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posted on 27 April 2017

It's Up To Congress

Written by , Clarity Financial

Last Thursday, the market rallied sharply on the back of some “top-notch jawboning" from the newly minted Treasury Secretary, Steve Mnuchin when he stated on CNBC:

“The Trump administration is close to bringing forward major tax reform, and will unveil a plan very soon."

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Despite a complete lack of details, the markets rallied on “hope" once again. After all, it is the “tax cut/reform" bill that is almost entirely behind the optimistic outlook for earnings per share climbing sharply by 2018 to justify current valuations.

However, there are a few hurdles Congressional Republicans will have to deal with as they return to Capitol Hill next week.

First, the “debt ceiling" will be hit on April 28th which will need to be immediately addressed. As I discussed last week with “former Freedom Caucus" member Congressman Ted Poe, it is likely Congress will immediately pass a “One-Week Continuing Resolution" in order to buy time needed to negotiate a “CR" for the rest of the 2017 fiscal year through August.

However, as Congressman Poe points out this negotiation will likely come at a “cost" of funding previous ACA requirements and “Planned Parenthood" which many Congressional Republicans strongly oppose. Also, the issues of “border wall funding" and “immigration" specifically related to the funding of the “deportation task force."

In other words, there is a risk that a one-week CR turns into a full-blown CR as both sides clash over opposing views. Such an outcome will be a significant headwind for the financial markets as the “sequence" of events that need to occur to get to the “promised land" of tax cuts begins to back up.

  1. Debt Ceiling needs to be raised to allow for continuing Governmental operations BEFORE

  2. Healthcare “repeal and replace" bill can be passed next to resolve the imputed tax liabilities and costs which must be done BEFORE

  3. Tax cut/reform bill can be passed to resolve budgetary (revenue) issues BEFORE

  4. Infrastructure spending can be passed.

The reason I say this sequence of events is a potential problem is because there is an EXTREMELY high level of disappointment that can occur EVEN if Congress passes bills approving all of the legislative items above.

Just because Congress approves bills, where they have a healthier voting margin over Democrats, there is only a one*vote majority in the Senate. With a 60-vote requirement in the Senate it is likely that many of these bills will either never pass the Senate, OR will become extremely watered down versions of their original forms.

Bluntly speaking - the possibilities of “repealing and replacing" healthcare with a “really great health care plan," significant “tax reform/cuts" and “infrastructure spending" realistically have very low odds over the next 12-months given the variety of factions within the Republican party.

I agree with Cowen’s Chris Kruger:

“White House’s misconception they have any leverage with Democrats when it’s the opposite, as Congressional Democrats have less than zero incentive to compromise with Trump and Trump needs them to keep govt from shutting down."

This puts the financial markets, which are currently remaining elevated on “hopes" of significant reform at risk of significant potential “repricing risk" in the future.

Having a little “dry powder" makes some sense over the next month until the path forward, or not, becomes more evident.

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