What’s being proposed?

So, let’s look at the big proposals that President Trump wants to put forward. His campaign proposals ranged from balancing the budget to bringing in a host of very favorable economic decisions from Capitol Hill that look to increase both business activity and personal consumption. There are seven major sets of initiatives on his campaign website. They include:

• U.S. – China trade relations
• Protecting second amendment rights
• Immigration reform
• A border wall between the U.S. and Mexico
• Veteran’s administration reform
• Health care reform
• Tax reform

The estimates for the approximate cost of the president’s vast array of plans is anywhere between $10 trillion to $15 trillion dollars over the next 10 years. In large part, that money is expected to come from increasing our U.S. debt by those trillions of dollars over the next decade. Currently, the U.S. people are holding $14 trillion of our approximate $20 trillion of U.S. debt. If the proposed costs are as expected and we need to fund those proposals by issuing new debt, then the total U.S. debt that we the American people would hold could be an estimated $36 trillion by the year 2026.

(We understand that these multi-trillion dollar figures are estimates that we read and see on a variety of different news sites. Furthermore, we understand the bipartisan nature of calculating these numbers. Staunch Republican supporters have a different view of what the total cost could be versus those who have a democratic view of the U.S. economy. As we try to figure out what is best for our country’s economic picture, we are not taking a Republican or Democratic stance in this article.)

Tax reform’s economic effect

The most controversial and most expensive proposed reforms that the administration hopes are put through Congress are the individual and business tax reforms. If we do indeed end up getting these reforms, there are many on Wall Street that would be delighted. Let’s say you’re the shareholder of a publicly traded company and the company’s tax bill drops by millions of dollars. That is new found profit that can be used to do a variety of things to help move your company forward. Those extra profit dollars, when translated back into a stock price, should increase many stocks that would be favorably impacted by some form of tax reform.

The economic thought on the individual side of tax reform is that by decreasing individual taxes, there would be more money to spend and push forward our consumption based economic model here in the U.S. So, with this very important tax reform, the questions remain. What exactly could be expected in terms of economic benefits if these tax reductions are put in place? Would businesses really invest those dollars into things that would create new jobs? Or, would they just increase their cash hoard or buy back additional shares of their own stock? Would individuals savings thousands of dollars in taxes increase their consumption? Or, would they just add those tax dollars to a savings account under their mattresses?

The skeptics of tax reform don’t believe that we are going to see a lot of economic movement if we implement these changes. The Trump Administration expects to see massive economic growth with these changes in an effort to increase our annual growth rate from a paltry sub-two percent rate to a three or four percent annual growth rate. President Trump is right that if the U.S. economy can grow by three or four percent, the economic benefits would be felt across all aspects of the U.S. economy and the net effect to our U.S. debt would go way down. Some Republicans hope that we would have so much economic growth from these tax reforms that it would pay for itself and help us pay down the U.S. debt at the same time! The real problem is that no one knows for sure.

Market outlook

As we sit here in the mid-summer months, we have two different views of what is happening with the U.S. economy as expressed by:

1. The stock market
2. The bond market

The stock market is making new all-time highs seemingly on a weekly basis. In large part, this is being led by big companies like Apple, Amazon and Google that are transforming our old economy by integrating technological forces to move us forward.

At the same time, the bond market is telling a very different story. Let’s start by looking at the U.S. 10 Year Treasury, which is the bellwether for gauging most interest rates. At the start of 2017, the U.S. 10 Year Treasury was right around 2.5%. It had gone up substantially since the market transitioned from a likely Hillary Clinton win to a surprising Donald Trump election result in November 2016. At that time, interest rates went from 1.5% all the way up to 2.5% on the U.S. 10 Year Treasury which was startling. It went up in anticipation of better economic times ahead and all of the reforms we discussed earlier in this article.

However, slowly month after month, the bond market is discounting President Trump’s agenda from coming to fruition. The U.S. 10 Year Treasury has slid down to right around 2.1% suggesting that some of these reforms may not happen and that would be a negative for the U.S. economy. Meanwhile, the stock market is at all-time highs, believing perhaps, that we don’t need any government intervention to help our U.S economic trajectory. We don’t know if either the stock market or the bond market is correct here, but we are watching this extremely closely.

Now what?

So, in conclusion, what do you do here? Stay vigilant! We are especially curious of the Federal Reserve raising interest rates on the short side while the U.S. 10 Year Treasury falls. If the short side rises and the long side falls, that flattens out the yield curve. If the yield curve goes flat, we would view that with extreme caution much like we did when we saw this in 2007. So, be on the lookout for further action in moving President Trump’s agenda forward because that is certainly going to have an impact on bond yields, stock prices and the economic expectations of tomorrow.

Michael Carlin, AIF