Weekend Reading: Storm Warning

August 25, 2017

45

Courtesy of Lance Roberts, Real Investment Advice

No, I am not talking about “Hurricane Harvey” which will likely be the first hurricane to strike the Texas coast since 2008, but rather the potential for another “debt ceiling” debacle brewing in Washington.

Just recently, Goldman Sachs raised its odds for a government shutdown from 33% to 50% which was further supported by recent statements from President Trump that he would be willing to risk a Government “shutdown” to get his border wall funded. However, as Axios.com noted yesterday:

“A top Republican source put the chance as high as 75%: ‘The peculiar part is that almost everyone I talk to on the Hill agrees that it is more likely than not.’

This may all come down to Trump’s mood. As Swan puts it: ‘Trump is spoiling for a fight and the [conservative House] Freedom Caucus haven’t had a fight for a while. That’s a dangerous dynamic.'”

While a Government shutdown is often used as a mechanism to force legislative action by threatening default on the national debt. Let me just assure, the Government WILL NOT default on its mandatory spending requirements which includes the social welfare system and interest payments on the debt. Given those items comprise 75% of the budget, the remaining 25% of discretionary categories could see cuts such as the temporary furloughs of some 900,000 government workers considered to be “non-essential.”

Of course, if you have a job that is considered to be “NON-essential,” maybe that is a good place to start cutting Government spending to begin with.

Sorry, I digress.

The REAL problem with a government shutdown is it will serve as another distraction to keep the current Administration off of their primary task of passing their legislative agenda of tax reform, cuts, infrastructure spending and immigration reform. As I have stated many times previously, this is one of the biggest risk to the markets currently.

While much of the mainstream analysis ballyhoos over the recent increase in operating earnings, it is often overlooked that operating earnings still haven’t surpassed their previous peak. Reported earnings and actual sales even less so. Importantly, a large chunk of forward estimates and guidance have been based on the assumption of the “dollar for dollar” impact of tax-related legislation.

Quick Note: It is worth noting that while mainstream analysts continue to point to the “number of companies beating estimates,” can I just remind you that it took estimates being DRAMATICALLY lowered in order to achieve that goal. In fact, for the end of 2017 estimates are more than $10 LOWER than where they began. After all, we live in a society where “everyone gets a trophy”, right?

That will only go so far, and if Congress fails to push through the tax forms to support the currently elevated estimates and valuations, at some point, the markets are going to demand – “Show Me The Money!”