GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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US TAX REFORM: PROPAGANDA AND PROSPECTS © Leo Haviland October 9, 2017

Genevieve Larkin exclaims in the film “Gold Diggers of 1937”: “It’s so hard to be good under the capitalist system!” (Lloyd Bacon, director)

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CONCLUSION AND OVERVIEW

The most recent American corporate and individual tax “reform” proposal sketched by the President and Republican Congressional leadership is merely a “framework”. These ringleaders and their acolytes proclaim that genuine legislative planning and serious negotiations will create a robust document, a beneficial bill suitable for passage. However, the overall explicit and implicit policy substance (partisan aims) incorporated in the current outline probably will not become law. Even if a few elements of the “reform” scheme manage to pass the House and Senate and become law, at most this will represent modest tinkering with rather than major changes in the current tax code.

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Why will the corporate and individual tax reform program advocated by the President and others generally fail to be enacted? First, partisan political divisions in America in general and Congress in particular are too severe. Although the Republicans control both Houses of Congress, their Senate majority is slim. Whereas Congressional Democrats for the most part have held ranks since the 2016 election, Republican unity, particularly within the Senate, has been fragile. Not all Republicans adopt the same (or Trump’s policies).

The corporate and individual tax code reflects a diversity of political (cultural) viewpoints. Consequently, perspectives regarding as well as campaigns to transform, modify, or preserve critical aspects of it reflect opinions. Thus competing cultural camps with assorted outlooks and aims engage in heated rhetorical battles to advance their interests. Moreover, these proposed so-called tax reforms represent significant ideological approaches, not merely cosmetic fixes and updates.

In recent years, compromise in Congress in various critical policy matters has appeared with less frequency and generally only grudgingly. If the Senate cannot repeal (or repeal and replace) Obamacare (Affordable Care Act), how will they manage to make substantial alterations in an extremely complex document such as the United States tax code? Donald Trump’s remarkable and shocking Presidential triumph in America’s 11/8/16 election has not been followed by Congressional passage of his legislative agenda (Inauguration Day was 1/20/17). Why will Democrats help President Trump and Republicans win a notable legislative victory on taxation with election 2018 coming into view?

In the United States, even though labels are not definitive and groups can overlap, look further at and beyond the “political” sphere. America of course has never been entirely homogeneous or unified. The widely-shared American Dream has been expressed and implemented in various ways. Yet America’s disagreements and debates currently are wide-ranging. The lines between and within camps are not always clear; moreover, individuals may be loyal (belong) to various (and often competing) categories.

In any case, the long list of America’s noteworthy splits and fractures makes it especially changing to enact wide-ranging changes in the core taxation (and spending, including entitlements) policy arena. There are liberals (progressives), conservatives (traditionalists), centrists (moderates), and independents. Populists (both left and right wing) confront the establishment (elites). Globalists contend with nationalists.

America, as a house divided, has rich versus poor, haves versus have-nots. Highlight the nation’s substantial economic inequality. Is America nowadays a Gilded Age era? Are economic and social mobility increasing?

Consider divisions relating to race (ethnicity), gender/sexuality, religion, age, geographic region, and urban/rural. Fierce quarrels rage not only over tax and spending policies, but also over health care. Heated fights occur on trade and tariff issues, economic regulation (how much is appropriate), abortion rights, immigration, gun ownership, and environmental fields such as climate change.

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Moreover, President Trump probably will be unable to lead the contending camps inside and outside Congress toward a realization of his tax “reform” plan. Some circles fervently admire Trump. His “Make America Great Again!” and “America First” slogans and many of his policy pronouncements obviously appeal to large numbers of Americans. Yet he nowadays lacks sufficient influence over Congress as a whole, including parts of the Republican caucus. And among the nation in general, his popularity is quite low. Many observers see him as erratic in his outlook and imprudent and insensitive in his opinions and actions.

Moreover, Donald Trump lacks government insider experience. Rhetoric and behavior (and talents) suitable for running a successful family-owned business, a reality television show, or even a successful Presidential campaign are not necessarily appropriate (adequate; likely to succeed) in regard to leading a country well or inspiring Congress to adopt his policy agenda.

Although Trump won in the Electoral College, he decisively lost the popular vote tally. The popular vote outcome obviously reflects America’s sharp political divisions. Also, the Russian President “directed a vast cyberattack aimed at denying Hillary Clinton the presidency and installing Donald J. Trump in the Oval Office, the nation’s top intelligence agencies said in an extraordinary report” (NYTimes, 1/7/17, ppA1, 11). Trump’s popular vote defeat and reports on Russian political interference undermine Trump’s political “legitimacy” (faith in it) and thus his ability to lead effectively.

The President’s continued unwillingness to release his own tax returns makes it challenging for some to agree with his reform package. Might he or his family benefit from the proposed framework?

