FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 17, 2017
Jim O’Shaughnessy: Fear Signals Created By The Reptilian Brain
ValueWalk's Raul Panganiban interviews Jim O’Shaughnessy, Chairman, Co-chief Investment Officer, and Portfolio Manager at O’Shaughnessy Asset Management. In this part, Jim discusses the fear and emotional signals created by the reptilian brain. Q1 2020 hedge fund letters, conferences and more That's very cool. For the factor to try to seek the reason why it works, Read More
- September Retail Sales Strongest in 2½ Years
- IMF Report: Global Economy Gaining Momentum
- Federal Budget Deficit Hit $668 Billion in FY2017
- Trump is Stacking US Courts With Scalia-Like Judges
While the mainstream media remains obsessed with President Trump’s tweets and other controversial statements, the Commander-in-Chief is quietly packing the federal courts with conservative, originalist judges who are not only very smart but also relatively young.
President Trump took office with more federal court vacancies than any of the last five presidents, with the exception of Bill Clinton. And Mr. Trump is wasting no time filling them: he has already made almost 60 nominations to the federal courts and has dozens more coming.
The president is literally remaking the judiciary with young conservatives who believe in the literal interpretation of the Constitution. Since the media is so obsessed with Mr. Trump’s unusual antics, they either haven’t noticed or are too busy bashing him for other things. It is for that reason that I want to let all of my clients and readers know about this good news.
Before we get to that discussion, let’s take a look at a couple of economic reports from last week. The September retail sales report last Friday was the strongest in 2½ years. The International Monetary Fund last week increased its estimate of global economic growth from 3.2% to 3.6% this year and raised its 2018 estimate to 3.7%.
Finally, we’ll look at the latest figures on the federal budget deficit for FY2017, which came in at a whopping $668 billion, up $82 billion over FY2016. This is a troubling trend that unfortunately looks to continue. Following that, I’ll get to our main topic today.
September Retail Sales Strongest in 2½ Years
US retail sales recorded their biggest monthly increase since March 2015 last month, in part due to clean-up and reconstruction efforts in areas devastated by Hurricanes Harvey and Irma, which boosted demand for building materials and motor vehicles.
The Commerce Department reported on Friday that retail sales jumped 1.6% in September – buoyed by a surge in receipts at service stations, which reflected higher gasoline prices after Harvey disrupted production at oil refineries in the Gulf Coast. For the 12 months ended September, retails sales increased 4.4%.
Sales at gardening and building material stores increased 2.1% last month, the biggest increase since February, and followed a 0.6% rise in August. Receipts at auto dealerships soared 3.6% last month as Americans in Texas, Florida and elsewhere replaced flood-damaged motor vehicles. Both of these sectors should continue to increase over the next several months.
IMF Report: Global Economy is Gaining Momentum
The International Monetary Fund (IMF) reported last Tuesday that the world economy is enjoying its most widespread and fastest growth spurt since a temporary bounce back from the global recession in 2010.
In its latest World Economic Outlook, published at the start of the annual meetings of the IMF and World Bank in Washington, the IMF added that the unexpectedly good news has further to run in 2018 and rising capital higher investment was also beginning to improve its longer-term economic prognosis.
The IMF estimates that the world economy will expand 3.6% in 2017, up from its 3.2% forecast earlier this year, and it is likely to grow 3.7% in 2018. These growth rates are better than the norm for this decade and are finally back to the long-term average of the past 30 years.
The upgraded growth forecasts came alongside predictions of low inflation across the world, helping to boost household incomes, a continuation of loose monetary policies and an end to fiscal austerity in most countries, the IMF said.
The last time the global economy grew this fast was in 2010 as the world economy staged a temporary recovery from the 2008-09 financial crisis, so this year’s performance was significantly stronger, according to Maurice Obstfeld, chief economist of the IMF. “This is not bounce back from a sharp deceleration, this is an acceleration from the fairly tepid growth rates of recent years, so that’s really good news,” he said in an interview ahead of the report’s publication. China’s economy is also performing better than expected on the back of easy credit and rising public investment.
The IMF forecasts for the US were cut marginally, however, reflecting weak 1Q GDP growth of only 1.2%, and the IMF’s view that a large fiscal stimulus is now less likely than it thought in April. That could change for the better in the IMF's next projections since the US economy rebounded to 3.1% growth (annual rate) in the 2Q. It will also depend on how the US economy performs in the wake of the hurricanes. I expect the IMF's estimates for US growth to improve in the months ahead.
The IMF did caution that the international good times are dependent on there being no serious shocks to the global economy from geopolitical tensions, from an increase in protectionist forces or from negotiations such as those over Brexit in England or the North American Free Trade Area (NAFTA). Any negative surprises in these areas could disrupt existing trade ties and supply chains. Yet all in all, the latest IMF global economic projections were quite upbeat.
Federal Budget Deficit Soared to $668 Billion in FY2017
In news that received scant attention in the media, the Congressional Budget Office reported last Friday that the US budget deficit for fiscal 2017 grew for the second straight year to $668 billion, an increase of $82 billion over FY2016. This news comes on the heels of the revelation last month that our national debt has now surpassed $20 trillion, which was also largely ignored by the media.
