Where Republicans and Democrats Agree

Tax reform is back on the table... Don't pop the champagne just yet... Where Republicans and Democrats agree... Doc's forecast is already playing out...

Is this our last great chance for tax reform?

Regular Digest readers know tax and regulatory reform were two of the big policy proposals markets cheered following President Trump's election last fall.

And now – after several unsuccessful attempts to replace the troubled Affordable Care Act, or "Obamacare" – Trump and the Republican-led Congress are reportedly turning their attention back to these issues. In fact, it appears they're now looking to address many of them in one fell swoop. As the Wall Street Journal reported on Tuesday...

House Republicans are unveiling an ambitious fiscal plan on Tuesday to rewrite the tax code, revamp medical malpractice laws, change federal employees' retirement benefits and partially repeal the Dodd-Frank financial regulations – all in one bill that wouldn't require any votes from Democrats to pass...

Republicans this year control the House, Senate and White House for the first time since January 2007, and they are trying to take advantage of that moment by pairing a landmark tax bill with at least $203 billion in deficit-reduction measures.

"With a Republican Congress and a Republican administration, now is the time to put forward a governing document with real solutions to address our biggest challenges," said Rep. Diane Black (R., Tenn.), chairman of the House Budget Committee.

As we discussed earlier this year, the key to this strategy centers on a loophole in the budgetary process called "reconciliation." While most bills require a 60-vote majority to pass the Senate – and are subject to filibuster – budget bills are exempt from that rule. They can be passed with a simple majority in the House and Senate, which Republicans currently hold.

In other words, by including these measures in their 2018 budget, the Republicans have a rare chance to pass them without any bipartisan support.

As longtime readers know, we do our best to avoid politics in the Digest...

The truth is, we have little fondness for politicians of any stripe. But regardless of our thoughts about Congress or the presidential administration, we continue to believe tax and regulatory reform could be a boon for the U.S. economy.

It could push economic growth back to levels we haven't seen in a decade or more. Significant restructuring of the tax code could potentially even delay the credit-default cycle Porter has been warning about for months.

But we're not popping the champagne just yet. Even with this strategy, success is far from certain. More from the Journal...

The strategy, embedded in the House GOP fiscal 2018 budget, faces political and procedural obstacles, including many of the same ones that derailed the party's health care bill in the Senate. For instance, Republicans will have a narrow margin in the Senate and will have to comply with budgetary rules that restrict which policies can be included.

[Under reconciliation, bills also] can't increase long-run budget deficits and must hit fiscal targets set out by the budget. To get to that point, Congress must adopt a budget first, which means the House and Senate must agree twice, once on the budget and then again on the ultimate bill.

And as financial-news network CNBC reported yesterday, it's unclear whether the Republican Congress (let alone the Trump administration) can even reach an agreement...

The $4 trillion spending blueprint, released by the House of Representatives budget committee, could become a new flashpoint for Republican in-fighting because it links future tax cuts for businesses and individuals with $203 billion in mandatory spending cuts that would reduce benefits for the poor.

The Republican push to repeal and replace the Affordable Care Act, widely known as Obamacare, collapsed in the Senate late on Monday after a tug-of-war between party moderates who wanted to preserve health care benefits for lower-income Americans and conservatives who wanted to scale them back.

On Tuesday, House Republicans disagreed over the budget proposal in terms that could foreshadow a replay of the Senate health care debacle when lawmakers turn to tax reform.

We'll be following this story closely.

Doc's forecast appears to be playing out already...

One area where lawmakers apparently do agree is military spending.

The new budget authorizes up to $696 billion for the U.S. Department of Defense next year. This is nearly $30 billion more than the increase President Trump had requested.

Notably, this portion of the budget garnered wide support from both Republicans and Democrats alike. As news service Reuters reported late last week...

The U.S. House of Representatives passed its version of a massive annual defense bill on Friday, leaving out controversial amendments on transgender troops and climate policy but backing President Donald Trump's desire for a bigger, stronger military.

The vote was 344-81 to pass the National Defense Authorization Act (NDAA), which sets military policy and authorizes up to $696 billion in spending for the Department of Defense.

Underscoring bipartisan support for higher defense spending in Congress, 117 Democrats joined 227 Republicans in backing the measure. Only eight Republicans and 73 Democrats voted no.

