When should you panic about Donald Trump?

Mainstream media is in a panic about Donald Trump. Financial markets are pretty calm. So, what would it take to spook financial markets?

US consumers / US small business owners are the key

My take is that the small business sector is the key driver of US employment, the US consumer is the key driver of demand. When sentiment leaves those sectors it’s time to panic.

I wish that the average American small business owner was more worldly and understood that if you abandon (or even threaten to abandon) NATO allies then you lose trust for decades. And your other allies begin to doubt your sincerity. But the average American small business owner doesn’t care.

I wish the average American consumer understood that you can’t convince totalitarian regimes to improve human rights when your own country is breaking the Geneva convention by torturing people. And even the US military says that torture doesn’t work. But the average American consumer doesn’t understand – torture has close to a 100% success rate on TV so surely it works in real life.

In Australia and the liberal press in the US, Trump insulting “Trunbull” was an outrage. In other news, the American in the street doesn’t care – they figure that Trump is in a Twitter war with Arnold Swartzenegger on a weekly basis, so what does it matter if Trump also insults the leader of the country that Arnie is from?

Building a wall with Mexico? It’s a border. Borders are meant to have something to stop people crossing.

Sudan/Iran/Iraq visa bans? All “bad guys”.  Except for those that are playing in the NBA for a local team – better make sure that they can still play.

Withdrawing funding from foreign charities who help with abortion? Someone else’s problem.

I have been looking to Fox News for perspective. While Australian newspapers led with half a dozen Trump catastrophes, Fox News was highlighting the increase in morale for US Border guards. Most Americans really don’t care what happens outside of America.

Don’t let politics cloud your investment judgement

From an investment perspective, don’t let politics run your portfolio. Japan from 1970 to 1990 coupled one of the largest economic booms in history with one of the world’s most xenophobic immigration policies. China’s own economic boom has been tightly bound with a regime that allows few civil liberties for ordinary citizens, and even less dissent.

Trump’s policies are socially divisive and will set back human rights, international diplomacy and global warming by a decade or more. Unfortunately (for society), these policies don’t affect the average Fox News watching small business owner, or the average US consumer in the short term.

Trade wars and real wars will.  But, economically Trump looks like he is going to run up the credit card bill to create a debt-fueled boom.  Yes, the boom will likely end badly for reasons I went into detail last month. But there are very few occasions where it works to sell before the boom even starts.


Goldman has useful take on how the Trump reform agenda will unfold:

Q: What does all of this mean for tax reform?

In our view, the last few weeks demonstrate that tax reform will take a while to enact and will probably be scaled back relative to what House Republicans and President Trump have proposed. As with many other policy issues, much hinges on the Senate. The ongoing debate over Obamacare demonstrates how difficult finding a consensus among 51 Republicans can be when there are only 52 Republican senators. Near-unanimous decisions are generally hard to reach and without bipartisan support congressional Republicans are apt to proceed more carefully since they are likely to be held accountable for the results.

The two biggest questions in tax reform are whether to include a “border adjusted” corporate tax in the proposal, which raises enough revenue to allow for 10pp reduction in the tax rate but could also result in potentially substantial unintended consequences such as price inflation of imported goods, and whether the legislation should be revenue neutral or whether it should result in a net reduction in tax liabilities. As discussed below, we assume that border adjustment will not ultimately be adopted, and that tax reform will increase the deficit by slightly less than 1% of GDP.

Q: What’s the latest on border adjustment?

We recently lowered to 20% our subjective probability that a border-adjusted corporate tax similar to the House Republican Blueprint will become law. This was mainly due to recent comments from President Trump expressing a mixed view on the proposal. That said, there continue to be what we view as good arguments for and against its eventual enactment.

