What We Worry About
Author: Greg Valliere
February 7, 2019
WE’VE BEEN CONSISTENTLY UPBEAT about the U.S. economic fundamentals, which still look solid. But we’re in an industry that has to worry about what might go wrong, so let’s look this morning at what worries us on the policy front:
DEFICITS: In a full employment economy, deficits should be falling but red ink will soon exceed $1 trillion annually — and no one seems to care. Both parties are equally complicit and equally indifferent; policies to reduce the deficit are considered politically toxic. The long-term issue is borrowing costs, as paying interest on the debt becomes a major economic drag by early in the next decade. Yet the threat posed by dramatically higher deficits wasn’t even mentioned in Tuesday’s State of the Union address.
SUBPOENAS AND INDICTMENTS: The concept of bipartisanship is laughable, as Democrats launch an all-out assault on Donald Trump and his inner circle — his tax returns are back in play, the House Intelligence Committee will re-open its probe of possible collusion with Russia, and sealed testimony from key Trump aides will be released to Robert Mueller’s staff, which will focus on perjury indictments. Impeachment in the House is possible this spring; conviction in the Senate is still unlikely, but this will be very bumpy ride.
EUROPE: Economic growth in key countries such as Germany is increasingly anemic, amid growing concerns that a “messy Brexit” could plunge the U.K. into chaos in late March. And then there’s the tear gas in Paris and other French cities as young radicals revolt against a system that seemingly ignores their concerns; will this anger spread to other countries? For now, the EU seems safe, but some members like Italy still want to evade budget rules.
A SLOW SLOG ON TRADE: It’s unrealistic to expect a final U.S.-China deal by the March 2 deadline, and a delay could increase the threat of stiffer American tariffs. The deadline probably will get extended, and a splashy Trump-Xi summit may produce an agreement in principle by summer. But this will take time; key issues (including enforcement mechanisms) are unresolved. And trade agreements that seemingly were resolved — such as a modest NAFTA replacement — could encounter stiff resistance in Congress.
TAXES: Democrats running for president are trying to out-bid each other on tax hikes: raise the top rate, impose a wealth tax, dramatically hike the estate tax, etc. Polls show astonishingly strong support for tax hikes, which are favored by Democrats, Republicans and — especially — young people. The Trump tax cuts will remain in place into 2021, but then there could be significant changes if a Democrat captures the White House. By early in the next decade, corporations and wealthy Americans could be vulnerable on this key issue.
BOTTOM LINE: An increasingly dovish Fed will counter some of these concerns; former Fed Chair Janet Yellen said yesterday that the central bankers’ next move could be a rate cut. But the economic outlook isn’t the problem — it’s the pervasive policy uncertainty, largely in Washington, which the markets can’t overlook.
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