It appears our colleague Dr. David "Doc" Eifrig's forecast is already playing out. As we noted on Friday, Doc believes U.S. military spending is practically guaranteed to rise in the coming years.

To be clear, we don't necessarily endorse this trend. And judging by the feedback we've received (see today's mailbag), many of you don't, either. But as Doc has explained, those at the highest levels of the U.S. military do.

They believe the military is on the verge of a crisis... And they have been warning that higher spending is needed immediately to maintain our role as a global superpower.

For better or worse, today's news suggests Congress agrees... And tens of billions of new dollars will be flowing back into the defense sector. Whatever your stance on the issue, you would be wise to take note. As Doc explained on Friday...

With the defense industry so consolidated, those billions flow very quickly into the pockets of a small group of companies and their shareholders. Even big, established businesses can get pushed very quickly by waves of cash that big – even though it's a minor increase from the government's perspective.

Again, Doc has prepared a special report detailing his five favorite ways to profit from this trend. He has also partnered with world-renowned geopolitical expert Richard Maybury – editor of the U.S. and World Early Warning Report – to show you exactly how to prepare for the growing risks of war and global conflict. Click here for the details.

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In today's mailbag, a British subscriber has a bone to pick with Doc Eifrig over military spending. Don't miss the responses from Doc and special guest Richard Maybury below... and let us know what you think at feedback@stansberryresearch.com.

"Hi Gents: Next year, the U.S. will spend in excess of $600 billion on its defence, or should we say military. According to the International Institute for Strategic Studies... the U.S. outspends the next 10 countries put together! And what's more incredible is that the last war America 'won' was WWII. Korea, Vietnam, Iraq and Afghanistan have all been quagmires. Especially Afghanistan, where America has been at war since 2001! America supposedly pulled out in 2014, and yet the bombing and droning against bearded men hiding in caves continues. The big question is this; When will the American people finally wake up and realise that spending such huge sums of their tax dollars on defence is a terrible, terrible waste?

"The military-industrial complex is taking roughly 20% of all U.S. government revenues. President Dwight D. Eisenhower saw this coming and actually warned the American public of its dangers. With $20 trillion of government debt, roughly $50 trillion in unfunded government entitlement programs, trillions of dollars in unfunded public employee pension funds, and several U.S. states on the verge of bankruptcy, America has reached the point of no return. The implosion of the U.S.S.R. apparently has been forgotten by American policy makers who seem to think; That could never happen here! That sort of hubris is exactly why it can happen in America. And most likely will... sooner rather than later." – Paid-up subscriber Steve Previs

Richard Maybury comment: Those statistics are widely used, and as far as I know, accurate, but not true. They should come with a very large footnote saying that the other governments do not have global empires to control.

The U.S. "defense" budget is actually the U.S. "domination" budget. For instance, an unknown but certainly large portion of Navy spending goes for building and sending warships to ports around the world to "show the flag." This in actual practice means telling foreign populations, "See those planes, missiles and guns? This is what can happen to you if your politicians do not follow the wishes of our politicians."

Think about it... How would Americans feel if, say, Russian or Chinese warships regularly cruised up and down U.S. coasts within sight of our cities and towns? Well, U.S. warships, and only U.S. warships, do this all over the world.

Did Rome have a larger military budget than Persia, Carthage, or Egypt? Of course, and there was a reason for it.

Doc Eifrig comment: Richard is right... No doubt, the dollar amounts are massive. But spending more than the next 10 nations doesn't amount to much when you're the de facto "protector" of dozens of nations around the world.

The United States has two options: spend more or stop serving as policeman and peacekeeper to the world. We could certainly debate the fiscal wisdom of maintaining our "World Police" status until we're blue in the face (though, I suspect we may be on the same side).

But as an investor, I'm in the business of figuring out what will happen rather than what I wish would happen. And I've been around long enough to know that no politician who suggests a sensible, scaled-down foreign policy paired with a smaller military will gain traction with American voters. Some have tried ("What's Aleppo?"), but if they didn't gain followers after the obvious mistakes of Iraq and Afghanistan, they never will.

As a U.K. resident, you likely have better insights into the long-term effects of global overreach than our elected officials (think British Empire). In the meantime, we expect the spending spigot will open back up.

Regards,

Justin Brill
Baltimore, Maryland
July 19, 2017