Hedge Fund CIO: “What If The 'Trump Earnings Surge' Was Just An Illusion?”
We bring readers this follow-up note to our earlier quote from the latest Weekend Notes by Eric Peters, CIO of One River Asset Management, as it provides a glimpse into the process of cognitive disappointment many other market participants may soon encounter, once the following key question is asked, and answered: “What happens if Trump can’t cut corporate taxes? What happens if we’ve recalibrated earnings to a future that was just an illusion?”
“How’s he going to cut taxes and make it revenue neutral?” asked the CIO. “How’s he going to do massive infrastructure when we’re so deep in debt?” he continued.
“And why is the yield curve flattening? Why is loan demand declining? Why is consumer confidence at historic highs while retailer stocks are getting demolished?” He paused to catch his breath.
And still panting asked, “What happens if he can’t cut corporate taxes? What happens if we’ve recalibrated earnings to a future that was just an illusion?”
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“Tax reform without tax cuts never works,” said the politico. “Because reform makes 50% of taxpayers winners and 50% losers.” To bribe the losers, you need to slash their taxes. The bigger the reforms, the bigger the required bribes. And Republicans want a massive reform package. “But Trump has no money to bribe the losers unless he generates it through Obamacare repeal and BAT (border adjustment tax).” Obamacare repeal was supposed to create $300bln of bribe money, and BAT would’ve generated another $1trln. But BAT also creates winners and lowers.
“Trump desperately needs the $300bln from Obamacare repeal to pay off the BAT losers, or that policy is dead on arrival,” continued the same politico. “And that is why Ryan told Trump that healthcare reform had to come first.” The Donald, Pence and Bannon all agreed. “But by the time they finished negotiating Obamacare repeal, they only ended up with $100bln. And even that couldn’t pass.” And $100bln isn’t even enough to pay off the BAT losers. So that’s now dead too. “So major tax reform is dead, so is major infrastructure.”
“Most people simply think that Trump can take the deficit higher and solve all of these problems,” said the politico. “But the Byrd Rule prevents any of the kind of plans Trump wants if it increases the deficit over 10yrs, unless he gets 60 Senate votes, which he can’t possibly.”
So slogging through the swamp, shunned by his own party, Trump first turned to the Democrats to do a deal. But for a democrat to deal with Trump is political suicide. So he quickly pivoted and went on the attack.
“His only chance is to beat the Freedom Caucus into submission.”
“But the Freedom Caucus gerrymandered themselves into electoral fortresses,” said the politico.
“They know Trump has a strong Twitter following, but he has limited ability to raise money from big Republican donors. And without money he can’t harm their re-elections.” Deep-pocketed Republicans are supporting the Freedom Caucus and their opposition to Obamacare in its entirety. “The most influential donors are vehemently opposed to the BAT, and they believe that if Trump can’t deliver healthcare reform, he won’t get a BAT deal either.”