THE DAILY EDGE (28 March 2017)

POLITICS, POLITICS!

Too much of it. Sorry but it’s everywhere now:

• Tax Code Becomes Next Fight for Republicans After a battle within the Republican party over its health-care bill, the GOP plans on moving on to something simpler: rewriting the U.S. tax code. But it might be heading right into another minefield.

• After failing with bluster, Trump could try politics Tax reform may be simpler than healthcare but it is not simple

• The Next Clash Emerges: Trump-Ryan Deeply Divided Over Tax ‘Cuts’

• Congress to Battle Over Spending After Failed Health Bill President Trump and GOP leaders face stubborn opposition in both parties that increases Republicans’ worries that they will need more Democratic support than expected to avert a government shutdown.

• Did Markets Overprice the Trump Agenda? Economists Thought So A recent survey shows growing doubts about whether Donald Trump can execute his policy vision.

• Former Fed Official Warns Politics Poses Threat to Recovery As global markets reel after the failure of the U.S. health-care bill, a former Federal Reserve official is warning that political issues threaten the central bank’s ability to maintain a sustainable recovery.

• In Health-Care Failure, a Lesson on Treating Politics Like Business In business, deals usually live or die because of money. That’s not so in politics, with implications across the Trump administration, Greg Ip writes.

• No, Obamacare Isn’t Exploding

• U.S. Travel Industry Fears a ‘Lost Decade’ Under Trump Bans, detentions, vetting, and restrictions on electronic devices are damaging a $250 billion sector of the American economy.

• Forget Trump v. Congress. The Real Political Danger’s Still in Europe Politics has been a big driver of markets, but investors may be worrying about the wrong politics. Much less attention has been paid to the biggest political threat on the horizon for investors: Italy.

• Time to Redo the Math on Tax Reform Prospects

(…) The failed health bill would have made tax reform easier because it created budgetary offsets that made it easier to cut corporate taxes without adding to the deficit. The border tax Republicans have proposed to help pay for tax cuts might also fall by the wayside. (…)

Consider, too, that there are about 15.9 million retail employees versus 12.3 million manufacturing employees. And when it comes to the number of businesses in each industry, the gap is even wider: The Census counts about 910,000 retailing firms in the U.S. versus 227,000 manufacturing firms.

If taxing imports is a no go then paying for the corporate tax cut gets harder. And, while optimists sometimes argue otherwise, cutting taxes without paying for them would be difficult. Fiscally conservative Republicans may balk at voting for a higher budget deficit and demand entitlement cuts instead. Those cuts, in turn, could be a hard sell with swing-district moderates.

If the Republicans can’t agree on what to tax to pay for the cuts then the lower corporate taxes that investors have been betting on may be more modest than expected. To get the win they desperately need, Mr. Trump and Mr. Ryan may decide to set their sights a lot lower. Investors should follow suit.

• According to the next chart, the markets seem to be giving up on US corporate tax cuts. It shows that a broad basket of companies paying the highest tax rates has reversed all of its post-election outperformance and then some. The stock market doesn’t see these firms in a lower-tax regime anytime soon. (The Daily Shot)

Source: @tracyalloway

•   Strategist: Keep Calm, Tax Reform Is On Its Way

(…) Investors, according to Marko Papic, geopolitical strategist with BCA Research, are making too much of the Obamacare issue. Regardless of its failure to be repealed, tax reform is on its way. On Friday, Treasury Secretary Steven Mnuchin reassured Americans that we could still expect “comprehensive” tax reform by August. It’s also worth recalling that, even though he failed to reform health care during his eight years in office, President Bill Clinton still managed to tackle tax reform with the Omnibus Budget Reconciliation Act of 1993.

Increasing the likelihood that tax reform and infrastructure spending can be brought to light is, paradoxically, President Trump’s historically low approval rating. As you can see, he significantly trails the average rating of nine previous presidents during their same weeks in office. Congress’ job approval fares even worse at 28 percent, as of February.

What this means is the sound of the clock ticking is deafening. Midterm elections are less than 20 months away, and Trump could very well be a one-term president. According to Marko, this gives Trump tremendous political capital among those who share his vision and urgently wish to pass legislation toward that end.

Trump is seeking high growth now, not in 2020 or 2024, and I think it’s a mistake for investors to dismiss him,” Marko said, adding that the president’s goal of 4 percent GDP growth is more than attainable. But how?

• Trump’s approval hits a new low of 36 percent — but that’s not the bad news Less-volatile weekly polling shows declines with groups the GOP needs.

In the end, it will all come down to earnings, inflation and interest rates…Q1 earnings season begins soon.

