This week: The House passed legislation to address the multiemployer pension crisis, legislation to ensure humane and safe conditions for those detained at the border, and the budget and debt ceiling agreement (see below). The Senate confirmed the nomination of Mark Esper to serve as Secretary of Defense.
Next week: The House will be in recess until September 9. The Senate will vote on the budget-debt ceiling deal approved by the House before going on recess until September.
Financial Services Issues
While an ever increasing number of states have legalized marijuana in some form, marijuana businesses in these states still face operating impediments and elevated risks because of conflicts between state and federal laws. One key issue has been their general inability to access banking services. Bipartisan efforts to address this problem have gained some traction in Congress. The House Financial Services Committee in March passed a bill (called the SAFE Banking Act) that would provide a safe harbor to banks and other financial institutions to serve covered businesses. Meanwhile, the Senate Banking Committee this week took the meaningful step of holding its first hearing on the issue. Nevertheless, the legislation’s prospects from here are somewhat murky. While the House is likely to pass the SAFE Banking Act in the coming months, many progressive members are looking to use the bill as leverage to advance social justice priorities. This only will complicate matters in the Senate, where the views of many Republicans are influenced by broader public health concerns about greater marijuana usage. While a narrow fix on marijuana banking is still in play, it will likely be stalled by roadblocks in the Senate.
Other Issues in Play
Budget and Debt Ceiling Resolved.
Congress and the White House have agreed to budget parameters for the next two years and an extension of the debt ceiling until July 2021. The extension of the debt ceiling is the most positive element of this deal. An extension to 2021 takes a possible default of the nation’s debt off the table for two years and eliminates a significant fear of the financial markets over that time. However, the budget agreement's impact on the federal deficit is less positive. The agreement increases spending by $320 billion and offers very little in corresponding offsets. Virtually all areas of federal spending favored by lawmakers and White House officials will receive budget increases for the next two years. Deficit reduction will make a comeback as a political issue one day, but not this day.
Two back-to-back hearings in the House on Wednesday featuring former special counsel Robert Mueller seemed to do little in terms of moving the needle in support of Democrats' calls for impeachment. Strong impeachment advocates and opponents both experienced spikes in their blood pressure during parts of the hearings, but is anyone else paying attention? It seems that most voters are focusing on other things and/or experiencing impeachment fatigue. Various House committees will continue in the fall to examine the President’s business, tax filings and other aspects of his life. It is now clear that any additional evidence to support an impeachment effort will have to come from something other than the Mueller report. The former special counsel is clearly ready to move on, and he exits the national stage at age 74 with a more favorable rating (relative to his disapproval rating) than the vast majority of lawmakers.
High-level US trade negotiators will visit Shanghai next week for two days to resume trade negotiations. Anything can happen, but our guess is that the two sides will find agreement on a few modest things, including new Chinese purchases of US agricultural products and a pause of new US tariff increases on Chinese exports to the US. President Trump and Chinese President Xi already agreed in principle to these two items in Japan a month ago. We should see details about them announced next week once this round of negotiations concludes. Following two months of escalating tensions, agreement on virtually anything will be a good sign. The markets will love any progress but may overreact to the baby steps that we believe will be announced next week. Major differences still exist between the two countries, and they will be very difficult to resolve over the next few months. One related development to watch is Hong Kong. The US has been restrained in commenting on the civil unrest in Hong Kong in order to not further alienate the mainland in the midst of these contentious trade negotiations. If the mainland takes any provocative action or the US were to comment strongly in favor of the protesters, this could significantly set back the trade talks for the foreseeable future.
US Trade Representative Robert Lighthizer and House Democrats have been meeting regularly to address Democrats' concerns over the USMCA. House Democrats want stricter enforcement, stronger labor and environmental protections and a shorter term exclusivity for biologic drugs. There was some hope that a deal would have passed by now, but that clearly has not happened. A vote on the USMCA, if there is one, will be closely watched by financial markets. Nearly 200,000 US companies are involved in trade among the three countries, more than the number of companies that are involved with US-China trade, which has received significantly more attention from the media and markets. The House is likely to vote on this agreement in October or November, but this could be delayed given the challenging relationship between the President and House Speaker Nancy Pelosi (D-CA), who must schedule the vote. There are various substantive and political challenges facing this deal, and its passage is anything but certain. Watch for this issue to rise in prominence in the fall and eclipse the US-China dispute as the lead trade story out of Washington.
Index Cap Gains?
Last year's chatter on a policy proposal allowing capital gains to be indexed has returned. Such a change, which would be advanced by the Trump administration, not Congress, would lower the tax liability of gains by investors, especially those investments held over longer periods of time. We were skeptical of such a change advancing last year and still remain skeptical of any changes in the near future. Proponents of the idea, including various economic officials in the White House, have begun a quiet campaign to breathe life back into the proposal, but we have not seen a critical mass emerge. We are keeping an eye on the issue, but don’t see it as likely to happen before the election.
With hurricane season already upon us, Congress faces a looming expiration of the National Flood Insurance Program (NFIP), a program that provides federally-backed insurance protection to homes in flood-prone areas, on September 30. The NFIP has buckled under the weight of the financial impact of major hurricanes over the past few years such that Congress in 2017 had to take the step of cancelling $16 billion of the NFIP’s debt so that it would avoid hitting a $30 billion statutory cap. Congress would like to pass a long-term reauthorization of the NFIP, but has had to settle on shorter-term extensions because of disagreements on reforms to the program. The House Financial Services Committee last month unanimously passed bipartisan legislation that would reauthorize the NFIP for five years and make some reforms to try to increase affordability and reduce program costs. A group of lawmakers from costal states last week proposed a bill that would go even further in providing protections to homeowners from premium increases. With the clock ticking and consensus still proving elusive, Congress once again will need to punt on flood insurance to a later date.
A Senate committee next week is expected to release a bill that will reauthorize funding for surface transportation programs. Funding will cover upgrades and new construction of highways, roads and public transportation. Authorization of funding for these programs expires next year. The Senate bill is expected to provide $287 billion for roads and highways over five years, a 28 percent increase from the $226 billion in the current law. The bill should be bipartisan and begin to move forward later this year. While it only covers a small portion of our nation’s infrastructure, it is nonetheless important and is something that will result in road improvements in virtually every congressional district. Congress won’t deliver a broader infrastructure bill this year or next, but smaller measures like this are helpful in addressing these needs on a more piecemeal basis.
The Final Word
Democratic Debates Round Two.
The second round of Democratic presidential primary debates begin next Tuesday. Once again, there will be two nights of debates, each featuring ten candidates. Tuesday's debate will feature Senator Bernie Sanders (I-VT) and Senator Elizabeth Warren (D-MA), who seem to be competing for very similar primary election voters. The Wednesday session will have a rematch between former Vice President Joe Biden and Senator Kamala Harris (D-CA). Montana Governor Steve Bullock will participate in this round of debates after missing the first round, while Congressman Eric Swalwell (D-CA) will not participate after dropping out of the primary in early July. These debates will be the last ones to use lower qualification thresholds (either 1% polling in three polls, or 65,000 individual donors). The September debate will require candidates to have 2% in four qualifying polls and 130,000 individual donors. So far, only a handful of candidates have hit those thresholds, which means that the upcoming debates may be the last chance for many candidates to make a name for themselves and gain the momentum needed to qualify for the next debate. We expect the debates next week to be more contentious than the last round as candidates become desperate to create a viral moment that helps keep them in the race.