Agnosticism and Political Economics

October 12, 2017

In this year's letter to investors, Warren Buffett wrote, "If you mix your politics with your investment decisions, you're making a big mistake."
As is usually the case, Buffett statement was on point.
Always be cognizant of the relationship between risk and reward. Never forget that saying yes to one thing is the equivalent of saying no to another. And never, under any circumstances, should you mix politics with investing.
Investors who remain cognizant of these maxims will invariably outperform their more emotional peers.
And remember: the markets do not prefer a political party. Choosing gridlock as their preferred candidate. Because when no party holds control, the odds of politicians screwing everything up are markedly decreased.
That in mind, let's take a politically agnostic look at the current machinations in D.C. and attempt to discern what the tea leaves are saying.
Political consensus postulates that Trump does not have the numbers in the Senate to pass a tax bill. Susan Collins. Lisa Murkowski. John McCain. Rand Paul. Each has been a thorn in Trump's legislative side. And each has stated his or her objections to his tax proposal. Thus, three to four Democrats would need to get on board. Which seems unlikely. As Democrat Senators have been in lockstep with their leadership. With the DNC telling them, "Vote our lead or face a challenger in your next election. A challenger funded on our dime."
Accordingly, how can Trump score a tax-reform victory? Here's how.
Last night Trump spoke in Harrisburg, Pennsylvania, to a group of Truckers. Who were surrounded by trucks. Why all the trucks and truckers in Pennsylvania?
Because truckers represent small-business owners who would benefit by tax-rate reductions for pass-through entities like LLCs and S Corps. Moreover, Trump won Pennsylvania in last year's election. Pennsylvania's Democrat Senator Bob Casey -- who has been opposed to tax cuts -- happens to be up for re-election in 2018. A Democrat Senator running for re-election in a state won by Trump. And now, a state in which Trump's team will be selling the benefits of tax cuts to anyone who will listen.
As the polls reveal that the good people of Pennsylvania want a tax cut, Senator Casey will have to choose: side with party leadership, or side with Pennsylvania's voters?
Even for the average politician, the political calculus becomes easy at that point.
Now, understand that this process will likely play out in nine states beyond Pennsylvania. States won by Trump. With a Democrat Senator facing re-election. Forced to choose between the will of the people or the will of the party.
And here, the intrigue thickens.
For all his faults and foibles, Trump has proven to possess considerable branding expertise. Moreover, he realizes that his approval rating hovers in the 40-45 percent range. Yet, he also knows that Congressional approval ratings sit in the 10-15 percent range. Both of which are eclipsed by the 70-75 percent approval ratings enjoyed by the U.S. military. So, don't be surprised when next year's elections feature an array of ex-military types -- former Generals, Admirals and Navy Seals -- running on the GOP ticket in the ten Blue States won by Trump against incumbent Democrats.
Trumps calculation? By aligning himself with the excellent approval ratings of the U.S. military, he'll put additional pressure on Blue-State Democrats to back his tax-reform package. And those who choose to ignore the calls for tax reform and side with DNC leadership will face a high probability of losing their elections.
Leaving us to agree with the A-political and ever-astute Larry Jeddeloh, who postulates that the House will remain Republican in 2018. His forecast being based on the probabilities stemming from the machinations laid out above. As well as the impact of gerrymandering, which will also assist GOP candidates in those states.
In the Senate, the GOP will also maintain control. Though the rubric of the Senate floor will change due to retiring GOP incumbents. Likely leaving Trump with a full house in 2019 and 2020.
As the Senate comes to this realization, Democrat Senators will decide to vote in favor of tax reform or tax cuts. Which the stock market is already pricing in. Moreover, the increase in former military personnel comprising the House and Senate will contribute to further military expenditures. Which already increased 27 percent year over year when the Senate approved the recent $700 billion defense appropriation.
All of which leads us to conclude that tax reform will get done. And that prescient investors should continue to buy high-quality aerospace and defense stocks on pullbacks.
Of course, we've been wrong before. And as H.L. Mencken said, "For every complex problem there is an answer that is clear, simple, and wrong."
Still, the tea leaves have been speaking. And we'd be foolish not to attempt to divine their meaning.

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