In Brief
- Former DNC head, Donna Brazile, will publish a new book this week describing exactly how Hillary Clinton rigged the nomination process to defeat Bernie Sanders. This revelation will heat up an already brutal war between the newer Progressive-wing and Clinton-Mainstream-Labor -wing of the Democratic Party.
- President Trump is on critically important 12-day trip to Asia focusing on four-things: 1. assistance from China on reining in N Korea, 2. negotiating stronger trade deals throughout the region, 3. strengthening defense cooperation with allies and 4. demonstrating, by attendance at the East Asia Summit, the US commitment to East and SE Asia.
- If things go as planned the Republicans will announced a revised version of their tax reform plan early this week. It will address some of the initial complaints but cannot address all of them. So far R unity in the House and Senate have both been strong but the lobbying will be tense and heated. The bill will change quite a few times. It is likely to pass by early 2018 and perhaps as early as Christmas.
- Watch the Tuesday elections in Virginia for some early clues about the 2018 Congressional races. The Ds should win in VA easily, as well as NJ, but the races in VA have gotten far closer than most anticipated.
In-Depth
What’s Important
Trump’s Asia Trip
President Trump’s Asia trip has four major purposes, all important.
The first is to get China’s help with de-nuclearizing N Korea. Short of war, only China can accomplish this as about 90% of N Korea’s trade is with China, including many essential goods, like oil. It is a carrot and stick game for China. Rein in N Korea or the US does one of several things to China:
- Attack N Korea on their border,
- The US rings China and N Korea with nuclear armed US allies, or
- Starts a major trade war with China…China is singlehandedly responsible for more than one-half of the US trade deficit. China in effect will have to pick its poison and the idea President Xi is in the driver’s seat is not the case. The Middle Kingdom is flirting with a dramatic economic slowdown and both Xi and Trump know it.
The second priority is to bolster US defense relationships with Japan, S Korea, Vietnam and the Philippines. These all constrain China whose recent policy to ignore International Law in the East and South China Seas has driven the East Asian littoral countries further into alliance with the US. China has created its own containment policy with its aggressiveness.
Third is to negotiate more balanced trade deals with all in the region and the last is to attend the East Asian Summit on the last full day of the trip to demonstrate to East Asia that it is a major US priority.
Elections
2017 Elections
The Virginia Governor’s race and the 100 races for the Virginia House of Delegates on Tuesday are likely to be quite important because they may well be predictive of the 2018 Congressional races nationwide.
Virginia has been trending heavily toward the Democrats with Clinton beating Trump there by almost 6%. Northern Virginia has become D territory because of all the growth around DC in government jobs and contracts.
Ralph Northam, the D candidate for Governor, had a comfortable 7-8-point lead until the last few weeks over Ed Gillespie, the R candidate. That lead has disappeared into the polling margin of error.
Gillespie now has momentum but could still fall short of victory.
One election doesn’t usually tell us a whole lot as political blunders can defeat someone who should win and several blatantly racist moves by Northam have hurt him. But there are also 100 legislative races to watch.
The Rs now hold a 64-36 margin in the House of Delegates. If Virginia is moving permanently toward the Ds they should gain 5-10 seats this year. Failing that, the Rs can claim victory.
Turnout is also important as Democrats are counting on anger with Trump to bring out large numbers of voters. If that does not occur on the doorstep of DC, the Democratic model for 2018 election victories is in question.
In NJ the Democrats should win easily.
We’ll follow the outcomes with interest.
Major Legislation and Policies
Tax Reform
The Republican tax bill moved an important step closer to success with the draft bill released by the House Ways and Means Committee. The bill is so important for the Republicans it is likely to pass, but there are too major unknowns. The first is …” what will be in the final bill?” Second…” when will it pass”.
Broad outlines and some detail exist for both questions, but much is unknown.
Formal discussion in the House committee starts Monday with the committee chairman already saying he will announce changes then.
The Senate Finance Committee will also produce a bill which will be at least somewhat different than the House bill.
Both Houses will vote on their separate bills, probably later this year but it could slip into 2018.
The two bills will then go to a House-Senate Conference Committee for negotiation as both Houses must pass the same bill for the President to sign it into law.
Many difficult issues remain to resolve but the Republicans almost all believe they MUST pass a tax bill to get back into the good-graces of their own voters. Nevertheless, there is a great deal of wheeling and dealing and horse-trading underway. You can count on grinding your teeth repeatedly as you will not like the process or some of the decisions. But, remember that there are over 100 million households in the country, most with different needs and priorities than yours.
Many lobbyists are screaming to get their loopholes and tax breaks back. Some will succeed and some fail.
