Time to Get Serious About U.S. Fiscal Expansion

Time to Get Serious About U.S. Fiscal Expansion

The late-night comics are having a field day, and you can’t really blame them. The events of the last few days in Washington are just so rich with potential comedic content.

Did you hear the one about Trump and ….never mind.

While the optics of the situation are quite juicy for comedians, the issue for the markets is quite real. At current valuations, for equity markets – at least in the U.S. – to sustain themselves or go to the next level, economic fundamentals have to be accelerating and the reflation thesis has to maintain its traction. For that to happen, we need fiscal policy support from the Trump administration.

Nevertheless, the policy support we need has nothing to do with healthcare reform. At the end of the day, while healthcare reform would have been good for Republican political goals, its economic impact would have been marginal at best. To the extent it would have had an impact on growth, it was likely to be consumption-negative and therefore growth-negative as well. The additional income retained through tax cuts for the higher-income quartiles were more likely to be saved and healthcare spending would have gone down from the lower-income quartiles.

U.S. Fiscal Deficit Must Widen

The fact that Republican leaders in the House of Representatives could not generate enough support within their own party to even bring the American Health Care Act (AHCA) to the floor for a vote, in and of itself, really does not endanger the reflation trade.1 That trade is still very much contingent on investments picking up and leading to future growth, without policies hurting robust consumption levels. In other words, the reflation thesis remains contingent on infrastructure spending and tax cuts that are not paid for. That is, the net impact must be that the U.S. fiscal deficit widens, as I have stated previously.

Certainly, all is not lost. While the markets may be lamenting the death of the AHCA, the impact of this outcome on the markets in general and the reflation trade in particular is still unclear. Specifically, a case may be made that the entire Trump economic agenda is in jeopardy as a result of the AHCA’s failure. On the other hand, an equally compelling case may be made that fiscal conservatives in the Republican congress have lost a lot of ground by being seen as obstructionists, and the likelihood of a debt-financed tax cut or infrastructure spending is now more likely to be passed with the help of more moderate Republicans and even some Democrats. We don’t know right now and won’t for a while.

The bottom line is that the AHCA’s failure may be good political theater and provide fodder for late-night comedians and other political pundits, but it does not tell us much about the future of the reflation trade.

The real issue for the markets and the reflation trade was, and still remains, whether a Republican congress will pass economic legislation that leads to fiscal expansion. In my judgment, the probability of that has gone up marginally. But we will find out soon enough.

In the interim, while we are focused on U.S. politics, let us not forget that European and emerging market (EM) economies continue to surprise on the upside and the strength of the dollar is fading. That combination is making European and EM equities quite attractive relative to U.S. stocks.

Want to read more from me? Visit News and Insights from OppenheimerFunds.

DISCLOSURE:

These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.

Amitava Misra

Web Developer at Self (Freelancer)

7 年
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Randy Conone

Craft Capital Management

7 年

We need immediate fiscal CONTRACTION. Cut entitlements, military, and everything else. Goal should be a $1T annual budget.

Matthew G. Tretheway

Experienced Professional & Part Time Soldier

7 年

I'm in shock that the idea of expanding our national debt is being considered. In the long term( and probably not that far down the road now), our national debt cannot peak anymore. It is a financial and economic time bomb and there is now way it will ever get paid off at is current level, never mind adding debt financed tax cuts and a national infrastructure project. Only way possible is for both parties to reach an agreement on the biggest spending and tax reform probably in our nation's history which I cannot see given the partisan atmosphere.

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Benedict J. P. G?tte

Managing Partner | Corporate Finance + M&A | 2x Founder | SFO InvestCommittee | Interests: Health, AI, Quantum, Macro & Markets, Geopolitics

7 年

as the debt ceiling is approaching and a massive deficit in sight, where will the money come from ?

Nasir Uddin Ahmed

Retired banker at worked with American express bank and BRAC bank

7 年

were they casual before!

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