Here's what Bill Evans from Westpac has to say about the US Election.. from one of the emails they send me every day..
Might have some really good ramifications for a company like EDE down the track..
"We have just witnessed one of the most volatile 24 hours in US equity markets on record.
After falling limit down 5% in overnight markets the US Dow Jones industrial Index posted a net 1.4% increase on the day for an overall “recovery” of 6.4%.
Much of this recovery can be attributed to the conciliatory speech which the President elect delivered following his election victory.
For me a very significant aspect of the speech was a very strong call to “rebuild America.” He signalled “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it”.
This statement, which as the first policy item in his speech, came as a surprise to me. To date his fiscal policy emphasis has been on personal and corporate tax cuts and unwinding Obamacare.
My concern with the effectiveness of corporate tax cuts has been that companies, with no sustained signals of a lift in growth, would use the additional funding to lift dividends; buy back shares; and generally offer higher incomes to investors without raising investment or lifting employment. Despite a fiscal stimulus from lower taxes the “secular stagnation” would persist in the US.
If, however, that policy was complemented by a significant lift in infrastructure investment with the government itself lifting demand and encouraging businesses to raise their sales expectations then a boost to private sector investment may follow. Higher investment, both private and public, will raise productivity and potentially lift the US out of the “2% growth” trap that currently prevails.
In turn, a significant boost to confidence, and a clear demonstration of the benefits to growth of a long term boost to infrastructure investment may encourage other “secular stagnation” casualties in Europe and Japan to follow with similar policies.
Stocks which are leveraged to a boost in infrastructure, certainly responded to these signals – note the 10% lift in Caterpillar’s share price.
However, as we discussed in the note that was released yesterday, before the President elect’s speech, the current “status quo” in Congress may thwart the new President’s plans. Recall that as a legacy from the cost of rescuing the US economy in the aftermath of the GFC Federal government debt in the US stands at around 80% of GDP. Policy “theorists” argue that government debt levels of around 80% –100% of GDP are important “thresholds” that should not be crossed. Following those guidelines the Republican Congress adopted the “sequester” approach which embedded automatic spending cuts basically throughout Obama’ s second term.
Combined with rising tax receipts that policy has had some success. The US deficit fell from around 8% of GDP in 2011 to 3.2% in 2016. The current deficit of 3.2% of GDP compares with four consecutive years of deficits of around 5% of GDP during the Reagan years.
So the issue becomes one of whether the new President with a clear Republican majority in both the House and the Senate can win majority support of his party to embrace a Reagan style fiscal boost, emphasizing infrastructure; tax cuts; and health care compensation.
At this stage a range of estimates cost his tax plan at around $4–5 trillion (near 25% of GDP) over 10 years. Around 75% of that tax package is represented by the corporate tax package. That estimate does not take account of any boost to GDP from the fiscal stimulus associated with such a plan.
With new infrastructure initiatives being announced as the lead policy objective in his victory speech he may need to trade off some the tax package for an ambitious infrastructure package.
Of course these issues will need to be addressed and resolved over the course of the new president’s first year in office.
President Obama was continually thwarted by the Republican Congress on his spending initiatives partly because they were dominated by transfer payments.
I expect that the new Congress will be able to be convinced by the newly installed successful President to accept his bold fiscal measures. A tax/ infrastructure package of $ 5-6 trillion , while accounting for a lift in debt of around 30% of GDP over 10 years ( before any estimates of the lift to economic growth) could be deemed acceptable by a Republican controlled Congress given its emphasis on infrastructure and tax cuts."
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