We expect the proposal to continue to enjoy support in the House, since it raises a substantial amount of tax revenue—over $100bn per year, enough to finance a roughly 10pp reduction in the statutory corporate tax rate—without, in theory, reducing the long-run after-tax profitability of any industry, if the value of the dollar ultimately rises to reflect the effect of the import tax and export subsidy. It could also potentially achieve a number of long-sought goals of corporate tax reform, particularly allowing for a territorial tax system without incentivizing offshoring or imposing cumbersome protections against profit shifting. From a political perspective, some proponents of the plan also emphasize its appeal as part of an “America First” theme, suggesting that it could offset the alleged advantage that border-adjusted value-added taxes in other countries provide their domestic industries. While the last argument is unlikely true if exchange rates adjust to these tax systems, it nevertheless increases its political appeal in some quarters.

However, there are stronger reasons in our view to believe that border adjustment will ultimately be excluded from this year’s tax legislation. In the House, some Republican lawmakers appear to have misgivings. This may not be that relevant in the near term, since House Republican leaders are likely to ensure that it remains in the initial version we expect to be introduced around May, and most House members will not get an opportunity to vote to change the bill, only to approve or reject the bill in whatever state it reaches the House floor. We would not expect enough House Republicans to object strongly enough to the border adjustment provision in particular that they would vote against the Republican tax reform bill as a whole.

However, these concerns could become much more important in the Senate, which differs from the House in three important respects. First, the margin in the Senate is much smaller, since Republican leaders there can afford to lose only 2 Republican votes assuming that no Democrats support the tax legislation and Vice President Pence casts a tiebreaking vote. Second, dozens if not hundreds of amendments are likely to be considered to the Senate’s tax reform legislation, both in the Senate Finance Committee and on the Senate floor, unlike in the House, where few members will have an opportunity to change the bill. This means that each Senator’s view on border adjustment is relevant. Third, while House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady appear to be strongly behind the border adjustment effort in the House bill, there does not appear to be an equivalent driving force in the Senate; in fact, Senate Finance Committee Chairman Orrin Hatch and Senate Majority Whip John Cornyn, among several other influential Republicans, have made comments suggesting they have reservations regarding the proposal.

Q: If Congress does not enact border adjustment, what does that mean for tax reform?

Without border adjustment, reducing the corporate tax rate to 20% or 15% will be very difficult. We noted previously that Senate Republicans appear less enthusiastic about border adjustment than House Republicans. This would leave them with three potential options:

  • Increase the deficit: President Trump’s proposal would lower the corporate rate without significant offsets, expanding the deficit instead. While one can imagine the political appeal of simply lowering the rates without raising taxes in other areas, we expect that it will be quite difficult to reach 51 votes in the Senate for tax legislation that is not roughly “revenue neutral” as defined by congressional Republicans (see below). There could be concerns among fiscal conservatives in the House as well, though that appears less likely to us to be the binding constraint.
  • Base broadening: While traditional base broadening such as the limitation or elimination of various tax preferences has been less of a focus in the current debate—the House pays for most of its proposal with border adjustment, and President Trump’s plan does not raise much offsetting corporate tax revenue—various other tax reform proposals over the years have primarily relied on such changes to finance lower rates. There is a limit to how far this can go; former Ways and Means Chairman Camp’s comprehensive reform bill released in 2014 went as far as politically possible, in our view, and achieved a 7pp reduction in the statutory rate.
  • Scale back the tax cut: Lawmakers might ultimately decide to scale back the size of the statutory rate reduction to avoid the first and second options.

While the situation is fluid, our expectation is that Congress will ultimately enact a meaningful reduction in the statutory corporate tax rate, potentially down to 25%, but not to 20% or 15%. This could be financed with limited base broadening, the proceeds from profit repatriation, and a redefinition “revenue neutral” as follows:

  • Dynamic scoring is likely to be estimated to generate at least a few and potentially several hundred billion dollars over ten years in revenue, enough to finance perhaps a 5pp reduction in the statutory corporate rate.
  • Technical factors could provide a few hundred billion of additional room for tax cuts, potentially financing another 3pp or 4pp of corporate rate reduction. The main issue in play here is the use of a “current policy” baseline, which assumes that temporary provisions will be extended rather than the traditional method of estimating against a “current law” baseline that assumes tax receipts increase when tax incentives expire.
  • Deemed profit repatriation is likely to provide sufficient revenue for another 1pp of rate reduction.
  • Base broadening measures, like incremental reductions in various corporate tax preferences, might provide sufficient revenue for another 1-2pp of rate reduction

Taken together this would provide sufficient room for a reduction in tax rates for around 10pp of rate reduction, or from 35% to 25%. While the rate could be slightly higher or lower, the range of possible outcomes does not seem very wide; without border adjustment, going much lower than 25% would require more base broadening or deficit expansion than we expect could pass the Senate; going much higher than 25% would result in a rate that is still among the highest in the OECD and we suspect some lawmakers might simply decide that, absent larger changes, tax reform is not worth the trouble.


