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Civil War

Saturday, November 26, 2016 14:02
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DOUG By Guest Blogger Doug Rowat

President-elect Donald Trump will be assuming office with some significant advantages. The Republicans hold the White House, Senate and House of Representatives—the last time an incoming Republican president was so fortunate was 1928. The US economy is also booming (as much as a post–credit crisis economy can boom) and markets are at all-time highs (Dow 19,000, folks). So smooth sailing; the path forward should be a lay-up even for someone with no political experience.

However, the US is, obviously, deeply divided, getting along about as well as Brad Pitt and Angelina Jolie after a long flight on a private jet. The fractures are becoming readily apparent on a number of fronts. First, Democratic-state strongholds, particularly California and New York, generally hate Trump. In California, for example, a dominant 61% (and counting) voted Democrat. California alone is the world’s 6th largest economy and ‘Calexit’ is already becoming a thing. Further, powerful US cities—New York, Los Angeles, San Francisco, Seattle, Chicago and Washington—have vowed to resist Trump every step of the way, particularly with respect to his immigration policies. You want to deport undocumented immigrants in these cities without the support of mayors and police forces? Good luck.

And what about some of Trump’s other goals like repealing the Dodd-Frank Act, which helps keep Wall Street in check? Well, US Senate minority leader Chuck Schumer, who gets along great with Republicans, has already said he has “60 votes” to block Trump. And the use of waterboarding, torture and “much stronger” techniques that Trump was in favour of throughout his campaign? Republican Senator John McCain has bluntly stated that he’ll see Trump in court if he proceeds with this proposal.

In fact, at least 11 Republican senators openly refused to support Trump during his campaign creating significant disunity within the Republican Party. Therefore major concessions and focused diplomacy will likely be required before any new legislation passes. Compromise and focus are not words I associate with Trump—someone so distractible that he may be at this moment angrily tweeting about Alec Baldwin’s “biased” portrayal of him. As journalist Andrew Prokrop recently noted:

Suffice to say… retaining the support of nearly every senator from one party for a major new bill that would hugely impact America is difficult, as Barack Obama discovered with his months-long effort to get enough Senate Democratic votes to pass health reform in 2009— and Democrats had a larger Senate majority, and a more popular president, than Republicans do.

Trump faces battles on other fronts. He’s been openly critical of the US Federal Reserve, arguing during his campaign that it should be audited and that Fed Chairwoman Janet Yellen should be “ashamed of herself” for what she’s done to the US economy. Unfortunately for Trump, Yellen’s four-year term isn’t up until February 2018 and Vice Chair Stanley Fischer, a close Yellen ally, will be in place until June 2018. Trump does have the power to fill two open seats on the Fed’s seven-member board, but the Fed is currently very unified in its hawkish view, so additional appointments might not actually shift the power balance.

Besides, disrupting the Fed would be a headache that Trump likely doesn’t want at the moment. So, Trump is probably stuck with a Fed that will work to curb inflation and be at odds with his aggressive economic expansion plans.

And finally, if you want even more proof of a conflicted and divided America, poor Vice-President-elect Mike Pence can’t even have a relaxing night out at the theatre without getting lectured by the cast of “Hamilton”.

So the election’s over, but other battles are just beginning.

However, there’s one area where both sides agree: the need for infrastructure spending. The American Society of Civil Engineers gave the US a dismal D+ grade in its latest infrastructure report card, which highlighted an urgent need to spend trillions to upgrade roads, bridges, water treatment facilities, transit, rail, dams and so on. One in nine US bridges, for example, is rated as structurally deficient. Pennsylvania tops the list with an astounding 24% of its bridges rated as such. Could this be one reason Trump won Pennsylvania? House Minority Leader Nancy Pelosi noted that Democrats could find “common ground” with Republicans on infrastructure spending as Hillary Clinton herself committed US$275 billion in this area. Trump has pledged roughly double this amount with the expectation that hundreds of billions more in private investment could follow.

As a portfolio manager, I can’t help but be pleased with Trump’s focus here. Infrastructure spending is clearly needed, will likely be economically stimulative, boost corporate profits and be positive for many cyclical equities. So, hopefully, this common political ground does exist.

According to AAA, nearly 49 million Americans will travel 50 miles or more throughout this US Thanksgiving holiday. Think of it: Democrats and Republicans driving across all those structurally deficient bridges—together.

Structurally Deficient Bridges In US

Source: American Society of Civil Engineers. Structurally deficient bridges are defined as bridges that require significant maintenance, rehabilitation or replacement. Yellow = more deficient bridges

Doug Rowat,FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.


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