Greg Valliere has a list of things that he’s worried about.
The chief global strategist for Horizon Investments shared that list with audience at the Schwab Impact conferenced in Chicago this week.
During his presentation, he outlined the six things that personally worry him.
“I’m going to challenge everyone … with a list of things that could go wrong,” he told the crowd.
1. Tax Bill
Nothing is certain when it comes to the Tax Cuts and Jobs Act.
While it passed the House on Thursday, the Senate must approve its own version, and “the votes are not definite,” Valliere said.
“Someone famously said ‘dealing with the Senate is like herding cats.’ Very hard for the Senate to get things done,” Valliere said. “We saw the debacle in the Obamacare [replacement] bill. Where just three negative votes killed it. And you have to wonder are there negative votes also for this bill?”
Another development that Valliere says few people are talking about is that the budget still hasn’t passed. “I think this budget plight in December could delay the tax bill,” Valliere said.
The other problem is reconciling the differences between the House and Senate bill, according to Valliere. He says that will require a conference committee, which “could drag past Christmas and into the new year.”
Valliere says he’s at “about 60/40 that we get” the tax bill.
“I sure would like to see the vote count when it comes to Rand Paul, the Alabama senator [who will be chosen in a special election on Dec. 12], John McCain, Susan Collins,” he added. “This is not a slam dunk.”
2. Budget Deficit
The second thing Valliere worries about is the budget deficit — which was $666 billion in the fiscal year that ended about a month and a half ago, he says.
“The deficit went up something like 18% in the last year. And I have to tell you, no one in Washington really cares,” he said. “I’m shocked by the lack of concern by this.”
And, according to Valliere, the deficit is only likely to go up because there’s “no spending restraint, a tax bill that will probably lose money and no one has the guts to look at entitlements.”
In all likelihood, Valliere sees the tax cut losing $1.5 trillion.
3. Federal Reserve Changes
Valliere said he was a “big fan” of Janet Yellen, whose term as Fed chair expires Feb. 3. He also thinks Jerome Powell, President Donald Trump’s pick to lead the Federal Reserve, is “first rate.”
“I think he will be a good Fed governor, but these could be uncharted waters for a while as the Fed loses their three most powerful players: Yellen, arguably the most dovish Fed chairman in our lifetime; the Vice Chairman Stan Fischer; and then [William] Dudley, the [Federal Reserve Bank of New York] president. All three quite dovish.”
Valliere said it could be “slightly unsettling” to see something different after this “exceptional period of monetary accommodation.”
Powell’s nomination is subject to Senate confirmation.
4. Trade Protectionism
Valliere thought the big theme coming out of the president’s trip to Asia was his repudiation of the concept of the U.S. being a part of multilateral trade deals.
“I think the president’s comments in Hanoi made it clear to me that he’s looking to kill NAFTA,” Valliere said. “He’s looking for an excuse to get us out of NAFTA. I understand that he wants to defend people that live in Bethlehem, Penssylvania or Youngstown, Ohio. He feels they’ve been hurt badly by trade deals like NAFTA.”
But, Valliere said that there are a lot of victims if NAFTA is killed, too.
“If we pull out of NAFTA, that is a very negative story for agriculture,” he said.
And pulling out of the Trans-Pacific Partnership could create a vacuum in Asia that “China will gladly fill,” according to Valliere.
“I do think we may be entering into a period where there’s more trade retaliation, whether it’s Canadian lumber, Canadian dairy products, Canadian aircraft. It looks like China may do something on steel and aluminum,” Valliere added.
This may create a situation where the markets may need to start worrying about protectionism, he said.
5. Weakening Political Parties
Valliere, a self-proclaimed “centrist,” said he’s a big believer in two strong parties. However, he thinks both parties right now have a lot of problems.
“On the Republican side, I think we’re closed to a civil war,” he said.
Another problem facing the Republicans, according to Valliere, is Robert Mueller’s investigation. Valliere thinks more indictments are “imminent.”
“I think we’ll get more indictments this month,” he added. “I think that this is going to go up, up, up the chain of command.”
Meanwhile, the Democrats have a problem with a “very elderly group of leaders in the party,” according to Valliere.
“If we all came down to Capitol Hill and asked Democrats ‘Who’s the favorite for 2020 as the nominee?’ A lot of people would tell you it’s either Bernie Sanders, who’s 76 years old, or Joe Biden, who turns 75 [on Monday],” Valliere said. “They desperately need fresh blood. I see a party that doesn’t have any.”
6. Geopolitical Threats
Valliere thinks the chances of a war involving North and South Korea and the U.S. are not zero.
“I’m probably around 20% and I’m high,” he said. “A lot of people say it’s 10%, 5%. I still think there’s an 80% chance that there will not be a war between the two countries.”
Valliere does think it’s more likely that there will be this “very uneasy stalemate” between the two countries that will persist for quite some time.
“But don’t you think at some point in the next few months that North Korea will test another missile that might go near Japan? Don’t you think at some point they might test a hydrogen bomb? I think that these threats are still out there,” Valliere said. “Considering how bombastic Trump’s rhetoric has been, at some point he’s going to have to back it up.”
The other story that Valliere thinks has not gotten sufficient attention is the growing antipathy of Trump’s generals toward the Iranians.
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