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posted on 25 March 2017

Fade To Black

Written by , Clarity Financial

One thing you can't take away from WallStreet is the ability to "spin" a bad news event into a "positive" for the market.

Remember when "A Trump Election Will Crash The Market?"

But on election night, as the impossible became possible, Wall Street's view was immediately spun into "Trumponomics Is The Revival Of Reaganism." Of course, this spin has been the fuel for the post-election surge in "infrastructure" related investments.

Over the last three years, as I have repeatedly documented, the "Affordable Care Act" has caused health care premiums to skyrocket which, along with homeowners equivalent rent, has been the primary source of inflationary pressures (read this). Repealing the ACA, along with the underlying taxes and mandates, was a cornerstone of the current administration's plans and a much-needed source of relief for Americans being impacted by spiraling costs.

However, on Friday, it became clear the ACA replacement, the "American Health Care Act," did not have the votes to pass and was pulled by Speaker Paul Ryan and tabled. While the "AHCA" plan was really not much better than the "ACA," it did relieve American's from the mandate to buy insurance. The death of the AHCA means the ACA remains for now along with the mandate to buy insurance and higher costs.

Immediately Wall Street spun this very negative news into the "positive" as noted by Margaret Patel via Wells Fargo Asset Management:

"It looked like the market was worried that the Trump agenda would get completely bogged down in the healthcare issue, and now that they've taken the healthcare issue off the table, I think the market is more optimistic that they can do other things that are more doable that are not so complicated, such as regulatory reform and lowering taxes."

Here's the problem for investors and the economy.

"Ignoring the fact that work on tax reform in earnest won't start for 6-8 weeks as House Ways and Means member Merchant said moments ago, and may not even take place until fiscal 2018 (after August), the reality is that since Obamacare and tax reform are both parts of the Reconciliation process, as a result of not freeing up hundreds of billions from the deficit that the CBO estimated repealing Obamacare would do, it means that Trump's tax cuts have been hobbled - by as much as $500 billion - before even starting.

Furthermore, with the Freedom Caucus flexing its muscle and openly defying Trump, another major headache for Trump's tax reform is that the Border Adjustment Tax - an aspect of the reform that the Caucus has been vocally against - is likely off the table. And since BAT was expected to generate over $1 trillion in government revenues, it means that a matched amount in tax cuts is also now off the table.

In summary, between Obamacare repeal and BAT being scrapped, roughly $1.5 trillion in budget "buffers" are wiped out."

Furthermore, from Axios:

  • We now know that Congressional Republicans are willing to buck Trump and leadership on big-ticket legislative items.

  • Republicans will need to keep working on healthcare reform, even though Trump says that he's done with it. They've campaigned for years on killing Obamacare, and can't head into the mid-terms without giving it another go. Particularly when they keep insisting that the current scheme is collapsing?

  • CBO said that the Republican healthcare bill would shrink long-term budget deficits by hundreds of billions of dollars. Without it, filling the tax revenue hole becomes harder.

  • Sean Spicer today said repeatedly that Trump had talked to "everyone" and listened to "all" ideas, which reflects zero consideration of Congressional Democrats. If such sentiment persists it just raises the degree of difficulty for tax reform, particularly if the White House doesn't change its position on keeping corporate tax reform tied to personal tax reform.

With the government currently at the "debt ceiling limit," and the June 1st deadline approaching for "extraordinary funding measures," Congress will need to address the FY18 budget resolution before it can act on tax reform. This is necessary to provide the "reconciliation instructions" that allow Republicans to pass tax legislation with only 51 votes in the Senate (and therefore no Democratic support). Reaching an agreement on the FY budget resolution will not be easy; in the past, conservatives have demanded a balanced budget within ten years but this would require endorsing spending cuts (in non-binding form) that some centrist Republicans might oppose along with the BAT.

Given this backdrop, tax reform will probably not begin to move through the legislative process until after June at the earliest. Of course, while Wall Street believes "tax reform" will be a much easier process than repealing health care, the reality is it could be just as tough as government entitlement programs, funding for Planned Parenthood, and other programs central to the Democrats, and some left-leaning Republicans, come under attack.

For the markets, which have ramped up since the election on "hopes" of a quick implementation of reforms under the new Administration, the risk of disappointment is running high. Or, as Jerry Reed once sang in "East Bound and Down:"

"We got a long way to go and short time to get there."

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