Trump: No sign of wavering to a strong fiscal stimulus package - BBH

Research Team at BBH, suggests that there has been no sign of wavering from the Trump about the commitment to a strong fiscal stimulus package.  

Key Quotes

“An economic adviser to Trump penned an op-ed piece in the Financial Times before the weekend that sketched out the $1 trillion stimuli in the form of tax cuts and infrastructure spending. With a roughly $18 trillion economy, the stimulus is significant at 5.5% of GDP.  In terms of GDP, that is, incidentally, the same size as the February 2009 stimulus package tax cut and spending package).”

“The stimulus would reach a US economy that is already growing near trend.  Trend growth is the sustainable pace consistent with stable prices.  The Federal Reserve has surely but slowly cut its assessment of this pace to 1.8%.  An unscientific sampling of private sector economists puts at 1.5%-2.0%.     Stimulus on top of trend growth is understood to be inflationary.  This implies a somewhat stronger monetary response and the derivatives market appears has begun the discounting process.  For example, the implied yield of the December 2017 Eurodollar futures contract rose nearly 25 bp since before the election.”

“While some may think a rising interest rate environment is not good for equity valuations, it is important to recognize the transformation by which corporations as a whole are net providers of capital rather than net takers.  There are also some important offsetting policies as well.    Among the stimulus measures are deregulation and tax cuts.   Trump's economic adviser underscored two tax cuts.”

“The first is the rate levied on corporate profits.  Trump would like to see it slashed to 15%, but his adviser notes that even at UK's 20% level, $660 bln would add to the economy.  Of course, the assumption here is that businesses currently pay the tax schedule of 35%, which is dubious.”

“The second is a one-off 10% repatriation fee to entice corporations to bring home the $2.5 trillion of foreign earnings that have been stashed overseas.  Every time the government offers such a tax break, it is presented as a one-off, but after getting the "one-off" break, companies retain earnings offshore waiting for another "one-off" break.   Trump's adviser suggests that an overhaul of the corporate tax structure (dramatic cut in taxes, and perhaps taxing foreign earning even if not repatriated) could deter this behavior. The sequence of the changes then will be important.”

“In terms of the impact on investment and employment, studies have suggested that past one-off tax breaks did not have the impact that had been promised.  In terms of the dollar, much of the earnings retained overseas are already invested in dollar-denominated instruments.  This is standard behavior for corporations that report in dollars.  However, the repatriation does show up in the current account, and the improvement may be seen by some investors as dollar positive.  In this case, assuming the "one-off" break takes place during the divergence of monetary policy, it could add more fuel to the dollar's appreciating trend.”