As I have said before, don’t get too exercised about specific provisions until you see what passes and see the effect of all the changes on your taxes. Some changes will raise your taxes and others cut them.
The total bill and all its effects are what counts. But there are additional crucial things to consider for high earners whose taxes may well go up because of the loss of some deductions. The Alternation Minimum Tax, in the past, already caused most high earners to lose those deductions but it is being eliminated. The pass-through income tax rates for S-corps, LLCs, etc. will be taxed at a max of 25%, and the economy is likely to grow faster along with asset prices for at least a few years resulting in higher investment income. Many…many…moving parts. Taking ANY single change in isolation is unwise.
Stay tuned but don’t hold your breath as changes will come for many weeks.
Trump and The White House
The Republican civil war?
The mainstream press has run story after story about a revolt in the Republican Party led by Steve Bannon. Let’s but that in perspective with some hard numbers from both parties.
Compare… in 2013, the year after the last presidential election, at the same point in the electoral process the Republicans had about 100 non-incumbent House members running for House seats. At the same point this year they have about 70. That is not even vaguely suggestive of a revolt or civil war in the Party.
By contrast, in 2013, the Democrats had about 80. This year they have 400…a five-fold increase. That is a party with an internal war, one that will get worse with Donna’s Brazile’s book at this week documenting how HRC high-jacked the D nomination process.
Democrats on the Democrats
This is a new approach the analyzing the situations in the two parties. For both the Democrats and, separately, the Republicans these sections will report what party official, politicians, or partisan analysts are saying about their own party…WITH WHICH I AGREE. For example, many Democrats recognize the internal battle going on now in the party between the progressive wing and the mainstream wing. Almost all Republicans recognize the internal conflicts between the Trump wing, the Never Trumpers, the Bannon alt-right, and with the Tea Party folks.
DNC chair details how Clinton rigged Democratic nomination.
Donna Brazile, a long-time Democratic leader and spokesperson and head of the DNC during last year’s Presidential election, is releasing a book this week that describes among other things how Hillary Clinton took financial control of the DNC. She used that control to assure her nomination and the defeat of Bernie Sanders and others.
The vehicle allowing Clinton to gain control was President Obama’s virtual bankrupting of the DNC.
As Brazile says, this was unethical of Clinton, and the revelations have set off arguments about whether it was illegal. We’ll have to see where that goes. The takeover is a perversion of the US electoral process and we are almost sure to see congressional investigations within both houses of Congress as well as in the Democratic Party.
This will acerbate the already strident civil war in the Party between the emerging Progressive-wing and the Mainstream-Clinton-Labor-wing.
All of Brazile’s motivations for writing this book will likely never be known but two appear transparent. First, she wanted to tell her story and make some money. She and others in the party also appear to want Hillary out of the picture for 2018 and 2020.
Forecasts
There are no changes this week
Political Forecasts – Elections
- The chance the Rs will lose at least a few seats in the 2018 House elections is 80 to 90 percent.
- The chance the Rs will lose their 241-194 House majority in 2018 is 10 to 20 percent.
- The chance the Republicans will still control the Senate after next year’s elections is 90 to 95%.
- The chance the Ds lose three or more of their 48 Senate seats in ’18 is 85 to 90 percent. [Up from 2 or more Senate seat losses previously.] The change is due to increased likelihood of major tax cuts and reform.
- The chance that Donald Trump will be the 202o R nominee is 90 to 95 percent.
- The chance that Trump will win a 2nd term is 80 to 85 percent.
Policy and Legislative Forecasts
- There is an 80-90% probability the Congress will pass and Trump sign major tax reform and tax cuts for most by fall 2018. [Up from 70-80%] The change is due to support for budget resolution, a key pre-cursor of passing tax package with just 51 votes.
- There is a 50-50 probability that Obamacare Repeal and Replace will be passed and become law by fall 2018. [This issue will not go away as Obamacare is self-destructing with high premiums, increasing state costs and insurance company losses.]
Media
Don’t forget the Tuchfarber 30 Day test—when you get upset about something in the news ask if it is likely to be IMPORTANT IN 30 days or soOnly seldom will it be so and you can usually ignore it.
China’s Politics and Economy
Economic Change
China’s politics and economy are so important to the global economy and the general situation around the globe I am adding a regular section on it to the newsletter. The section will periodically include detailed articles on specific things but will also list each week evidence that suggest an economic soft landing for China—a controlled slowdown to “normal” economic growth levels—or a hard-landing—a more rapid, extended and dangerous bursting of China’s asset bubbles.
I WILL ADD AND DELETE ITEMS TO THIS SECTION AS RELEVANCE DICTATES. “NEW” ANALYSES WILL BE SO LABELLED AND REVISED SECTIONS WILL BE LABELLED “CHANGED”.