Q: What ever happened to the infrastructure program?

President Trump proposed during the campaign to generate $1 trillion in new infrastructure investment, but unlike other policy areas where the President has already taken executive action, infrastructure has gotten relatively little attention, for two reasons in our view. First, infrastructure is mainly a financing issue, and spending and tax changes must go through Congress. Second, while congressional Republicans are very focused on tax reform and Obamacare repeal, infrastructure appears to be a lower priority. Congressional Democrats are quite supportive of infrastructure spending, but have shown much less interest in tax incentives aimed at public-private partnerships, as the White House seems to envision.

Our expectation continues to be that a modest infrastructure package will be enacted—we have penciled in a figure of $25 billion per year—and that it is likely to consist mainly if not entirely of tax incentives. If so, the most likely avenue for enactment will be to include it in tax reform legislation, which we expect to pass late this year or in early 2018.

Q: What happens next?

The next major milestone will be the President’s State of the Union Address, scheduled for February 28. This is likely to be followed by the President’s submission of a preliminary budget to Congress sometime in March. We are unsure of what to expect out of the budget next month but, in light of the fact that the nominee for Director of the White House Office of Management and Budget (OMB) awaits confirmation along with several other Administration officials, we expect that the forthcoming budget will probably include minimal detail.

Around this same time, in late March or April, we expect the budget resolution for the coming fiscal year (FY 2018) to be released, though the timing could be delayed if Republican lawmakers are still trying to resolve the Obamacare issue. This will be an important event for two reasons. First, it will demonstrate how congressional Republicans propose to simultaneously eliminate the budget deficit by 2027 (the end of the 10-year budget window Congress uses), cut taxes meaningfully—the Tax Policy Center estimates that the House plan would reduce tax receipts by around $3 trillion over ten years—while preserving Medicare and Social Security spending, which President Trump indicated during the campaign he did not want to cut, and increase defense spending. By contrast, the most recent House-passed budget resolution proposed spending cuts of around $6 trillion (13%) over ten years to reach balance by the end of that period, with half of the savings coming from Medicare savings and the repeal of Obamacare benefits, no reduction in tax revenues, and a modest increase in defense spending. We expect that congressional Republicans will ultimately reach an agreement and pass a budget resolution because it is a necessary step to pass tax reform legislation later this year, but the process is likely to demonstrate the limits of how much fiscal stimulus is possible given other constraints.

Once the FY 2018 budget resolution has been approved by both chambers, the House Ways and Means Committee is likely to move forward on tax reform legislation. This is unlikely to occur before May. At this point, we expect to see the first concrete policy details of tax reform in the House and, as noted earlier, we expect that border adjustment will continue to be in the House proposal at this stage. House passage looks likely by July. The Senate is likely to be on a slower track; the Senate Finance Committee may not produce legislation until the second half of the year, potentially responding to the House product with a proposal of its own. Assuming substantial differences with the House on issues like border adjustment, the two chambers will probably resolve differences in a conference committee, which will agree on one final version subject to a single final vote between the two chambers, though other methods are possible. In Exhibit 3, we show this final step as occurring sometime between October and December, but there is a fair chance that final enactment of tax legislation could slip into early 2018.

Growth vs Valuation

From a growth perspective, it looks like there has been a wholesale increase in sentiment in the US:


This will probably increase economic activity enough to tide the US economy over until the tax cuts actually kick in, so there is probably 18-24 months of growth to run.

The US forward P/E is 17.3x. Which is expensive, but add 10% EPS growth from tax cuts (see post from last month) and it looks cheaper.  Regardless, we need to be selective about what we purchase – avoiding companies that will suffer from a high USD is important.

