Both the House and Senate passed a short-term extension of government funding through December 20. Both chambers also approved legislation that subjects the US preferred trade status for Hong Kong to annual reassessments.
Both the House and Senate will be on recess to celebrate Thanksgiving, though work on impeachment will continue in various House committees (see below).
Financial Services Issues
Terrorism Risk Insurance.
Congress took some important steps this week toward extending the Terrorism Risk Insurance Act (TRIA), which provides a federal insurance backstop to cover significant damage caused by acts of terrorism. The House passed a seven-year extension of TRIA this week, and the Senate Banking Committee followed up by passing a similar bill. TRIA, which was created by Congress after the 9-11 attacks, will expire at the end of 2020. Although this is over a year away, the insurance and real estate industries, among others, have been pushing Congress to act well in advance of this deadline to ensure that there isn’t disruption in the marketplace. Major construction projects, for example, might not be able to move forward without the certainty of this backstop being in place. While past extensions of TRIA have been fraught and weighed down by debate about the extent to which the government should be providing this support in the first place, the process this year has been smooth thus far and the progress this week could allow a long-term extension of TRIA to become law later this year as part of a final agreement on government funding.
Private Equity Pushback.
The House Financial Services Committee this week held a much-anticipated hearing on private equity (PE) that was clearly animated by Senator Elizabeth Warren’s (D-MA) attacks on the industry on the presidential campaign trail. On one side, Republicans and some Democrats argued that the industry is an important engine of long-term business growth and investment as well as returns for pension funds. Many other Democrats echoed Warren’s criticisms, with value extraction, excessive leverage and job layoffs being key themes. Senator Warren has a bill that would upend the PE business model, most notably by requiring PE funds to assume the liabilities of portfolio companies and by prohibiting any capital contributions for two years. While this legislation isn’t going anywhere in the current Congress (particularly with even several Democrats expressing concern about the bill’s economic impact), there will continue to be a lot of noise about the PE industry at least as long as Senator Warren is a presidential candidate.
Other Issues in Play
Eight witnesses appeared before the House Intelligence Committee this week and largely reiterated points made earlier in private hearings. In the process, the impeachment rationale, as advocated by House Democrats, was solidified. Articles of impeachment are being written by the Judiciary Committee as a result of the findings of these hearings, if they haven’t already been written. The House still appears to be on track for a final vote on impeachment this year, though no date has been set yet. There has been speculation this week that the probe of the President could be expanded to include issues brought up in the Mueller investigation, but an expanded probe would certainly push a final House vote well into 2020. House Democrats don’t want their vote to interfere with the ongoing presidential nominating process, especially as it moves toward early contests in Iowa and New Hampshire in February. However, even if the House votes on impeachment this year, the subsequent Senate trial almost certainly will extend through that period and perhaps longer.
We're still slightly bullish that a modest "phase one" agreement in the ongoing US-China trade spat will materialize, but things are proceeding much more slowly than we expected. Progress only seems to be made when the negotiators are meeting in person and therefore are more distant from other influences in their respective capitals. With this dynamic, the US-China negotiations have seemed to proceed with a pattern of one step forward and two steps back. Reflecting the pressure they face to complete a phase one deal, each side recently has made some concessions. Notably, China has shown flexibility in accepting US poultry exports, while the US has issued some waivers for US companies to work with Huawei. Nevertheless, finding agreement on remaining issues will not be easy and we would feel better about this overall situation if both countries showed more urgency in their negotiations. We think the urgency will kick in as we approach the December 15 date for the US to impose higher tariffs on Chinese consumer goods.
Both the House and the Senate this week overwhelmingly passed legislation to reassess the US's preferred trade status for Hong Kong. This could be a complicating factor to a phase one agreement as a spokesperson for the Chinese Government recently said that China will take "strong countermeasures" if the US were to enact such a law. It's hard to know what this means exactly, but such an increase in tensions could upend the trade negotiations. While the bill doesn’t end Hong Kong’s preferred trade status with the US, it would subject it to an annual reassessment. It also would subject Chinese officials involved in aggression against Hong Kong protesters to potential sanctions. With delicate trade negotiations with China in the background, President Trump now faces a decision on whether to sign or veto the legislation. Since any veto would be overridden by Congress, we believe President Trump will sign it over the next week.
US-Mexico-Canada Agreement (USMCA).
The House seems poised to vote on the USMCA in early January once it has had its vote on impeachment. This is a big development and will result in a major win for President Trump, whose administration authored the trade deal. It's a big win for House Speaker Nancy Pelosi (D-CA) too, since she will cite the vote as proof that the House can address major policy issues at the same time it pursues impeachment proceedings. The agreement should pass the House and the Senate with comfortable majorities. The House plan is to vote on impeachment in December, followed by an extension of government funding by December 20. The USMCA would then be next up and subject to a vote likely right after January 1. A solid vote on the trade agreement will remind the world and financial markets that the US is committed to an expansive trade policy with its top two trade partners.
Trump Tax Cut, Round Two?
There has been speculation that President Trump will push for another round of tax cuts focused on the middle class. At this time, White House staff is examining options and will likely outline a plan in the first or second quarter of next year. While this plan will clearly not advance in Congress next year, President Trump can tout it on the campaign trail. As such, President Trump's tax plan and those of his Democratic challengers (including Senator Warren's wealth tax) should be evaluated in the context of what might happen in 2021 depending on the election results.
The retirement savings bill that passed the House in May, the so-called SECURE Act, remains stalled in the Senate. At the time, we didn't expect movement on this legislation until the end of the year, and that has been the case. This bill has many provisions, most notably an increase in the age for required minimum distributions (from 70 ½ to 72) and an effective end to stretch IRAs. Lawmakers will make another push in December for this legislation. Supporters are hoping it will be included in a year-end funding package, but its inclusion is not certain given that there remain a few Senators with concerns about the retirement bill. While we are less optimistic about the bill's prospects than we previously were, we still believe it has a fighting chance.
The Final Word
All Eyes on Impeachment?
As the public impeachment hearings finish their second week, interest in the historic event is high with 63% of adults and 70% of registered voters saying they are closely following news on the impeachment inquiry. However, this interest has not yet translated into massive viewership of the hearings, which had an estimated 13.8 million views at its peak and is averaging around 12 million views per day across the major broadcast and cable networks. While this is larger than average weekday viewing for these networks, it is well short of the 20 million viewers who watched the hearing of Supreme Court nominee Brett Kavanaugh and the 19.5 million viewers who watched former FBI Director James Comey's testimony before the Senate Intelligence Committee. One reason for this lower viewership could be that most Americans say the impeachment hearings won't change their mind on the subject. Recent polling shows that only 30% of those surveyed say that information gleaned from the impeachment inquiry could change their mind on impeachment, while 65% of respondents indicated they didn’t think any new information would change their mind. While interest in the impeachment inquiry is high, many Americans appear to have already made up their mind on the issue and therefore don't feel the need to tune in and watch the hearings.