Tax Cuts, Trade War and Eased Bank Regulation – What’s Next?
This week Congress decided to roll back several bank regulations (Dodd-Frank law) while Trump announced that more tax cuts could be on the horizon. Get the details by reading on…
Congress Eases Dodd-Frank Bank Regulation – in a rare bipartisan effort, Congress agreed this week to roll back several bank regulations (Dodd-Frank law) put into place in the aftermath of the 2008 financial crisis. The bipartisan legislation – which had the support of 33 Democrats in the House and 16 Democrats in the Senate – is designed to ease restrictions on small and medium-sized banks. Under the new law, which President Trump is expected to sign, small and medium-sized banks will no longer be required to undergo Federal Reserve “stress tests” that have strict requirements about capital ratios and in some cases prohibit banks from engaging in dividend and share buyback activity. With the new legislation, thousands of banks with less than $250 billion in assets will see a substantial reprieve from strict and often complex rules and will also not be deemed “systematically important,” which frees them from the most burdensome of federal oversights. The new law does not do much to help the biggest banks in the country, like JP Morgan Chase, Goldman, and Bank of America, but lawmakers have made mention that they intend to go further in unwinding Dodd-Frank with future legislation.1 For now, the new changes should boost regional banks and mid and small-sized companies in the industry. As a general rule, the market responds favorably to fewer, less complex regulations, in our view.
Trade War Expectations Subside…As Expected… we have written many times recently that while we believed an all-out trade war with China and other nations would be a material negative, we did not see it as highly probable. Already we’re starting to see signs of backing-off from some of the harsher rhetoric and tariff threats. This week, Treasury Secretary Steven Mnuchin said the U.S. would be putting the trade war “on hold,” while the U.S. and China seek an alternate way forward. Perhaps China used North Korea as leverage to push back on the Trump administration, with the U.S. thinking it could revisit the issue after the planned June summit with Kim Jong Un. Or perhaps it was the minor breakthroughs that de-escalated the threat of a trade war: China this week pledged to cut import tariffs on passenger vehicles from 25% to 15%, with import duties on car parts being reduced to 6%; the Trump administration walked back its harshest penalties on Chinese company ZTE; and Beijing halted its probe into U.S. sorghum imports and restarted the review of the Qualcomm-NXP deal. Whatever the cause, the likelihood of trade war seems to have subsided significantly, as we largely expected.2
No Deal on NAFTA? Meanwhile, in North American trade negotiations, parties are “nowhere near close to a deal,” according to U.S. Trade Representative Robert Lighthizer. The NAFTA negotiation has crossed several deadlines with the needle hardly moving in any direction. Lighthizer added that “gaping differences” remain on issues like agricultural access, intellectual property, labor rules and movement, and energy. With midterm elections fast approaching, the likelihood that Congress reviews or votes on major NAFTA changes is dwindling by the day.3
When Religion and Finance Intersect – normally one would expect a 10,000-word essay/white paper on the dangers of “unstable” products like derivatives and credit default swaps to come from an economics professor or a think tank. But in this case, the bulletin classifying these financial products as “unethical” came from none other than…the Vatican. Indeed. Pope Francis has ventured into territory normally well outside of the purview of the Roman Catholic Church, in criticizing what the Vatican refers to as the “absolute power” of the financial system, which Pope Francis thinks could result in many more crises in the years and decades to come. The recently published bulletin won’t likely result in any change or regulatory effort to address the issue, but certainly created an echo in the financial world.4
More Tax Cuts? – are there more tax cuts headed your way this fall? It’s possible. Earlier this week, President Trump said that his administration would be “submitting additional tax cuts sometime prior to November,” perhaps in search of an additional boost ahead of midterm elections. No details were offered in Trump’s statement, but he mentioned that he plans to meet with the House Ways and Means Committee – which writes tax legislation – soon.5 It’s difficult to say no to a tax cut, but the question is, does an economy at full capacity need additional stimulus?
This week was filled with eye-popping headlines from potential tax cuts to eases on the Dodd-Frank Bank regulation. Still, it can be difficult for investors to stay up to date on these stories to see just how they will pan out, and how they could affect the market. While we cannot predict exactly what will happen, the right investment strategy can make an enormous difference over the long haul.
To help you learn more about strategies that cater to different investment objectives, we have created our Dean’s List of Investment Strategies.6 If you have 500,000 or more to invest, these strategies could help meet your investing needs. Click on the link below to learn more about these strategies and download your copy today:
2 Yahoo Finance, May 22, 2018, https://finance.yahoo.com/news/comes-trade-china-trump-hardly-winning-155524962.html
3 Reuters, May 17, 2018, https://www.reuters.com/article/us-trade-nafta/nafta-nations-nowhere-near-a-deal-ustr-lighthizer-idUSKCN1II2BU
4 Bloomberg, May 17, 2018, https://www.bloomberg.com/news/articles/2018-05-17/pope-goes-off-on-cds-market-calls-derivatives-ticking-time-bomb
5 CNN, May 23, 2018, https://www.cnn.com/2018/05/23/politics/tax-cuts-trump/index.html
6 ZIM may amend or rescind the “Dean’s List” guide for any reason and at ZIM’s discretion.
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