Daily Comment (November 8, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST] There was a good bit of news overnight.  Here is what we are watching:

The message from the voters: Governor and downstate elections were held in Virginia and New Jersey yesterday.  Although small sample size projections are the lifeblood of political punditry, we see three legitimate takeaways.  First, polarizing figures seem to boost voter participation.  In 2016, an element of voters opted for Donald Trump simply because he wasn’t Hillary Clinton.  Sec. Clinton was a polarizing figure, which led Republicans and disaffected Democrats (Berniecrats and others) to vote for Trump.  Now, the president has become a polarizing figure and that seemed to boost Democrat Party turnout yesterday.  It should be noted that polls were favoring the governor winners, although they did outperform the polling.  Second, the establishment/populist divide remains in place.  There is a tendency to simply look at the winners and losers but neither party has really embraced the populist mantel.  The president claims he has but if that were true his order of execution of his legislative agenda would have been infrastructure, trade restrictions and immigration restrictions.  Only immigration has been implemented and that’s because it doesn’t need legislative action.  Trade action has been limited to killing TPP but that may have been dead already.  NAFTA remains in place and actual targeted tariffs against China and other large deficit nations haven’t occurred.  Tax changes and ACA adjustments would have been far down the list.  The order of execution suggests that he isn’t fully committed to a populist agenda.  However, we are not seeing anything coming out of the Democrat Party that suggests an embrace of populism either.  Thus, the continued realignment of the underlying coalitions of the two parties will continue.  Third, the midterms very well could put the GOP majority at risk next year.  This highlights a point we have been making for over a year—political capital is limited and perishable.  Much of it was burned over the ACA repeal and now it’s being torched on tax changes.  By next spring, the president’s political capital will mostly be exhausted and he will be in the maintenance period for the rest of his presidency.

The president moves on to China: The president ended his visit to South Korea with a rather straightforward speech, avoiding bombastic threats but making it clear the U.S. would defend its allies.  China, so far, is using the Abe playbook, flattering President Trump and showing him a good time.  However, back in Washington, China is facing a significant sanctions threat.  The Senate banking committee approved the Otto Warmbier Banking Restrictions Involving North Korea Act, or BRINK Act; the bill would increase sanctions on firms doing business with North Korea, specifically targeting major Chinese banks.  Up until now, sanctions have only affected small Chinese firms and banks and therefore haven’t had a significant effect on curtailing China’s economic support of North Korea.  We note that President Trump did soften his rhetoric against North Korea earlier in this trip, calling on Kim to make a deal.  This bill may represent the “stick” and talks are the “carrot.”

The Street and Brexit: The FT[1] reports today that large U.S. financial firms have informed the Trump administration that if progress on Brexit doesn’t improve soon they will be forced to begin moving operations out of London.  Interestingly enough, it was also mentioned that the U.K. run by a Corbyn-led Labour Party would be viewed as very negative.  Initial job losses are pegged at 10k but could eventually rise to over 70k if the U.K. government is unable to execute Brexit and maintain trade relations with the EU.  The GBP fell on this report.

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[1] https://www.ft.com/content/2dec32be-c3e3-11e7-b2bb-322b2cb39656?emailId=5a021eb88a3fa4000439a9cb&segmentId=ce31c7f5-c2de-09db-abdc-f2fd624da608 (paywall)