The US administration has suffered two significant setbacks in recent weeks. The first was the failed effort to repeal Obamacare despite claims of universal revulsion by the Republican Party. The second is the mounting spectre of a political scandal as the FBI hints of broadly-based complicity between the Trump team and Russia.
There is nothing stopping politicians from taking another crack at Obamacare at some future date, but a heavy legislative calendar and the inability of the Republican-dominated House to secure the necessary votes despite widespread loathing of the incumbent law has delayed it indefinitely.
Meanwhile, the mounting toll of ousted and compromised officials over Russian linkages presents a further threat to the legislative agenda. While the outright removal of President Trump before the end of his term remains an unlikely event, it is not impossible. Betting websites put the odds of his early exit at a lofty 45% to 55%. We assign a lower 35% probability. This scenario thus warrants at least a moment’s contemplation. Early Presidential departures have historically had a short-term negative influence on equities. That said, the policy contours of a hypothetical President Pence – who sports a worldview that embraces tax cuts and small government, but without the same protectionist twist as Trump – could substantially ameliorate the market’s medium-term interpretation of a hypothetical ouster.
All of this matters in its own right, but is also relevant as we look forward to the next waystation on the US legislative agenda: tax reform. This is the big-ticket item that the market has long anticipated. Its prospects are surely somewhat shabbier given the inability to rescind Obamacare and the distraction of political intrigue.
Tax reform was going to be tricky at the best of times given the Republican goal of making the tax cuts permanent so as to avoid the fate of the now-expired Bush tax cuts. The constraints of a Republican party that falls shy of a Senate supermajority demands that the “reconciliation” process be employed. Among its many nuances, any legislation deployed in this way be budget neutral over the long run. Tax cuts cannot be described as neutral even under the most optimistic assumptions. This is why the border adjustable tax (BAT) remains in the mix – it has the theoretical capability of maintaining a fiscal balance by taxing foreigners more, though with many undesirable attributes as well. Other options include eliminating loopholes and tax credits, though many Republicans have pledged not to raise taxes in any form. At a minimum, tax reform will take longer to unfurl than previously imagined.
We still budget for a partial delivery of fiscal stimulus via tax cuts, but acknowledge that the size and prospect have both dimmed somewhat. Of course, it is still very early, deregulation is still on track, and the delivery likelihood of some of the Trump administration’s less desirable platform planks such as protectionism has also fallen. In fact, if anything, the outlook for protectionist actions has declined more precipitously than that of tax cuts as the centrist Wall Street element at the White House is said to have outmuscled the isolationist faction.
In the end, the US policy shift underway still seems capable of boosting growth over the next few years, but negative factors could subsequently start to drag. This argues that there is still some validity to the reflation trade that has dominated the narrative since last autumn, but other macro factors will have to lend a helping hand over time. Fortunately, they broadly are, with various global signals beginning to strengthen well before the US election spectacular.