An own goal

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Kim Asger Olsen

Kim Asger Olsen


President Trump and the Republican House majority managed to make a dog’s breakfast out of the attempt to repeal “Obamacare”. It sends a warning signal that Trumps economic policy plans may have to be weakened. Financial markets are adjusting to this new reality.

President Trump and the Republican majority in the US Congress inflicted an embarrassing defeat on themselves last Friday. After 7 years of promising to get rid of “Obamacare”, it appeared that the preparations to do so were sorely missing. Or completely absent.

House Speaker Paul Ryan presented a draft bill, which quickly was analysed to imply that more than 20m US citizens could lose health care cover in the coming 8 years while the poor would have to pay more for coverage while high income earners would pay less.

Paul Ryan had also omitted to take into consideration the HFC, the House Freedom Caucus, an anarchistic radical right grouping formerly known as the “Tea Party”. This faction wanted an ever more radical change: they want the Federal Government to keep out of health care altogether.

Trump’s White House staff proved to have neither the policy specialists, not the influence on the House Republicans needed to push through a “repeal and replace” of the “Obamacare”.

As such, the chaos has little importance for the investment markets. And yet it has. The incompetence of the Republican leadership and the inability of the White House to move votes sends an important signal regarding the fate of something of a far greater importance for the markets, the economic policy.

The Freedom Caucus has in the past proved no less uncompromising when it comes to central aspects of economic policy.

Remember that Trump’s campaign promised an economic cocktail consisting of infrastructure investments, tax reform, more military spending, deregulation of the banking sector and less spending on other federal programs.

It did not take a long time for the financial sector to make the sums: the effect would be a significant stimulus to the economy, created by running up a major budget deficit. In the best of Republican traditions, a significant helping of woo-doo economics was involved. Including the long –disproven Reagan-era belief that tax reductions may in fact increase the tax revenue.

As a result, we saw a completely understandable reaction from the financial markets. The bond markets fell in the expectation of higher growth, higher inflation and higher issuance of government bonds. Stock markets gained, as deregulation and tax reform (plus stronger economic growth) seemed certain to increase corporate earnings.

The question now is how much of Trump’s economic program is in jeopardy. If he is to rely on the Freedom Caucus, he chooses a fight with a group who has on several occasions chosen government shut-down to prove that they are serious about preventing government deficits at all. If he wants to reach out to the Democrats in order to shut down the HFC, he is unlikely to be met with open arms.

The Democrats have already clearly stated than not one dollar of Federal money can go the building of the Border Wall (yes, THAT wall). Trump may also have to provide more infrastructure and less military. The tax reform will be more focused on closing loopholes for the wealthy in order to reduce taxes for the middle classes. And so on.

The financial markets have reacted in a typical fashion. Bond markets began to trade on the unraveling of the Trump stimulus 3-4 weeks ago. The stock markets have lost their momentum over the past week as the implication of the health care fiasco has dawned upon them: Trumps chances of advancing his political agenda suddenly seemed in jeopardy.

We believe that the most likely outcome over the coming weeks is a continuation of the falling bond yields, US stock markets specifically, may give up the froth seen in the past months and surrender 4-6 per cent of the gains and the USD should strengthen.

The period since late summer 2106 where macro inputs dominated and thus supported markets is about to end and we are back where headline news are again back in vogue.