We end the week with the American Healthcare Act bogged down in the House of Representatives. It is being reported that the conservative leaning Freedom Caucus and, possibly, a few moderate Republicans are set to vote “no” on Speaker of the House, Paul Ryan’s and President Trump’s proposed replacement of the Affordable Care Act. Supporters of the new healthcare bill say they want to push it through because it is better than so-called Obamacare, albeit modestly.
Opponents want to construct better legislation, even if it takes more time. In response, conservative media wonks have begun to criticize Representatives who are sticking to their principals. Political analysis is not the purpose of this publication, at least not on an ideological basis. However, the friction within the GOP can impact the timing and magnitude of tax reforms, regulatory reforms, trade policy and infrastructure plans.
GOP supporters are trying to defuse the situation by saying that discord regarding healthcare does not mean that there will be similar discord regarding other measures. I respectfully disagree. It is believed that, after healthcare (pass of fail), the next topic on the agenda will be tax reform. That should go through smoothly, right? I doubt it. This is because, as I have previously stated on several occasions, the GOP is really three parties in coalition. There are the moderates, the mainstream Republicans (Ryan and the crew) and the very conservative Freedom Caucus (Tea Party). Add to this an alt-con populist executive branch and discord, and disagreement appear inevitable.
The Freedom Caucus will argue for low taxes and laissez-faire government. The mainstream group favors supplyside economics. The moderates want only minor tweaks to the status quo. The Trump administration wants corporate tax savings to be used by business to move production back to the U.S., increase hiring and raise wages. There are some analysts who believe the Administration would like to require businesses which repatriate capital to use it to hire and invest in productivity, if they wish to bring money back onshore. This sets up a battle royal.
It is similar for trade. The Freedom Caucus wants free markets, with little government interference as to where and how production takes place. The Trump administration would like to implement import tariffs. The GOP old guard favors a border-adjusted tax. The moderates want only a mild tweaking of the status quo. As with healthcare, it is the Freedom Caucus which represents the most difficult obstacle for trade reform, in my opinion.
Other than healthcare, infrastructure spending appears to face the most challenges, in my opinion. Republicans, even mainstream Republicans, have long opposed debt-fueled public works projects, unless they were offset by spending cuts. Thus, a good many mainstream GOP members could side with the Freedom Caucus in opposing infrastructure plans which are not offset by 3 entitlement cuts. Meanwhile, President Trump’s goal is to not cut entitlements, as this would most negatively impact his base, preferring to have foreign businesses and U.S. businesses producing overseas to pay for infrastructure spending through taxes and tariffs.
Then there is regulatory reform. Mark my words, we are unlikely to see a full repeal of DoddFrank. In fact, regulatory relief for large systemically-important financial institutions is likely to be very minor. No one wants a redux of the financial crisis. If you want to obtain a good understanding of why banks posed such a threat to the global economy, in 2007 and 2008, read former Bank of England Governor, Lord Mervyn King’s book, “The End of Alchemy.” I do not expect much, if any, reduction in reserve capital requirements for large banks. In fact, reduced lending restrictions and some relief on proprietary trading could be accompanied by increased capital requirements for large financial institutions.
Although I believe that we do see tax, trade and regulatory reform, as well as some infrastructure spending, I believe the finished products will be far less dramatic than what the President has proposed and what the markets have priced in. President’s rarely get everything they want. On the rare occasions they do, their respective parties typically lose seats in Congress at the mid-term elections. In my opinion, to price in a scenario in which Mr. Trump gets everything he wishes, considering the divisions within the GOP, is extremely naïve. No matter what it may say on Congress’ website, there is no united GOP controlling Congress.
I only mention politics because, in my opinion, political policy expectations have been responsible for about the half the rise in the equity markets and half the rise of long-term rates. Longterm rates have surged on the idea that growth-fueled inflation is on the way.
About Thomas Byrne
Thomas Byrne brings nearly 30 years of financial services experience to Wealth Strategies & Management LLC. He served as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.