean for the economy?
Cue the bond vigilantes of 2009, if there are any left.
Three financial companies ranked in the top four among the 30 companies lists in the Dow for stock price gains since the election: Goldman Sachs, JP Morgan Chase, and American Express. The relative losers:
Mnuchin may have spoken too soon when he said that the stock market is “absolutely” a report card for the Trump administration. Once again, as this administration reckons with reality, the stock market will be quick to notice that a massive stimulus will not be hitting any industries this year.
- Personal Income Taxes | HRC proposes adding a 4 percent surtax for those earning more than $5 million. Trump has proposed reorganizing the current tax brackets into three tax brackets, with rates at 12, 25 and 33 percent
- Estate Taxes | HRC has proposed increasing the top estate tax rate to 45 percent and lowering the exclusion valuation to $3.5 million. Trump has proposed repealing the estate tax
- Corporate Taxes | Trump has proposed lowering the top corporate rate to 15 percent, while HRC has said she would like to increase taxes on corporations, without outlining a specific target rate
- Republicans relented and appropriated $170 million for Flint water crisis relief
- Louisiana and other states were given $500 million in flood relief, a key Republican priority
- $1.1 billion in Zika relief funding was provided to Puerto Rico, after Democrats forced Republicans to remove partisan rider language that would have stopped funding for Planned Parenthood
- The SEC will continue to not require companies to disclose their political donations, a Republican victory