This week, members of congress are supposedly spending a recess to converse with town hall voters in their respective districts. Like eight years ago, that is not exactly happening.
In 2009, President Obama unveiled his Affordable Care Act (ACA) which set off a firestorm of pushback from voters worried about dilution of healthcare benefits. Add to this mix people who thought the country was spending itself into bankruptcy with budget deficits, who did not like the social direction the country seemed to be headed in, or who just plain did not like the President at the time, and the result was the creation of the Tea Party. The name was a reference to the patriots who stormed the ships in Boston Harbor in 1773 to dump tea into the water, rather than pay the enhanced British tax.
Tea Party support coalesced around Donald Trump in 2016. Once elected, and in an effort to acknowledge the debt to his base, he has begun implementing his campaign pledges of removing immigrants and dismantling what became known as Obamacare. This time, the firestorm has come from the progressives, who feel that ejecting all immigrants is barbaric and economically self-defeating. Eliminating the ACA without a replacement and not knowing what that replacement will look like is an additional issue. How to pay for proposed tax cuts is a natural source of concern for fiscal conservatives, as is the merits of trying to tax imports.
Like 2009, the flash point has been the town hall meeting, in which voters in a given area can converse with their elected representatives. Some politicians are attempting them; many are not. For those who are not, cardboard cutouts of the senators and congressmen have stood in, offering no response or rebuttal to the crowd. For those who are, the experience has been searing. If nothing else, the 2016 election has created several grassroots movements, which, if organized further, could be a political force in 2018.
The largest of the progressive grassroots movements is called the Indivisibles, which is a word plucked out of the Pledge of Allegiance. There are other organizations, such as Pantsuit Nation, which organized the Women’s March on Washington the day after the inauguration and prompted Trump’s challenge over crowd size. However, the Indivisibles seem, at this stage, to have the greatest organizational capability.
One question is whether these groups will steer the Democratic Party or decide to form their own. One of the Democratic candidates for President, Bernie Sanders, has been working to take over the Democratic Party from the grassroots up. His followers took control of the Democratic Party in Washington State, and have positioned themselves in several other state and municipal boards as well. Given how ossified the Democratic Party is in several states, any shake-up has to be seen in a positive light, if only for the sake of the two-party system.
One school of thought is that President Trump can head off the creation of the new progressive movement by being more inclusive, in an effort to broaden his base. However, this is not his style or his temperament. When the world is a zero-sum game, you do not accommodate your adversaries. Instead, you seek to marginalize them.
Recently The Economist magazine ran a piece entitled, “A Peronist on the Potomac”. The essence of the article was to compare Trump to other authoritarian populist leaders such as Evita Peron, Hugo Chavez, and the like. The common traits are: the projection of a large external and/or internal threat, the idea that only the leader can address the threat, pursuing short-term solutions that creates long-term problems (like tax cuts and deficits), calling anyone who disagrees with you an enemy of the state, claiming that more is lost than gained through foreign trade, and that citizenship should be granted sparingly, if at all.
Ever since the use in his inaugural address of the term “America First”, which was originally coined by Charles Lindbergh to keep America out of World War II and Jewish refugees fleeing Hitler out of the United States, the Trump world view is that of a sinister place. His foreign policy consists so far of defeating ISIS (never mind the organization succeeded Al Qaeda) and will no doubt be succeeded by something else, until such time as the causes of the local appeal of such organizations are addressed.
The business and investment community has been mesmerized by the prospect of a material and significant cut in both corporate and personal taxes. As usual, how these cuts will be paid for is a bit fuzzy. Perhaps the President’s address to Congress will clear this up, but probably not.
The enemy of grand concepts is the details, which is why we have not heard yet how this is going to be funded. Import tariffs will need to be very high to close the gap, and the jolt to the cost of living will be painful. Besides, what happens to the domestic economy when other countries decide to slap tariffs on our exports in retaliation to what we do to them? Exports are 15 percent of the GDP. Be careful what you wish for.
The economy is close to reaching full employment, and probably will exceed it if all immigrants are forced to leave the country. In this environment of slow population growth, aging demographics, and full employment, the idea that the economy can grow, ex-inflation, at four percent a year is a pipe dream.
Much has been said of the excellent employment, housing, and general economic numbers coming out of Washington. Overlooked is that fact that Trump’s taking credit for such is a bit overwrought. It takes six months to a year to affect the American economy, given its size and complexity. What we are witnessing are the residual effects of the prior administration. Trump’s time will come later this year.
Given the potential for the labor force to shrink with the threat of mass deportations, it is axiomatic that inflation will increase faster than any data would now forecast – probably in the neighborhood of 4-5 percent, with a tariff, if implemented, increasing this to 8-10 percent. As we saw in the 1970s, once the genie of escalating prices is out of the bottle, it is very difficult to change mindsets and put it back in.
The Federal Reserve is now on record for increasing rates three times in 2017. However, the data the Fed uses does not reflect a labor force contraction, or the consequences of tariffs.
Nor does the Fed data include a $1 trillion infrastructure spending package to be sent to Congress for approval. All these things would cry out for far higher interest rates than forecast, should they be implemented. This all implies that a two percent money market fund by year end is the minimum, with the possibility of being far higher than this.
The Stock Market
Overall market valuations are high, unless you price in a tax cut that has not been explained or implemented.
While stocks can stay overvalued for a long time, such valuations normally require low interest rates to sustain them. The interesting thing is to see how stocks hold up as interest rates are increased.
With the attack on the ACA, the healthcare sector, usually considered a defensive or safe haven industry, has seen stock prices cut across the board. Other industries will no doubt feel the shifting winds of Washington as well.
Warren M. Barnett, CFA
February 24, 2017