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Valliere: Despite Victory, Republicans Shouldn’t Think Voters Love Them

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Greg Valliere of Potomac Research Group grabbed the audience immediately at Schwab Impact Tuesday afternoon.

“Today is the day we have all been waiting for,” he said, “the end of TV political ads.”

He followed up at the preconference session, attended by a good chunk of the more than 2,000 Impact advisor attendees (a record number, Schwab said), by getting more serious about the implications of the big Republican win on Election Day, while also seeking to dispel six myths “about my town.”

The 2014 midterms, he said, constituted a “referendum on Obama” and his governing and leadership shortcomings. “The House will stay Republican for a while,” he predicted, accurately, while the “Senate will go Republican.”

While Republicans have a clear majority in the Senate following the election with 52 seats, they lack the 60-seat, filibuster-proof supermajority needed to pass much important legislation.

Valliere began by criticizing a familiar target of his — the media — for blowing way out of proportion the Ebola scare, before saying that “the media has created many myths” about Washington. The six big myths, he said, were that:

1)    Washington (the federal government) is “hopelessly broken”

2)    The Federal Reserve is seriously divided

3)    The budget deficit is fixed

4)    After the midterm elections, the Republican party will be “resurgent for years”

5)    Hillary Clinton (the putative 2016 Democratic presidential candidate) will be “horrible for the markets”

6)    And finally, that geopolitics doesn’t affect the U.S. markets.

As for the government being “broken,” Valliere said flatly, “it’s not true,” listing a number of legislative accomplishments over the past year, and asserting that “the center has held.” As for the Fed, “this is the most dovish Fed ever,” that “the Fed is remarkably unified” and that it will “keep rates low for too long” rather than raise them prematurely.

On the deficit, Valliere noted that federal spending is only up 1% this year while receipts are up 9%, but that “we’ve failed to deal with the elephant in the room: entitlements.” Moreover, he said the expected tax extenders bill in December “won’t be paid for,” citing no less an authority than Rep. Paul Ryan, R-Wis.

While the midterms do constitute a big victory for the Republicans, “it would be a big mistake for them to think Americans love them,” since the election was a referendum on the president. The GOP, he said, has a “big choice” to make: whether the party will be led by the Tea Party faction, led by Sen. Ted Cruz of Texas, or by the pragmatists, such as Sen. Mitch McConnell of Kentucky, who will become the Senate majority leader in the new Congress, and Rep. John Boehner of Ohio, who he expects will “stick around for one more year” as speaker of the House. In the new Congress, Republicans will attempt to repeal Obamacare, which won’t happen completely since President Barack Obama will use his veto power to squash such an attempt. However, the Republicans “may be able to alter” Obamacare, especially around the law’s requirement to offer health insurance to employees working at least 30 hours, the employer mandate and especially the medical device tax, which even some Democrats (like Sen. Elizabeth Warren of Massachusetts) might agree on.

Expect “lots of hearings,” Valliere predicted, with possible compromises on the Keystone pipeline and perhaps allowing the export of liquid natural gas. “The big story next year will be tax reform” from the Republicans, Valliere said. While tax reform for individuals is unlikely, he does think there is a possibility of reforming the corporate tax code.

As for myth No. 5, he expects that Clinton will run in 2016, in large measure because of the Democrats’ “weak bench.” Clinton will also be the favorite in the 2016 presidential election, since the “demographics of a persidential election are different than midterms,” since it attracts more Democatic-leaning voters such as women, African-Americans and Hispanics. It’s likely that “she’ll run against Jeb Bush,” he said, though he suggested watching Marco Rubio, Jon Kacich, Chris Christie and even Ryan. “Tonight’s victory,” he said “isn’t a cosmic event for Republicans.”

As for the myth that Hillary would be bad for business and the markets, Valliere said “If Hillary is elected she’ll have to deal with a GOP congress,” but she’s “more moderate than Obama.” Valliere also got a big laugh from the attendees when he said that on foreign policy, Hillary’s “got much more testosterone than Obama.”

She won’t be bad for the markets, he said, but Warren and Sen. Rand Paul of Kentucky, with his animus toward the Fed, would be bad for the markets.

As for the final myth, he suggested that one reason for the persistently low yields on fixed income is Americans’ “pervasive anxiety about the state of the world.” That anxiety comes, properly he said, from the strength of ISIS, from Russian President Vladimir Putin, who he said is “increasingly messianic and delusional” and fears that Communist China may decide to crack down heavily a la Tiananmen Square on Hong Kong’s pro-democacy movement.

He finished with a date to keep in mind: Nov. 24 — when he said there “should be a deal on the Iranian nuclear issue.” If no deal is reached, expect big new sanctions by the U.S. on Iran.

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