Daily Comment (February 28, 2017)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EST] On the eve of President Trump’s first major address to Congress, financial markets are mostly steady.  As each day passes, however, the odds of passing a sweeping agenda lessen.  The temporary nature of political capital is perhaps one of an incoming president’s least appreciated elements of governing.  The master of managing the early stages was President Roosevelt; the idea of focusing on the first “100 days” came from his first term.  However, it should be noted that Roosevelt enjoyed a crushing mandate; he won 472 (out of 531) electoral votes, 42 states and gathered 57.4% of the popular vote.  In addition, Roosevelt had commanding control of Congress, with 70 Senate seats held by his party (out of 94) and 322 out of 435 House seats.  With complete control of Congress, Roosevelt was able to pass numerous new laws, including Glass-Steagall, the Securities Act and the Tennessee Valley Authority, among many.  In fact, the only real restraint on his power was the Supreme Court, which he unsuccessfully tried to “pack” by adding new judges.

President Trump’s hold on power is significantly more tenuous.  Although he won a majority in the Electoral College, he did not win a majority of the popular vote.  His party’s hold on Congress is narrow, with only a 52-48 margin in the Senate.  Thus, he cannot ensure that all filibuster-prone bills will become law unless he can woo eight Democrats to vote with his proposals.  Otherwise, a filibuster can prevent a vote.  That doesn’t mean nothing can get done.  Reconciliation bills can pass with a simple majority but, since they are part of budgets, they usually “sunset” after 10 years.  That’s what happened to parts of President Bush’s tax cuts, especially regarding the estate tax.

The real issue, as we see it, is the populist-establishment divide within the GOP (it also exists within the Democrat Party, exhibited in their recent national committee leadership vote).  The right-wing populists want infrastructure spending, trade restrictions and immigration reform.  Getting rid of the ACA without a replacement probably won’t be popular and cutting taxes isn’t high on the agenda either; many populists’ marginal income tax rates are already low.  Additionally, this group wants no changes to entitlements; Social Security and Medicare are sacrosanct.  On the other hand, the right-wing establishment want tax cuts and ACA removal.  This group is where the budget hawks live and thus entitlement reform is always a goal.  Maintaining deregulation and globalization is a key element of the establishment across party lines.

All along we have postulated that a successful Trump presidency will require him to deftly manage the goals and expectations of these two groups.  Needless to say, the goals and aspirations of the two groups don’t overlap much.  The other outcome is a left- and right-wing populist coalition,[1] which is theoretically possible but unlikely.

Financial markets have been building in expectations of fiscal spending, deregulation and tax cuts.  The longer the administration fails to move programs forward, the less patience the markets will have with future legislation.  Our expectation, based on past equity market performance during first-term new republican administrations, is that equities will remain supported into summer.  However, if disappointment sets in as the year wears on, a pullback later this year is possible.  Tighter monetary policy could exacerbate this trend.  We note that fed funds futures have now put the odds of a rate hike at the March 15th meeting up to 50% after being well below that just a few weeks ago.  A March hike would raise the odds of three hikes this year.

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[1] Ralph Nader’s proposal in his book.  Nader, R. (2014). Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State. New York, NY: Nation Books.