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NOTES FROM THE MEETING
- Inauguration was full of hot air, when Nancy Pelosi came back in December, Speaker thought she was gone (not coming back), he’s figured out the dems are out for blood in 2014, Obama thinks he can take back the house, wants Pelosi as his speaker 2014-16.
- Grand Bargain GB, better than a 50/50 chance, but not before late April – Early May (this would be bullish for equities). One client at the table, knows Lloyd Blankfein well at GS, said a GB gets you 500-600 Dow points to the upside, per Goldman.
- Hard to believe, Boehner or McConnell, strategically did not bring up the sequester ($85 bln spending cuts to defense / Medicare) in the Dec 2012 Fiscal Cliff negotiations, Obama wanted it part of the deal, the GOP agreed in the end.
- The March 1st sequester deadline kicks in March 27th, Speaker thinks it’s time for a fight. The GOP is willing to let the sequester take place, there are already 500k layoff coming in the Defense space. (this is very bearish short term, get long vol). I really don’t think the market is expecting this.
- Many government agencies have significantly reduced their spending in preparation for the sequester, evidenced by the dramatic 15% drop in government spending in the fourth quarter of calendar year 2012.
- White House and members of Congress have proposed various approaches to avert the sequester and these ideas will continue to garner more attention in the weeks ahead, with a blame game as well. There is unlikely to be any compromise reached, cuts go into effect toward the end of March, Obama and Harry Reid continue to demand that additional tax revenues remain part of the solution. Speaker said in George Herbert Walker Bush style, NO New Taxes, we’ve already gone there, we’re done.
-Another point at the table made by a client was if the sequester does not get triggered, and no grand bargain, rating agencies downgrade in April is a done deal.
- He was surprisingly passive around the possible use of the March 27th continuing resolution (government funding needed to keep the gov going), I was shocked, GOP doesn’t want to mess w/ a Government shutdown (must feel they will be blamed and hurt in 2014). This was a major positive for me, in terms of the market. A lot of people feel the GOP is prepared to use the shutdown to get more spending cuts on entitlements, I didn’t get that impression.
- GOP is very disappointed with the Presidents daily / weekly interaction with Congress, in all his years, this Admin has been the most distant. The Hagel trail balloon was a classic example of this. Bad judgment without enough recon. The Obama admin does not have the traditional recon gathering team which collects information from Congress, and then creates policy.
- Fannie & Freddie: I got the impression, Jeb Henserling will bring a privatization Bill to the House floor before June 1st. This is good news as many feared the GOP wants to kill F&F. Sever clients pushed the securitization drag on the economy and how few securitized loans exist in the system. The most difficult task will be getting the bill through the Senate. I got the feeling at the table, without fixing securitization, housing’s near term (next 4 months) upside is limited from here. Securitization was responsible for over 65% of home sales 2004-2007. We don’t want to bring back the low quality securitization, but high quality structured finance would give a colossal boost to housing. This is NOT happening, regulation, banks are getting hell when they take risk on their balance sheet. Today, average credit score of new loans in their portfolio 760! Vs. 2007’s 590-600 ave score.
Treasury: No one from Wall St is in Treasuries top 10 officers. The appointment of Jack Lew shows just how out of touch the president is with Congress, the Speaker is very concerned about Lew’s total lack of any meaningful Wall St experience. With the challenges developing in Europe, the Speaker is very worried we don’t have the right person on the job in Jack Lew. We will miss Hank Paulson.
- He referenced Bob Woodward‘s book several times, claims the idea of the sequester came from former White House Chief of Staff Jack Lew. The GOP will use this as a PR weapon over the next 3 weeks.
- The repatriation tax changes were debated at the table, as most know by now some $2 trillion is kept overseas by American companies who would most likely would bring money back with a lower tax rate. One client made the point as you bring the money back to the US, under CBO rules, it will increase the deficit?? (I’ve never heard that, trying to confirm). A bill addressing repatriation tax changes does not seem likely this year. This was a major downer at the table, bearish.
- Obamacare, one BIG factor now being priced in to the market is the possible fiscal drag from insurance companies raising their premiums in 2013, as they pass along additional costs to consumers. The speaker reminded the table, all giant pieces of well-intentioned legislation, always have dozens of side effects, unintended consequences.
- Why is congress so polarized? Proliferation of social media (Facebook & Twitter), talk radio have made so much information available that there are really red states and really blue states. There are fewer people in the middle. In a fast, easy flow of information age, each individual in society is much more defined politically that they were 15 year ago.
- Jan 2013 house republicans passed legislation to eliminate the nation’s statutory borrowing limit until May, with a provision that would withhold the pay of lawmakers in a chamber of Congress that fails to pass a budget blueprint by April 15. The Speaker doesn’t want to look down the road of threatening the full faith and credit of the US Government. There is just too much unknown risk, the GOP won’t use this dangerous weapon. GOP wants $2 trillion of entitlement cuts over 10 years in return for a 1 or 2 year extension. This was a major positive.
- Harry Reid does not have enough Dem votes for more taxes, in other words, ahead of the 2014 elections, the Speaker doesn’t think there is enough support, even on the Democratic party side, for more taxes in 2013
- Sequester hits hard Dr. and hospital cost reimbursements, defense
- Next week, the GOP will start marketing “Obamaquester,” to pin the blame for the pain on the White House. Eric Cantor and other Republicans will pick up the campaign. These tensions and bad blood will be more visible next week in the market. This is a bearish indicator for the next 3 weeks and they start throwing punches, both sides, in the public eye.
- We will see a major blame game, marketing campaign from both the WH and the Speaker, Cantor, McConnell the next 3 weeks over the sequester.
- Most likely piece of legislation in Q1 / Q2? Immigration reform (GOP will try and lay claim to this success but the WH is moving fast to take credit). There was a poll taken at the table in a raise of hands, 85% of clients thought Obama would get credit for Immigration Reform.
- Presidential Primary: The GOP allowing 32 debates in the primary was a horrible, disastrous decision. It allowed Obama to use all of the attacks fired at Romney, then start early to pound their definition of him home, Romney was defined in American’s eyes even before the election process started. This will change.
- The one statistic Romney could not over come was, 78% of Americans didn’t think he cared about them, relate to them.
- Why isn’t the GOP more effectively using the national debt and deficit as a weapon against the President? A. The GOP has a difficult time staying on one message, there are so many different outlets in the party, they must become more defined B. So far, the debt and deficit are too complex to make simple to use properly as a weapon. This will change, they are working on a plan to simplify and deliver this message.