Don’t forget the risks

A major trade war remains the key risk. I’m sticking with the view that Trump’s diplomacy is the Art of the Deal:  take an extreme position (check), create the appearance of unpredictability (check), then negotiate back to a reasonable position.

If we don’t progress to stage 3 then we have a problem.

The other risk is that the tax cuts don’t get put through in the expected size. This remains a risk to monitor.


The round-up

US small businesses are the key to employment. US consumers are the key to demand.  That is where I’m watching for signs of panic, not the headlines.

Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):

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    • I think those who expect Trump to settle down into something resembling semi-normalcy after a few months on the job are probably going to find that it just doesn’t happen. I’m hoping he does but I’m not really expecting it. This guy just ain’t playing with a full deck.

      • “normal presidency” – ie. pandering to special interests and lobbyists. Nuh-uh, this isn’t what he was elected to do.

        Trump is bringing REAL change – none of that fake stuff like Obama.

      • Gaining power and holding power are very different beasts
        Trump will be well advised to watch his back.
        Steve Bannan famously said this a week ago;
        “Darkness is good, “Dick Cheney. Darth Vader. Satan. That’s power. It only helps us when they get it wrong. When they’re blind to who we are and what we’re doing.”
        Today there is a report that Bannon apointed himself to the National Security Council without Trump’s approval. Wonder who the “they” are that he is referring to?

      • Yes – the kind of real change Damien has mentioned in his article.

        I trust you understand that the kind of swamp-dwelling lobbyists Trump prefers don’t need to lobby – he has drained the swamp straight into his administration and put some of the major denizens of the swamp in charge of his cabinet.

      • Speaking of fake news, Bannon said that a lot longer than a week ago, and you’re missing the context of how he said it, much like Sessions claim the KKK are good guys unless the smoke marijuana.

    • “When will (((fake news))) stop writing shit about Trump and begin to cover him fairly?”

      That sounds like a good time to panic.

      If they begin overlooking atrocities as they did Obama, they’ve failed.

  1. The Traveling Wilbur

    “When should you panic about Donald Trump?”

    Don’t panic Mr Mainwaring. Don’t panic! (They don’t like it up ’em Sir. They don’t like Trump up ’em!)

  2. Saw a short slice of an interview with Trump rejecting the interviewers assertion that American leaders are and have always been Innocent of crimes etc. Powerful and interesting, nobody know this President and I think its healthy.

    As for Nato it has of late been an aggressive (growing) and a threat to stability in Europe so Trump wants it back on its leash.

    About money, Trump has a grand plan, I think it may include debt free money and other big changes.

    • Quite right. And as for Damien’s ‘wishes’? Wake up man! Those aspirations have been in plain view of many if not most of the citizenship of not only the USA but the World for many years. Perhaps the reason that those you are talking about aren’t worried what you are highlighting, is because they see the world for what it tuely is, and it is perhaps YOU that don’t and haven’t……

    • I think there’s a fair chance there might even be something of an economic surge under Trump if he engages in his infrastructure renewal drive. Which will probably end up transferring public assets into private hands.

    • That was an interview with Bill o’Reilly, who remarked that “Putin is a killer. ” Trump rather accurately retorted that “we (the USA) aren’t so innocent.” Of course this got the “America is exceptional and can never be wrong” crowd up in arms. I like Trump for very simple reasons. He recognises that the US is indeed NOT exceptional, as it perhaps once was, and that being exceptional is something that is easy to lose. He’s also not a raving hypocrite on the world stage. When Obama says the US stands for smaller countries not being bullied by bigger ones (he said this years ago and just last week again) i can’t help but to laugh. It is risible.

    • @tonydd – – agree with you it was great to see Trump turn tables on that talking head –
      “America’s done wrong things too”

      Re NATO and the Author’s statement : ” wish that the average American small business owner was more worldly and understood that if you abandon (or even threaten to abandon) NATO allies then you lose trust for decades”

      What a Joke. NATO is the USA ! It was set up by the USA & mainly funded by them. It is another arm of USA policy & EVERYTHING done by NATO is USA inspired. The ONLY thing Donald wants to change is that the Europeans PAY more !
      That’s why NATO has been so belligerent to the Russians. NATO should be scrapped -full stop!

