By Christian Takushi, Macro Economist & Geopolitical Strategist, 19 Dec 2017- Switzerland.
The U.S. House of Representatives has just passed the reconciled (final) TAX BILL with 227-203 votes, with the Senate now trying to pass it over the next 24 hours amid fierce, but fading Democrat opposition. If it clears the Senate, as we expect, President Trump will be signing this Bill into law before Christmas Day. While the details of such a historic Tax Reform Bill will be the source of many debates amongst economists for months to come, the impact on the US Political Process is likely to be positive for Republicans during Mid-Term Elections 2018 and even General Elections in 2020.
We focus on what Consensus underestimates and overlooks:
We reiterate that in its obsession with President Trump, Consensus is underestimating Mike Pence. Pence was the mastermind behind the recent US move to recognise Jerusalem as the capital of Israel and he played a key role in coordinating the efforts of the White House and Congress for this Tax Bill push. Given the effectiveness of Mike Pence to push through the conservative agenda, a Pence Presidency in 2020 – at this stage – is not less likely than a 2nd Trump Term.
We have maintained since 2016 that a watered down Tax Bill is likely before the end of 2017. Analysts are focused so far on how investors are anticipating the passage of the US Tax Bill, but longer term I ascertain that consensus could be underestimating the total impact of a combination of Tax Cuts and Deregulation. After 35 years of a Western Policy Mix characterised by increased regulation, stagnant incomes for the middle class and tax exceptions for big firms, the compounded effect of this new Conservative Policy Mix (rearmament, lower taxes, deregulation, controlled migration etc.) could be significant, but its impact is hard to gauge. We simply don’t have any recent time series to seriously simulate how a massive Tax Cut accompanied by Deregulation will impact the US and the World Economy. Even though most American households will benefit from the Tax Cuts and the simplification of the Tax Code, there are segments of society that are likely to be negatively impacted on specific topics: i.e. high tax states etc.
We think that the combination of Tax Cuts and Deregulation (albeit slow paced so far) is a “Double Pack” that could be more than just higher accounting profits: It could re-energise the economy, lead to insourcing and a reshaping of the suburbs, the heartland and supply chains. Politically, it could open the door for a 2nd Republican Term. A 2nd GOP Term will greatly depend on how this historic Tax Bill affects the US economy. The FED expects it to increase economic growth, while adding only modestly to US inflation. Many economists say that the US market is ripe for a correction, but this Double Pack could also trigger a re-rating. The Trump-Pence era has us economists working overtime.
Another possible aftermath of a “Double Pack” is that it could increase the Transatlantic tensions. It could energise the US economy and increase the trade & policy tensions between the USA and the EU. Paris, Berlin and Brussels are already concerned about deregulation and tax cuts in the USA just as the EU is adding to more regulation at a frenetic pace – much of course in the name of consumer protection. Those tensions will only increase the patched up rifts in the NATO Alliance. Not least, because the deepening strategic alliance between Germany and China is raising more and more concerns in US security and conservative circles.
Too much of consensus analysis has focused on whether and when President Trump will be impeached or ousted from the White House, too little on Mike Pence and the conservative movement he represents. I reiterate that if Trump were to step down, Mike Pence would assume the Presidency and the US Administration would become more conservative, effective and also less exposed to scandals. Pence leads a humble & disciplined lifestyle – the liberal media may quickly miss Trump and his weekly tweets. Pence is a no-nonsense devout evangelical Christian that accepted the role as Vice President by committing to a conservative Agenda. One that he has delivered on over the past ten months, despite the slow progress on Capitol Hill. Consensus has focused on Trump and the obstruction on Capitol Hill, but downplayed the Executive Action by the White House. The Conservative and evangelical bases are paying attention though, they have seldom seen their “ticket” delivering on their campaign promises as Trump-Pence is doing. They are both angering Democrats and the media with their executive actions, but the pace of promise-keeping by Trump-Pence will be a challenge for Democrats in 2018 and 2020. Let’s make no mistake, the GOP is not out of trouble. Both parties (GOP and DNC) are weak, divided and out of touch with vast segments of their base. Renewal was promised, but the proximity of the Mid-Term elections is forcing both parties to focus on short term politics rather than the much needed renewal. This Tax Bill could be the one game changer. In my humble opinion, Democrats made a mistake by prioritising Obamacare over defeating this Tax Bill. They would have done much better losing the first battle and blocking this Bill.
Democrats are right about some of the flaws of this Tax Bill, but the combination of massive tax cuts and deregulation are likely to overshadow the flaws of this Bill and the increase in the US Deficit in the near term. Ironically, concerns on the deficit may actually help keep the USD weaker than normal, giving US economic growth an additional support and the FED and additional hedge and more room for its policy. Barring new developments and surprises I see a tough 2018 for Democrats. This Tax Bill will probably make Democrat leaders and EU leaders worry more in 2018 than they had thought.
Christian Takushi and team,
Macro Economist & Geopolitical Strategist, Switzerland – 19 Dec 2017.
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