It's Time for Markets to Acknowledge Political Reality
There is nothing wrong with reaching for the stars. In fact, there is everything right in trying to attain your goals and fulfill your ambitions. The problems begin when you publicly make your intentions very clear and you can’t deliver on what you promised. This is the situation President Donald Trump currently faces. He has over-promised and is under-delivering, which almost never works out well.
This is not about taking sides on politics, but rather noting what a failing agenda may mean for markets. There will no doubt be collateral damage, and it’s best to prepare now instead of getting trampled by the herd when everyone is racing for the barn door.
What’s concerning is that the least of the market’s problems may be whether Obamacare is repealed, replaced, rejiggered, re-sold, replicated or rolled-over. The larger question is what can be delivered on the president’s agenda? The problem is that the “delivery boy” is stuck in his White House without transportation. If he can’t deliver the barbecue chicken, how do we know if we'll get the pizza?
After failing to replace Obamacare, Bloomberg News and others reported that Senate Majority Leader Mitch McConnell’s new proposal to simply repeal it appeared to be dead after less than 24 hours for lack of support among fellow Republicans. Bloomberg News also reports that Trump is now more likely than ever to end his first year in office without a single major legislative accomplishment.
This promise is going nowhere, fast.
There is still the hope, especially in the equity markets, that tax reform is coming. This would include a simpler tax program, a cut in both corporate and individual rates and some kind of repatriation of the $2 trillion that is held in overseas markets by American corporations. I am coming around to the position that this hope may be misguided. The “delivery boy” is stuck in traffic and the snarl is consequential.
According to the Wall Street Journal, the “House Republicans are unveiling an ambitious fiscal plan on Tuesday that could let them rewrite the tax code, revamp medical malpractice laws, change federal employees’ retirement benefits and partially repeal the Dodd-Frank financial regulations -- all in a single law without any votes from Democrats. The strategy, embedded in the House GOP fiscal 2018 budget, faces a host of political and procedural obstacles, including many of the same ones that derailed the party’s health-care bill in the Senate.”
So, what if nothing can get done? That notion may have been an outlier at one point, but no longer. The question is now real and daunting and applicable to where the markets might be going, and the bond markets may have the correct sense of it.
The flip side of the rejection of Trump’s agenda would be that no new spending will actually take place and that the current tax rates will remain embedded. This would be an addition to the notion that the world’s central banks have produced so much new cash and liquidity that they have overwhelmed the available supply of bonds in the marketplace, forcing rates even lower. What the central banks have done is significant enough, but when added to the dawning realization of Trump’s failure to deliver, this may be our new reality. Then we may still be in the high range of bond yields, as failure has its consequences.
What is clear is that substantial and serious risk is now present. Nothing of importance may get done, and all of the bets placed with Trump’s election may start to be taken off the table. It may not be Aldous Huxley and his “Brave New World,” but it is going to be a very different world than imagined. The borrowing needs of the U.S. Treasury, in these circumstances, could be far less than thought by almost everyone. The jig may be up.
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