      • It should indeed as a guy who has bait a boatload of taxes to maintain it. You’re a great big vagina with no stake in the NATO game, though. Let’s see how tough you talk when you have no country left as opposed to a diminishing one. Straya is horse-fucked. and you have nothing but your own horrendous greed (and hubris) tho thank for it.

  3. I think – debt fill boom – is not 100% accurate when increased financial deregulation is not a fiscal nor monetary policy approach, more FIRE sector expansion without regard to building a broad wage based floor.

    disheveled…. really don’t see any sort of jobs increases outside the crappy gig sharing thingy…..

  4. A little tip for young Mr Klassen: Do not assume that the average American does not understand. It has a whiff of arrogance.

    The average American, like the average Australian, has a good fundamental grasp of socio-economic issues. It’s hard not to when you’re at the coal face. But they are tired and they are angry. They now place family before country, where once they had trust in both.

    • Yep, agree – the people are tired and angry and were ready to embrace something new. That’s how extremists often rise to power. They haven’t had eight years of “leftist” economic management, there isn’t really any such thing anymore from my perspective. The big parties really just represent neo-liberal and neo-liberal lite. As was always going to be the case, neo-liberal oriented policies have failed to really fire up the economic engines of America and the time was ripe for a “radical” (a very generous description) to rise up.

    • “A little tip for young Mr Klassen: Do not assume that the average American does not understand. It has a whiff of arrogance”
      Condescendingly referring to him as “young” Mr Klassen has a pretty big whiff of arrogance. Pot and kettle eh…

  5. “..they figure that Trump is in a Twitter war with Arnold Swartzenegger..”

    Please tell me this misspelling was a continuation of the ‘Trunbull’ joke and not your own ironic slip up 😀

  6. QE1, QE2 and QE3 were all about supporting Wall st. There can be little doubt that Trump plans what amounts to QE4 but I suspect it will be focused on Main st or maybe even Struggle St, which is where QE2/3 should have been focused.
    It’ll take a strong personality to make this happen, he’ll need to overrule the million economic math models that say he is wrong, but you know what, in the end analysis the Confidence Fairy is a very flighty little Sprite, now if Trump can convince her or even trick her into sprinkling her fairy dust all over the economy, than it’ll all be worth it. Customers need the confidence to buy American, Businesses need the confidence to Invest in the Make side of America, and most importantly fundamentally demand needs to be restored and the beneficiaries of that demand need to be Americas small and medium sized companies. As I sees it America has spent 8 long years spending Trillions of dollars on the wrong things, despite this we have an economy that is returning to strength. Now imagine what’s possible when the Government is aligned with the people and spending it’s dollars in a way that boosts American demand and boosts American confidence.
    Sounds like wishful thinking, Maybe, but deep down I believe that most Americans are optimists, they believe that they can build a better future for themselves, they just need to have the foot lifted from their throat. Furthermore I believe that they believe Trump is the man to do this.
    Sure Trump’s a nutter, but he’s their nutter, he’s in their corner fighting for them, a little like the High school bully, big on beef and short on brains, but damn doesn’t he demand respect.

    • Another thing is that i don’t think he can be bought! It’s not like he needs more money and with his personality and character, he might opt to actually get people to actually appreciate him buy concentrating on helping them and not the corporate world! Who knows with this guy!

      • That’s kinda what I’m also saying. To some extent if he can just return the worlds focus to what’s happening in the US than he’ll take the wind out of China’s sails and that might be all that’s required.
        Trust me I’d never vote for Trump but we’ve got him so it’s time to figure out how to profit from this change.

    • ErmingtonPlumbingMEMBER

      “I suspect it will be focused on Main st or maybe even Struggle St, which is where QE2/3 should have been focused.”

      I wouldn’t have expected such naivety from you Bob,…I mean Trumps going to be good for Struggle street!,. Really?

      “they just need to have the foot lifted from their throat.”

