By John Richardson
WHILST some Republicans claim that the House bill to replace the Affordable Care Act goes too far, others have called it “Obamacare lite”.
And unless the Affordable Care Act is replaced, or at least modified, by the end of this year, then the rest of President Trump’s legislative programme for 2017 might well be in jeopardy.
On the link between Obamacare and tax reform, a Chicago Tribune blog post, from a right-leaning commentator, said late last month that the repeal of Obamacare had seemed like a “slam dunk” immediately after the election, but now: The controversy between and among congressional Republicans is now so multifaceted, heated and chaotic that the delay could soon make it far more difficult for the House and Senate to deal with both ACA [the Affordable Care Act) and tax reform.
Let’s assume that this is too pessimistic, though, for those who believe that Obamacare needs reforming. Assuming that a deal on the Affordable Care Act can be reached, thus freeing-up Congress and the President to focus on tax reform, the challenge then becomes finding tax reform that keeps all sides happy. The too and fro debate about whether tax cuts should or should not include a border-adjustment tax is just one example of the tax-reform complexities that are already out there.
The third major policy initiative is the one trillion dollars that President Trump has promised to spend on infrastructure. But as the same blog post wrote: Between the mammoth tax cuts for the rich and a needed, but expensive, build-up of the military, there aren’t funds to pay for a trillion-dollar infrastructure plan. When you throw health-care reform into the mix, political bandwidth to take on infrastructure spending disappears.
Politico rates the chance of reform of Obamacare happening in any timeframe at all at only 50%.
On tax reform, it rates the chances of a major overhaul at 25% and a smaller package at 50%. And again this is not ust this year, but at any point during the Trump administration. And like the Chicago Tribune, it sees tax reform as linked to Obamacare:
Repealing and replacing Obamacare is the key to what a tax deal looks like because there are many taxes associated with the health care law. Without the health overhaul, it’s hard to see a major tax reform package happening.
On lots of money being spent on infrastructure, it sees just 10% long-term chance of this occurring because:
Infrastructure might be a major priority for Trump, but it’s not as high on the agenda for congressional Republicans, many of whom blasted the Obama stimulus programme as a waste of money. Republicans are also reluctant to approve a trillion-dollar infrastructure package without a plan to pay for it, which Trump hasn’t done.
There was some speculation Trump might work with Democrats to pass such a package, but relations between Trump and congressional Democrats have quickly devolved to the point where it’s now hard to see that happening. Democrats are going to want real dollars, not tax credits, behind any plan they would support.
In addition, the more distracted the President becomes by issues relating to his Twitter activity the more difficult it might become for him to craft the deals he needs to get his legislative programme off the ground – at the very least in 2017. My base case is thus that there will be no significant progress on tax reform and infrastructure spending during the rest of this year.
Oil Prices and Other Commodities under Threat
So we need scenarios to evaluate what could happen to the post-Trump election bounce that has occurred in commodity and equity markets. As far as equities are concerned, Goldman Sachs in late February talked about the “huge role” that promised tax cuts and infrastructure spending had played in the then 10% rise in the S&P 500 since 8 November.
If stocks went down on the consensus waking up a stalling of the Trump agenda in 2017, then of course there would be a downside for commodities.
And specifically on oil prices, as I discussed last Friday, hedge funds on February 24 had set a new record for net long positions in WTI crude futures. This followed the previous record, set in early February, for long speculation as a whole in the oil markets.
A great deal of this money could head in the opposite direction in a tiny fraction of an algorithmic-driven trading second if the majority view switches to accepting that President Trump’ main policy agenda will not go forward in 2017.
Add to this today’s high levels of crude inventories in the US on higher shale—oil production and talk of oil-price stability around $50/bb for the rest of this year seems a great deal premature.
The other element of the story is China. As I discussed on Monday, lower credit growth in 2017 seems highly likely as President Xi Jinping is now in the political position to once again put his foot down the reform accelerator. Take away at least a few percentage points of Chinese economic growth, from last year’s level, and this would again exert more downward pressure on crude prices.