Trump’s Reflation Agenda Gets Accelerated

The Affordable Care Act was put on hold Friday, as the Republican controlled House could not agree amongst themselves to bring it to a vote. So the bill was pulled for another day. Bravo!

I felt all along that Trump’s reflation agenda should have kicked off with an overhaul of the tax code, cutting taxes for corporations and individuals, along with regulatory relief followed by the trillion-dollar infrastructure program and fair trade. All of these items are in Trump’s wheelhouse. He understands the problems, knows what to do and how to get it done. Repealing and replacing Obamacare was a difficult, complex, controversial and an overly politicized endeavor, which might have dragged into 2018, postponing the real reflation agenda to “Make America Great Again.” Not now!

President Trump stated Friday night that tax relief would be first and foremost out of the box now. I can assure you that Trump and his team learned a lot about the process of government and won’t make the same mistakes again. By the way, Presidents Carter, Clinton, Bush and Obama each had rough starts that were clearly huge learning experiences, which helped them throughout their terms. Being President and trying to bring together different factions within your own party and then sell it to the opposing party is a daunting task for anyone, even a great negotiator.

The first question to ask is, “Why did the Affordable Care Act fail?” I felt that Trump did not fully understand the ins and outs of the bill and therefore could not sell it and that House Speaker Ryan rushed the process and failed to bring all factions of the Republican Party into the process from the get go. Whether it is a good bill or not is really difficult to know. If the aim was to provide better coverage with more choice for less for the same number of people already covered than it failed. If the aim was to reduce future deficits then it succeeded. Neither the right nor the left of the Republican Party really liked this bill. Both the Democrats and Republicans know what really needs to be done, but there is so much animosity between the parties that it is hard for them to work together for the good of the country. Do we really need Obamacare to implode before both sides come together? I hope not! But for now repeal and replace Obamacare is off the table, so on to areas that both parties have some agreement-taxes and infrastructure. Unfortunately the Republicans will not have repealed the higher taxes of Obamacare, which was to be part of their grand plan to lower taxes while balancing the budget. Reduced regulations and trade are issues more for the Republicans than for the Democrats.

Trump and his team will work more closely with all factions of the Republican Party to coalesce his agenda such that it does not meet with the same resistance, as did his “Affordable Care Act.”  While I never expected that Trump would be able to lower the tax rate for businesses to 15% from an effective tax rate of 28% today, I still see a new effective tax rate moving down to 20% while closing loopholes, reducing deductions, and giving big incentives for capital spending, job hiring and research tax credits. In addition, repatriation of foreign retained earnings will be part of the plan with only a small penalty close to 6%, which will add to the federal coffers and give corporations the added fire power to make additional capital investments, raise dividends, increase buybacks and/or reduce debt. Taxes for individuals will be simplified and reduced too with the overwhelming benefits going to the middle and lower classes. The wealthy will most likely get little or no net benefit here. The new tax legislation will maintain preferential tax rates for long-term capital investment over short-term gains and removes the benefits of carried interests. If there is a border tax, it will be far less punitive on imports than now perceived and will not hurt the consumer who remains the driving engine of our economy.

It is clear that both sides of Congress will soon begin work on and support a trillion dollar infrastructure program, which is a necessity to “Make America Great Again.” The major issue tied to it will be reducing the red tape such that “Shovel Ready” projects are really that unlike what occurred during the Obama administration. Trump’s background and team really have the knowledge and ability to make this work in a timely fashion and with a financing package that won’t hurt the federal budget.

Trump and his team have already started work on reducing regulations including parts of Dodd-Frank that have hurt the ability of financial institutions to lend which is a necessity to provide the fuel for economic growth. Also, Wilbur Ross has begun negotiation to reach bilateral deals with our largest trade partners that will be mutually beneficial promoting fair trade. Every day another foreign corporation is announcing its intent to build facilities in the U.S. to satisfy demand rather than importing. Give Trump some credit here.

Trump’s administration formally approved the Keystone XL pipeline Friday, which is part of his program to make America energy independent, which includes reducing regulations to boost drilling, increase refining, expand pipelines and exploration.

The bottom line is that Trump’s reflation agenda is now front and center rather than behind healthcare reform. I fully expect completion of tax reform and the infrastructure program by the fall of this year. Corporations can finally begin incorporating these changes in their future plans and be ready to hit the road running when passed by Congress and our economy will accelerate as the year progresses into 2018 and beyond.

Don’t forget that reflation is now a global phenomenon. The Eurozone PMI just hit a 7-year high; growth in China’s first quarter accelerated from the 4th quarter, and growth in India and Japan as well as in the Emerging Markets is accelerating too. Interestingly many foreign market gains to date have exceeded gains here.

Stay the course and continue looking through the windshield. The global reflationary trends are your friend and expect Trump’s real reflationary agenda to take center stage and pass by the fall of 2017 with huge investment implications for the next several years. Trump will certainly revisit healthcare again but not until the rest of his agenda is passed into law. Trump’s team learned a valuable lesson, which will help them moving forward achieving victory from the apparent jaws of defeat on his healthcare bill.

Remember to review all the facts; pause, reflect and consider mindset shifts; reconsider your asset allocation and risk controls; do independent firsthand research on each idea and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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