Sputnik discussed the projection with Daniel Lacalle, chief economist at Tressis Gestion and author of the book 'Escape from the Central Bank Trap'.
Sputnik: Strategists said that the US will become less attractive for investors with Democrats occupying the majority of seats in the House of Representatives. What's your take on this?
Daniel Lacalle: The positives that many investors will see coming from a new tax cut and an infrastructure plan will obviously become a lot more challenging. It is possible that President Trump implements these new measures with an executive order, but it's not easy. We have seen in the past that when a party of the President loses one part of the legislative power, (the House) in this case, it is much more challenging to pass new bills. So I think that it makes sense for some to say that, maybe because the economy is starting to become overheated in some sense, or at least past the stimulus of the tax cuts at the end of the year, then it becomes a bit less attractive.
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Sputnik: While the outcome of the midterms has been met with relief by financial markets, many experts expressed concern that it may not last long, why is that?
Daniel Lacalle: I think that some believe that the Democrats in Congress are going to try to make the rest of the (President's) tenure much more challenging, and definitely they will make aggressive moves as much as they can. However, if you look at the results of the elections, they have actually been a lot better for the Republicans. Everybody was talking about a 'blue wave', as you remember, and yet the Republicans have actually strengthened their position in the Senate. The increased seats of the Democrats in Congress obviously gives them a majority, but not that kind of majority that would sort of give an idea that there is a big change going forward. So I think we will have to see, I think that it's a challenge, but we also have to remember that in front of us, after the relief rally of the midterm elections, what we'll have is the rate hikes by the Federal Reserve and that is what is likely to cause a little bit of turmoil in the markets, added to the fact that in general, valuations are elevated.
Sputnik: Some analysts consider the stalemate in Washington to be profitable for the market, how's it so? And who does it benefit?
Daniel Lacalle: The reason why some people believe that a stalemate is positive for the market is because it tends to make the incumbent, the president, be less ideological or less aggressive about the policies that are implemented. If you remember in 2010, when Obama lost 60 seats in Congress, that led to a much, I would say, more benign stance on regulation, on taxes and on investment. I think that is probably what commentators are thinking about this new configuration of Congress.
Sputnik: Speaking of taxes, President Trump has floated the idea of a new tax cut for the United States, with Democrats taking a chamber of Congress, how feasible is this proposal now?
Daniel Lacalle: It's much less feasible, definitely, but it can be implemented through an executive order, so therefore surpassing congress. If you remember, President Obama lost Congress in 2010 and furthermore in 2014 he implemented most of the legislation through executive orders, and I think that's probably the way that President Trump is going to try to move his agenda forward, but it's not easy. It makes it very, very difficult and it's not popular, and it definitely hurt the Democrats in the previous presidential elections, if you rule by executive order, because it's perceived as undemocratic.
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Sputnik: The US Federal Reserve is due to meet, what are we to expect from this meeting? Will we see any changes in the Fed's policies following midterm results?
Daniel Lacalle: I don't think that Jerome Powell and the Federal Reserve are going to make drastic changes. The latest economic data show a very healthy employment market, a very good jobs figure published last week, the economy is growing above trend. This new Federal Reserve Chairman is very data-dependent, and therefore it is unlikely that it changes the path. I imagine that he will probably be less concerned about the recent market sell-off because from the perspective of the Federal Reserve, the market remains close to all-time highs. Therefore, I believe that the path of rate hikes is likely to continue.
Sputnik: We've been hearing a lot of reports about Democrats launching an investigation into the Trump administration, they've openly talked about using their new power to subpoena Donald Trump; if they succeed, how would markets react?
Daniel Lacalle: We remember the previous cases of impeachments, the markets tend to react negatively. However, I think that given the history so far of failure in terms of investigations of collusion and all those things, where there's been a tremendous amount of media hype but nothing or very, very little in terms of real evidence, I think that the reason why the market is reacting positively today is because the probability is perceived as very low.
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