Macro Trends/Forecasts

Jeff Miller

"The Man Who Called Dow 20,000" --CNBC

The $2 Trillion Blowup and Why It Matters

A month ago, I reported on a warm session between Democratic leaders and President Trump.  They had reached agreement in principle on the outline of a major infrastructure bill with a price tag of $2 trillion.  The only thing missing was how to fund it!

I expressed skepticism.

A planned follow up session this week lasted less than ten minutes, leaving the proposal dead in the water.  This is important for the economy and also influences stock selections.

The Need for Infrastructure Improvements

During the great recession government at all levels had less revenue and greater social service needs. Budgets were under great pressure.  Across the board staff cuts were common.  Employment data showed government as a drag for years.  Schools saw increases in class size. The employment pressure covered a wide range of critical services, usually creating delays and (arguably) increasing risks.

One of the easiest things for a government to cut is the maintenance budget.  This may meet the short-term need, but it is costly in the long run.

Today is the anniversary of my father’s birth.  He was a star in the foundry business, taking a failing plant and turning it around.  He had three rules.  The first was to take time out each week to perform maintenance. (The other two?  Don’t permit a high scrap level.  Slow down and do it right. And don’t cave in to the union).

As a nation we have violated the maintenance rule for years.  The cost is mounting.

The longer we delay, the more it will cost. Here is a chart of the growing gap.

Here are the key areas of need.

The Economic Consequences

The funding gap has clear economic consequences, partly due to misallocation of spending.

An infrastructure program would also stimulate additional private spending.  While no funding plan was agreed upon, the President’s approach has been to spread the cost over about ten years and require local government participation. This could take many forms, including public private partnerships.

The Broader Implications

Infrastructure needs have widespread support and bipartisan agreement.  Inability to make policy on this issue implies a virtual standstill for government.  There seems to be little hope.  The President wants an end to Congressional investigations. As I pointed out right after the mid-term election result was known, the investigation season was just starting.  House Committee Chairs now have subpoena power and they are using it.  If this oversight clash is tied to policymaking, we must consider the likely implications for markets and investors.

  1. Debt limit increases.  These will not be passed without bipartisan support.  The current timeline shows the ability to stretch things out until August or so.  Markets have reacted poorly to this situation in the past.  Credit agencies threaten to lower the US ratings.
  2. Another government shutdown.  There was a clear economic effect from the last one along with a lot of personal and financial stress for affected employees.
  3. A budget.  Any new initiatives or spending will be on hold.  The days of sequestration could return.  This would pressure defense stocks, despite the increasing tension with Iran.  Forget about needed upgrades to computer and security systems.
  4. Immigration policy has increased the number of cases in the system as well as the delays.  A bipartisan plan is needed.
  5. Policy to protect future elections is essential.  It does not require agreement about what happened or who was at fault in the past. It requires attention to prevention.
  6. NAFTA 2.0 may not pass the House.  This is extremely important for the economies of North America.

And that list is just a start, including only things that might have been expected to happen a few weeks ago.  The President’s diplomatic powers are greatly weakened when the US government seems crippled.

Some White House advisers suggested that the Administration will continue to work on some policy matters.  I hope that is accurate.  If not, we must all start adjusting our investment positions to deal with the consequences.

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Jeff Miller provides Economic Analysis as well as Market Forecasts as one of the original contributing analysts at FATRADER. A quantitative modeling expert and former university professor who is the #1 Economics contributor at Seeking Alpha, Jeff is regarded as an expert on economics, market reaction to news events, and computer-based trading.
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