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Over three decades have passed since the last notable US tax reform (Tax Reform Act of 1986). Even though many gurus complain about parts of the current personal and corporate tax system, there does not appear to be a widespread consensus as to how to dramatically overhaul it.

Keep in mind that the individual and corporate tax codes are not merely long and complicated. It is a rhetorical structure reflecting a large and complicated society. Its lengthy enshrined provisions and interpretations of them therefore frequently represent competing visions and values. America’s current tax laws took a long time to reach their current structure. The US from the vantage points of both individuals and corporations of course is a diverse and complex country; this parallels the complexity of the global economy, with which the nation is enmeshed. Some “special interests” will fight vigorously for the proposed “reform” (or parts of it), but other crews will lobby heatedly against all or many of its provisions. These considerations also make it very difficult, and particularly unlikely in the current domestic American political environment, for substantial tax changes (“reform” of whatever fashion) to occur.

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US Tax Reform- Propaganda and Prospects (10-9-17)

THE NEW WORLD?! US ELECTION AFTERMATH © Leo Haviland November 15, 2016

In “The New World”, the band X sings:
“Honest to goodness
The bars weren’t open this morning
They must have been voting for the president of something…
It was better before
Before they voted for what’s-his-name
This was supposed to be the new world”.

“Don’t stop thinking about tomorrow
Don’t stop, it’ll soon be here
It’ll be, better than before
Yesterday’s gone, yesterday’s gone”. Fleetwood Mac, “Don’t Stop”

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OVERVIEW AND CONCLUSION

What marketplace consequences will ensue from Donald Trump’s surprising “populist” victory? Much obviously depends on how successfully the new President implements his campaign agenda. Some aspects of his plans in principle and practice require clarification. And he might elect to change his current political views and aims. However, at present one should assume this leader generally will seek to accomplish the broad outlines of his recent messages, particularly in the economic arena.

In trade and several other matters, the President retains substantial freedom relative to Congress. However, even though the Republicans control the Senate and House of Representatives, passage of the new President’s proposed legislation is not guaranteed. The Republican Party has significant divisions. Senate Democrats, as they control well over 40 seats, likely can block many executive branch proposals.

Moreover, in a globalized and multipolar world, America’s political and economic fields, even after dramatic change such as that represented by Trump’s triumph, of course do not move independently of other realms. In addition, numerous assorted and entangled variables and trends, not just those closely linked to the 2016 election and American political (economic) scene, influence financial marketplaces in the United States and elsewhere. Besides, benchmark interest rate, currency, stock, and commodity benchmarks themselves intertwine. The economic game, like the political one, moves as it plays.

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With such complexities and caveats in mind, let’s concentrate on three key parts of the American and global financial marketplace pictures, the United States Treasury 10 year note, the broad real trade-weighted US dollar (“TWD”), and the S+P 500. The long run yield trend for the UST probably is up. In the near term, the dollar will challenge and perhaps break modestly above its January 2016 high. However, as time passes and the new President and his friends fight to implement his policies, the trade-weighted dollar probably will embark upon a notable bear trend. Though it is a very difficult call, the S+P 500 probably will not surpass 8/15/16’s record high at 2194 by more than five percent.

To some extent, and although not exclusively, the patterns of rising interest rates and the (eventually) weaker dollar probably will derive from a growing lack of domestic and international confidence in American political and economic leadership and policies. America’s ongoing severe political and other cultural divisions likely will interrelate with this eroding trust. The passing and outcome of America’s Election Day 11/8/16 did not bury the nation’s substantial conflicts. Widespread support for Trump and Sanders showed that American “populist” ideologies, whether within so-called right wing/conservative congregations or left wing/liberal fraternities, likely will not soon surrender their attractiveness or fervor. But the “establishment” (elites) have not fled the battleground or abandoned their doctrines.

UPCOMING MARKETPLACE ADVENTURES

“Fasten your seatbelts, it’s going to be a bumpy night!” advises Margo Channing in the movie “All About Eve” (Joseph Mankiewicz, director)

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The aftermath of Trump’s victory saw the UST 10 year note yield jump sharply, breaking above 3/16/16’s 2.00 percent. Yet recall that UST yields had been climbing higher several months prior to his win; recall 7/6/16’s 1.32 percent bottom. US inflation expectations also have ascended since early summer. The St. Louis Fed’s measure of expected inflation (on average) for the five year period that begins five years from today has risen from 1.41 percent (7/5/16) to over two pc recently (11/10/16’s 2.06pc).

Why should US Treasury 10 year note yields keep rising from current levels around 2.25 percent?

First, America’s debt was rather lofty and likely to trend higher over the next decade (and probably thereafter) even before Trump’s win. See the Congressional Budget Office’s “An Update to the Budget and Economic Outlook: 2016 to 2026” (8/23/16; this study did not include Trump’s plans). Second, and very importantly, most experts believe Trump’s (Republican) tax and spending (think of infrastructure projects to help make America great again) proposals, if enacted, will result in even more massive budgets deficits. Gaping budget holes, especially those lasting for several years, represent a demand for cash to fill them. Who will do so, and at what price? For many months (a long time before the November 2016 election), foreign official institutions have been notable and consistent net sellers of UST notes and bonds (next Treasury International System/TIC release is 11/16/16). See the essay “Running for Cover: Foreign Official Holdings of US Treasury Securities” (10/13/16).