      Sure,… but that would require Trump to put his Boot on the throat of the Wall Street status quo, do you teally believe he is going to? And I haven’t seen Trump call on any Michael Hudson types to step up and offer any real kind of alternative narrative, just more of the same,…Debt.


      • @EP I wouldn’t have expected such naivety from you Bob,…I mean Trumps going to be good for Struggle street!,. Really?
        It’s not often that anyone calls me naive, so I take it as a kinda complement, for me the lies are all to often completely transparent, as in: that’s never going to work, but they do it anyway, so I take my position accordingly and wow look at that I made a profit. With Trump I’m not so certain that these simple financial games will be as rewarding as they have been to date, which is OK with me. IF value can be returned to Manufacturing than I’ll also return to real product design, I’ve no deep love for financial engineering, give me real world, real product engineering any day, but it needs to be profitable.
        That’s why I’m saying that the key is Confidence and restoring robust demand, especially restoring demand for new highly differentiated products. It’s the consumers belief that they absolutely need that new fancy thingy which drives differentiated demand AND delivers outsized manufacturing profits. These are profits which neither Japan nor China nor for that matter Europe can tap into, they simply can’t design the right product to satiate demand because they’re not drinking the kool-aid. yeah it’s a circular argument but so is life…in the end we’re all dead, but for now we have a game to play, so I’m getting my game face on.

    • China-Bob, you seem to be suffering from self-deception just like every other Trump supporter.
      Trumps raison d’etre is to enrich himself and become the richest man in the world.
      He has no morales, and has been living in a rich bubble for his whole life so is completely out of touch with reality.
      China-Bob as a Trump supporter are in in the deplorable half, or the other half?

      • Why does it have ot be binary?

        Not supporting those that opose Trump is not automaically support for Trump.
        Goals do not justify the means anti-Trump hysterical snowflakes are using. Simple as that.
        Can’t fight an idiot with greater idiocy.

      • @ jdliveuk
        “Trumps raison d’etre is to enrich himself and become the richest man in the world.
        He has no morales, and has been living in a rich bubble for his whole life so is completely out of touch with reality.”

        What nonsense – You have all this of course on “good” authority ? Have you met him ? Utterly silly comments.

  7. I don’t think he wants money – he has oodles of that. He said in an interveiw referring to that context “I believe it’s the hunt” and that money was just a way to keep score.

    His motivation is POWER.

  8. TailorTrashMEMBER

    Settle down folks ……Do I detect the tiniest bit of questioning and doubt creeping in here that maybe just maybe Trump is just what the US needs at this point in its decline and malaise to shake up their marbles ……as the American guy said on 4 corners last night “Trump promised to break some eggs ….and break some eggs he is doing ” . We need to get with the mainstream media programme and rubbish him at every turn ……..after all he is not our president …….

    • Well put it this way, he hasn’t nuked anyone yet for insulting his hair, the U.S army hasn’t yet goose-stepped into Mexico nor has he yet ordered copious amounts of Zyklon B to treat Muslims.

      In other words, what was being asserted as the litmus test of credibility for many commentators, pundits and blog editors hasn’t eventuated. This has meant the credibility of said commentators, pundits and editors is zero, or even negative when one considers the character assassination the Trump has gone through.

      Thank goodness he’s a straight white man, every other class of person would have folded by now

  9. The panic about Donald Trump will likely begin in the next 18 months when he is blamed for the demographic downturn that will run contrary to any expansion plans. Hopefully Trump will expand sufficiently to avoid the downturn…but that is unlikely.

  10. One for the gossip mags: I see the ratings for Mr Trump’s pre-super bowl interview are in and they were lower than for any of Mr Obama’s pre-super bowl interviews (can you imagine the outrage if any PM tried to give a formal interview before the AFL or NRL grand finals…Americans are weird).

    Does it matter? No, of course not. But I reckon it will be yet another bur under Mr Trump’s saddle.


    Now would be a perfect time for Arnie to point out that it is Barry rather than Donald who is the real “ratings machine”. (of course all of the nonsense between Mr Trump and Mr Schwarzenegger is great promo for the tv show that both still are involved in).