‘Project Scalpel’: Behind Big Banks’ Plan to Save $2 Billion After cutting more than $40 billion of costs since the financial crisis, big banks are considering ways to slash still more from their back-office budgets.

(…) While prospects for revenue growth at banks have brightened since the election, a handful of the biggest firms are considering ways to slash still more from their back-office budgets. One effort, dubbed “Project Scalpel,” is aimed at cutting the administrative and operational costs involved with processing stock and bond transactions after a trade is struck, according to people familiar with the discussions.

Talks around this effort are at an early stage but so far have included a number of banks, such as Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp., the people said. If the idea materializes, it could create a joint venture that allows banks to share trade processes and technology. (…)

Now, the processes and systems around these functions have become commoditized. Competing banks have redundant systems handling the same functions. (…)

The six biggest U.S. banks have eliminated more than 100,000 jobs since 2009, while shedding less-profitable business lines and trimming compensation. (…)

European banks including Barclays PLC and Société Générale SA have said they are working with technology providers to outsource and share some trading back-office operations in Europe. (…)

Banks better work on their costs rapidly because their huge commercial real estate loan books are not looking good:

• Manhattan Retail Landlords Offer Unprecedented Giveaways

(…) Tenant-improvement allowances haven’t been typical in the Manhattan retail market. But now the concessions, which can pay for anything from lighting and displays to a complete overhaul, are becoming a key component in some new leases, particularly for large, flagship stores in high-profile areas, such as Madison Avenue and Fifth Avenue, according to Steve Soutendijk, an executive director at brokerage Cushman & Wakefield Inc.

“We’re seeing tenant-improvement and concession packages that retail landlords never, ever contemplated before,” he said. (…)

The rise in costs for retail landlords mirrors trends in other corners of the commercial-property market. Manhattan officelandlords, facing falling rents and heightened competition, took on a record 12 percent of the expense of converting raw space last year, according to Savills Studley. Apartment landlords are offering concessions and paying broker’s fees — a burden typically shouldered by the tenant in New York — to better compete as a glut of new towers gives renters more choices. (…)

China Drifts Into a U.S. Vacuum in Asia

(…) China’s advance is being enabled by a factor that few countries in Asia could have foreseen, not even China itself: an American retreat.

With no obvious alternatives, Beijing is filling a vacuum that is rapidly expanding in the early days of the Trump presidency.

But while China dominates its region with the sheer size of its economy, it struggles to lead—or inspire.

Years in the making, the 12-nation Trans-Pacific Partnership was the core of the Obama administration’s “pivot” to Asia, the product of compromises hammered out in capitals from Tokyo to Canberra, an ambitious—perhaps the last—U.S. effort to shape the destiny of a region that stands at the crossroads of every global trend from fashion to “fintech” and clean energy.

In repudiating that deal, Mr. Trump has empowered China. (…)

Instead of a U.S.-inspired free-trade deal focused on the digital economy, intellectual property, the environment and labor standards—what Hillary Clinton called the “gold standard,” before turning against it as presidential candidate—China is pushing a lower-grade alternative.

Yet, despite the shortcomings of this incremental effort, known as the Regional Comprehensive Economic Partnership, Asian economies are aligning around it because there’s no better deal on the table. (…)

For now, the main danger is that Mr. Obama’s Trans-Pacific Partnership will morph into Mr. Trump’s Trans-Pacific trade war.

Mr. Trump has threatened to impose 45% import tariffs on Chinese imports. If he triggers such an action, the effects will ricochet around the entire Asia-Pacific manufacturing supply chain.

A common view in Asia is that the success that the U.S. did so much to encourage is now feeding a backlash. (…)

Evercore’s Hyman Says China a Mess, Will ‘Blow Up’ at Some Point

(…) “The issue is that debt keeps growing faster than the economy,” in China, Hyman said. “So the economy continues to lever up. Same is true for here. We continue to have debt grow faster than gross domestic product.” (…)

Mexico Autos Output Soars as Trump Administration Settles In Mexico gains considerable regional share as production in the U.S. and Canada sags

(…) Mexico’s vehicle output rose 10% over the first two months of the year compared with January and February 2016, while Canada slipped 9% and the U.S. fell 2.9%, WardsAuto.com said. That tally doesn’t include production of heavier-duty trucks.

Fiat Chrysler’s decision to move production of the Jeep Compass sport-utility vehicle to a Mexican factory from one in the U.S., and Volkswagen’s plans to start output of Audi Q5 luxury SUVs in Mexico, helped fuel the shift. Both auto makers are boosting jobs and investments at American plants amid a focus on building more trucks, but those plans are unlikely to lighten the companies’ dependence on Mexican factories for U.S. sales. (…)