The larger than expected increase in the budget deficit in FY2017 was primarily due to the fact that federal spending in FY2017 increased by 3% over FY2016. That probably doesn't sound like all that much to many Americans, but it adds up quickly when the national debt is $20 trillion. Federal spending climbed to a record $3.98 trillion in FY2017, and it is projected to top $4 trillion for the first time ever in FY2018.
The main reason for the large rise in the deficit was the fact that federal revenues grew by a mere 1% increase of $47 billion in FY2016. Individual income taxes last year climbed a meager $39 billion, or 2.5%, while corporate taxes fell $3 billion, or 1%. And this slow growth continued in the first half of FY2017.
A typical economic expansion throws off 3% or more in additional revenue each year as wages and profits rise, and in the go-go 1980s and 1990s increases of 5% or more were common. It’s no coincidence that the federal budget deficit declined rapidly as a share of GDP during those expansions, even going into surplus in the 1990s, in contrast to the current expansion.
The bottom line: If our economy continues to grow at 2% or less, the budget deficits and the national debt will continue to soar. And the Congressional Budget Office now projects that the economy will continue to grow by an average of only 1.9% annually for the foreseeable future. If that’s as good as the economy can do, revenues will continue to trickle in and deficits will climb as far as the eye can see.
President Trump and the Republicans are proposing major tax reform with the goal of lifting growth to 3% or more a year. That’s hardly a far-fetched goal, and if growth reaches 3% for even a few years, the Treasury will get a windfall of new revenue far exceeding current estimates – in which case the budget deficits will not be as large as the CBO currently projects. On the other hand, if economic growth remains stagnant at 2% or less, the annual budget deficits will continue to mount.
At some point, our political leaders in Washington are going to have to face the fact that we have to cut entitlement spending – Social Security, Medicare, Medicaid, etc. – if we are ever going to get our deficits and debt under control. Yet neither political party has the conviction to make such a stand. Unfortunately, it will likely take another even worse financial crisis to force such a change.
Trump is Stacking US Courts With Scalia-Like Judges
If you ask conservatives what President Trump’s major accomplishments have been since he took office, most will cite only one: Supreme Court Justice Neil Gorsuch. Yet behind the scenes, the president has been packing the federal courts with conservative, originalist judges at a pace which has already exceeded what President Obama accomplished in his first full year in office.
Mr. Trump has now nominated nearly 60 judges. While not all of them have been confirmed, they likely will be. There are another 160 court openings to go, which should allow this president to flip or further consolidate conservative majorities on the circuit courts that have the final say on 99% of federal legal disputes.
To be on this blistering pace, President Trump has reached out for help from Senate Majority Leader Mitch McConnell and White House Counsel Don McGahn. While Mr. Trump makes the final decisions, he does look to McGahn and his team for suggestions on who to consider.
Most importantly, the president is taking a very different approach to his selection of judges than that, say, of President George W. Bush. Bush preferred a committee approach where dozens of advisers hunted for the least controversial nominees with the smallest paper trail. That helped get picks past a Senate filibuster, but it led to bland choices, or to ideological surprises like retired Justice David Souter who turned out not to be a conservative at all.
Harry Reid’s 2013 decision to blow up the filibuster for judicial nominees has freed the Trump White House from having to worry about a Democratic veto during confirmation. Mr. McGahn’s team (loaded with former Clarence Thomas clerks) basically has carte blanche to work with outside groups like the Federalist Society to tap the most conservative judges.
According to Kimberley Strassel (one of my favorite writers) in a piece in The Wall Street Journal last week, Mr. McGahn has long been obsessed with constitutional law and the risks of an all-powerful administrative state.
His crew isn’t subjecting candidates to 1980s-style litmus tests on issues like abortion. Instead the focus is on promoting jurists who understand the unique challenges of our big-government times. Can the prospective nominee read a statute? Does he or she defer to the government’s view of its own authority, or insist on a literal interpretation of the Constitution?
Mr. Trump has also made it clear to his team that he wants – in addition to a conservative paper trail – men and women who are very smart and relatively young. Take for example his nominee for the Seventh US Circuit Court of Appeals, Notre Dame law professor Amy Coney Barrett, age 45, whose influence on the court could still be going strong 40 years from now.
The result, according to Ms. Strassel, has been a “band of young rock stars and Scalia-style textualists like Ms. Barrett, Texas Supreme Court Justice Don Willett and Minnesota Supreme Court Associate Justice David Stras.”
Because Mr. Trump’s picks have largely spent their careers focused on administrative law and constitutional questions, few have gotten bogged down by controversial cultural rulings (abortion, etc.). They do have paper trails, but mostly on serious and technical issues. As a result, they provide little ammunition for the Democrats to use against them.
While Senate Republicans have little in the way of major accomplishments, they’ve remained unified on judges. In the absence of a Senate filibuster, they have already confirmed a number of Trump’s conservative, originalist nominees and stand ready to greenlight dozens more just ahead. I’m surprised the mainstream media is not squawking more about this!
Finally, and unrelated, a lot of people have asked me why President Trump ended the Obamacare subsidies to insurance companies last week. The first link in SPECIAL ARTICLES just below explains it better than I could – so if you’re wondering, be sure to read it.
Wishing you all the best,
Gary D. Halbert
Why President Trump ended the Obamacare subsidies
Good explanation of President Trump’s new executive orders
Charles Schwab analyzes Trump’s tax reform plan
BLOG: Optimism Is Surging in America, Despite Dislike of Trump