Moreover, the Federal Reserve Board, which has for several years repressed the Federal Funds rate (and thus the government yield curve) at artificially low levels, again has hinted it will gradually normalize rates. The next Fed meeting is 12/13-14/16. Admittedly, inflation benchmarks such as the consumer price index and personal consumption expenditures have not marched above the Fed’s beloved two percent target. The Fed nevertheless nowadays likely will be more inclined to push rates higher. Not only is the election past, but also the likelihood of monumental US fiscal stimulus (huge budget deficits) encourages rate hikes. In addition, headline unemployment is around the Fed’s goal. Asset prices such as stocks (S+P 500) and real estate have soared from their international economic disaster depths.

In his political apprenticeship on the campaign trails, Trump criticized Fed rate suppression. Perhaps he should have been more careful regarding the higher policy rates for which he implicitly asked. Since Trump and others criticized the Fed for keeping rates on the ground floor, they hardly can complain (at least for a while) about upward Federal Funds rate moves.

In addition, keep in mind that the Fed for several years engaged in mammoth money printing (quantitative easing). Although the Fed ceased QE, it has not reversed its money printing actions. Thus though some inflation measures (such as the CPI) are low, even before the election 2016 outcome, there arguably was potential for eventual inflation ascents as a consequence of the Fed’s ardent QE monetary stimulus. Assuming the new US political regime enacts hefty individual (and corporate) tax cuts and embarks on its infrastructure schemes, Trump’s festive tax and spending party will intertwine with this earlier Fed money printing extravaganza. Also, the European Central Bank and Bank of Japan continue to print money.

Signs of US wage inflation have appeared. There remains some pressure to boost the minimum wage. Would a big infrastructure plan, if it occurs a time of low headline unemployment, lift labor prices? Also, suppose the US deports a significant number of illegal (undocumented foreign) workers; that will tend to push wages and thus interest rates higher, though gurus can quarrel as to how much.

Suppose inflation marches higher and sustains levels around the Fed’s two percent weathervane. To (finally) give savers (creditors) a decent return relative to inflation, UST rates obviously should be above that goal. Focus on the UST 10 year. A one pc premium (100 basis points) makes the UST 10 year yield 3.00pc, well above current levels. The 6/11/15 top was 2.50pc. Above that stands 1/2/14’s 3.05pc peak. A two pc premium makes the UST 4.00pc. Obviously, no guarantee exists that the inflation level, if it advances, will halt at two percent (or that the Fed immediately will fight vigorously to contain inflation once it touches two pc).

Suppose US government (and many other related) interest rates rise from low levels. Will current debt holders start to run for the exits? Supply from those sellers of “old” debt may supplement the US government’s effort to sell “new” securities to finance tax cuts and spending programs.

Finally, suppose America imposes tariffs to ensure “fair” trade. Viewed alone, this perhaps will tend to increase the price of goods and services sold in the US. Of course other nations may respond. Some may cut prices to retain access to the American marketplace. Or, a genuine trade war could help weaken world (and US) GDP and keep prices and rates low.

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The New World- US Election Aftermath (11-15-16)

FISCAL FINE PRINT © Leo Haviland, February 7, 2012

To create a sustained and substantial recovery, gurus and their audiences agree that much matters on the fiscal front. In the darker days of the economic crisis, most financial sentinels and their allies proclaimed that large sustained fiscal deficits were good (or at least acceptable, up to some point). Whatever have been the short term benefits of enthusiastic deficit spending campaigns in America and elsewhere, epic fiscal measures only shifted some of the debt (and leverage) burden from the private sector to the public one.

However, nowadays big sovereign debt generally is viewed as a problem. Most of the public hopes that noteworthy fiscal progress to reduce terrifying deficits has been made, is being achieved, or eventually (and soon enough) will be accomplished.

Let’s spend time surveying some fine print regarding the fiscal landscape, paying particular attention to Europe and America. At best, only limited advances have been made in recent wars against huge deficits. Actually, judging from their very modest results, these struggles to slash them look more like skirmishes than pitched battles.

A Financial Times front page headlines the European Union’s “tough fiscal treaty” (1/31/12; this refers to the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”). Many applaud this treaty for its alleged fiscal hard line. It indeed takes a step towards resolving Europe’s sovereign debt and banking crisis, but a small step is not a giant leap. Despite the stagecraft of European leaders, the region’s fiscal challenges are not near to being resolved.

Though many states and municipalities face scary times, let’s focus on the federal deficit. The US fiscal situation remains fearful.

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Fiscal Fine Print (2-7-12)