New or Major Evidence for Soft Landing
- The WSJ reports that Chinese regulators removed emergency measures they put on the Chinese stock exchanges in support of equities following crashes in 2015 and 2016. This is a sign of confidence and stability.
- The political leadership, including President Xi, and the financial regulators have promised to rein in excessive speculation and credit growth. [We’ve been promised that for many years and the debt has continued to sky.]
New or Major Evidence for Hard Landing
- NEW—China’s totalitarian regime is now taking control, over instant messaging apps, video streaming, and new content platforms in China. The economy and society are being more and more shut-down. Ask yourself…is this a sign of a healthy economy or society. What if the US or Germany were doing this? Think about that.
- For years the Chinese government has set very specific economic growth goals …7%, 10%…and then managed the economy, mostly through lending/debt… to meet those goals. It has stimulated the economy with $3-4T in debt each year since the 2008-9 Great Recession with total debt currently over $35T…300% of GDP. Now that President Xi has consolidated virtually all power in his hands, Xi’s senior economic advisor has announced in a press conference, a shift from quantity targets for growth to quality growth…” growth with quality, efficiency and dynamism” …said Yang Weimin. TRANSLATED THAT MEANS SLOWER GROWTH AND LESS DEBT CREATION. But, note that less debt creation doesn’t solve the already staggering debt problem.
- China’s central bank chief, Zhou Xiaochuan, warned repeatedly over the last week that China faces the risk of a “Minsky Moment”. Named after economist Hyman Minsky, such an event is a sudden market sell-off driven by an over-leveraged asset. In other words, an asset like real estate, stocks, or commodities whose prices are much too high, often because of speculation. It is remarkable that Zhou made his comment during the 19th Party Congress where the past and future successes of China are to be celebrated. Zhou cites corporate debt in China being too high corporate and household debt rising very fast.
- In an under-reported Chinese initiative, the government is demanding partial ownership and substantial control of China’s private companies, especially the big successful ones. That is almost surely a prelude to sharing profits with the government. China already owns and runs most of the older major companies in the country and fears the wealth being gained by Jack Ma of Alibaba and other tycoons. One simple way to understand what is happening is to imagine the US government telling Apple that it is “buying” into the company, will have multiple seats on the board, will name some managers, will share in the profits and will do what is best for the country, not the company or its shareholders. Governments have proven to be bad managers and terrible predictors of winners and losers.
- The WSJ headlines…” Consumer Loans Fuel China Housing”. Short-term consumer loans have grown at an astounding 100% rate in the last year but not for retail spending whose growth is little changed. Rather it is for investments in housing extending the housing bubble and adding more debt.
- Party Secretary/President XI continues to purge opponents and those offering him only weak support so as to have almost complete control of the levers of power when the economic/financial crisis starts to bite. On Oct 18 every 5-year Party Congress starts. Expect major news at the end of it and for months to come.
- S&P has joined Moody’s and Fitch in downgrading China’s debt because of excessive and growing levels of that debt.
- Two quotes from separate stories in a recent WSJ accurately describe where things are with China’s economy. “China’s economic mandarins are unlikely to permit an overly sharp slowdown in investment that could tank commodity markets right ahead of the twice-a decade Communist Party leadership shuffle kicking-off in mid-October.” “An all-powerful leadership can likely keep the forces of disruption at bay for some time. But they haven’t disappeared…”
- A WSJ story reads— “…China has been reeling in some of its biggest deal makers on mounting concerns about capital leaving the country and debt loads posing a risk to its economy.”
- The WSJ’s Heard on the Street [Sept 8] wrote…” This doesn’t mean China’s bad loan problem has gone away, it just has been swept under a convenient nearby rug.”
- WSJ article points out that the yield curve in China has flattened—the prices of 3-year bonds are essentially the same as 10-year bonds. Such flattening is often, but not always, indicative of an economic slowdown on the horizon.
- Weeks ago, the IMF raised its projections for Chinese growth but sternly warned that rapidly increasing Chinese debt will hit 300% by 2022. Others like the Institute for International Finance [IIF} asserted in June that Chinese debt already totaled over 300% of GDP, a high percentage for a developing country.
- China is now officially and publicly instructing its companies that they must stop foreign investments in areas like insurance, hotels, other real-estate, gambling facilities, etc. Foreign investments are to be directed to two areas. The first is into strategic areas, as defined by the government, such as technologies where the intellectual property gained fits with government plans for China to become a major, worldwide competitor in various fields. [Sound like Japan in the 1970s and 80s?] The second area is into investments consistent with China’s One Belt-One Road strategy to tie it more completely with all of Asia as well as Europe and Africa.
These all indicate concern that economic, financial and political risks are rising.
Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati