Washington Weekly: Trump and Coronavirus

The House passed five bills relating to veterans care and a bill to make lynching a federal crime. The Senate approved two federal judges.

The House will pass legislation to extend collective bargaining rights to Transportation Security Administration officers. The Senate will consider comprehensive energy legislation and may approve various Trump administration executive and judicial nominations.

State Fiduciary.

After a federal court in 2018 invalidated the Department of Labor’s (DOL) 2016 fiduciary rule, the SEC moved ahead with a best interest standard for brokers (called Regulation Best Interest or Reg BI) that was finalized in June 2019. Reg BI raised standards for brokers while also preserving investors’ access and choice regarding investment advice and products, a major problem with the DOL rule. Firms are working to implement the requirements of Reg BI by the end of June. As this new federal standard has come into the forefront, many state regulators have proposed their own fiduciary rules. The Massachusetts securities regulator was the first to issue a final regulation last week. The final rule, which will be enforceable in September, alters some problematic provisions in the original rule, but still could pose some problems. New Jersey could finalize its own standard in the coming months, while proposals in other states continue to percolate. Some of these state initiatives could be challenged in court. The continued activity on the state level raises concerns that brokers will be subject to a potential patchwork of conflicting state requirements.

Trump and Coronavirus.

With the continuing global spread of the virus, it's hard to know whether it will still pose an economic or health risk months from now and particularly in the fall as the US presidential election nears. If the virus spreads significantly in the US, it will present a difficult and unforeseen management challenge to President Trump to respond to effectively. His response has to be robust, even if excessive, to accommodate the public's expectations and fears. The Trump administration has requested $1.25 billion from Congress in emergency funding and reallocated that same amount internally to deal with the crisis as a first step. The funds would be used for vaccine development, medical monitoring and stockpiling of protective equipment (such as masks). While the President has been attentive to the issue, he is somewhat vulnerable on it since his proposed budgets over the last three years have reduced spending on public health programs. Democrats have begun to pounce on this issue and will attack the President on any perceived lack of preparation or slip as the crisis potentially widens. Situations like these are difficult for any White House to manage but very easy to spin out of control. The President and White House staff are fully aware of how President George W. Bush's second term was sunk by what was perceived to be a weak response to Hurricane Katrina and how a similar situation could develop with the coronavirus.

US-China Trade.

As we have projected, more serious difficulties have arisen with regard to the modest phase one trade deal that the two countries struck in January. China has signaled it will not need to purchase the same level of energy supplies as it has committed to buy from the US because of falling demand from the coronavirus crisis, but a commitment was made to buy those supplies. Is a deal a deal or not? The US thinks so and has worries about other potential backsliding from the agreement. The agreement has only been in effect for two weeks and progress has been made in other areas, such as select tariff reductions by both sides. Nonetheless, we feel there will be continued friction over the terms of the phase one agreement. These fault lines will come to light once the coronavirus crisis subsides and will be an unwelcomed development for financial markets. And don't even think about a possible phase two deal. Phase one implementation will dominate this year and will be one of many issues that will pose significant challenges to the bilateral relationship.

Retirement Savings 2.0.

At the end of last year, Congress enacted the SECURE Act, a bipartisan package to help increase retirement savings. Congress is now looking to pivot from that success and craft a second package of bipartisan legislation focused on retirement issues. House Ways and Means Committee Chairman Richard Neal (D-MA) is interested in requiring small businesses with ten employees or more to automatically enroll employees in retirement plans. In the Senate, a bipartisan bill sponsored by Senators Rob Portman (R-OH) and Ben Cardin (D-MD) consists of more than 50 provisions that aim to increase retirement savings. These include another increase of the required minimum distribution (RMD) -- to age 75 -- and a provision to index to the allowable catch-up contribution to IRAs to inflation. The bill would also allow employers to base the size of a matching contribution to an employees' retirement account on the amount of an employee's applicable student loan payments. As with the SECURE Act, we think this retirement package will eventually become law but it is more likely to occur after this year.

Electric Vehicle Fee?

The search for revenue to pay for a comprehensive infrastructure bill continues in Washington as lawmakers from both parties would like to move a bill forward. An increase or indexing (to inflation) of the federal gas tax, the primary source of funding for most of the road infrastructure work, seems out of the question for most lawmakers. The gas tax is not presently providing the needed revenue, a problem exasperated as more fuel efficient and electric vehicles hit the road. In the third quarter of last year, more electric vehicles were sold in the US than cars with manual transmissions. States also rely upon a gas tax to fund their portion of infrastructure projects. With the gas tax unable to provide sufficient revenue, 26 states have enacted special registration fees for electric vehicles. Federal lawmakers also are examining a fee for electric vehicles, though this is unlikely to get traction this year. However, there eventually will need to be a fundamental shift in the funding of highways and infrastructure, and electric vehicles will not be able to escape the tax man when that happens.

Not All Love for India.

While the media focused on the large crowds at the rallies featuring President Trump and Indian Prime Minister Modi in India this week, the two countries failed to reach an expected agreement on trade. This false start will strain US-India relations this year. When the President agreed to go to India, the assumption was a trade deal was ripe enough to be announced last week, but negotiators from both sides have dug in. India is bitter about its removal from a US list of preferred counties that have given it greater access to the US market as well as the year-long application of higher US tariffs on steel and aluminum from India. The US actions were in response to India's generally high tariffs on US goods and its market access restrictions on US companies. The difficulties both sides had in reaching a deal on trade this week suggest that there could be a longer trade impasse. Other US trade partners (UK, EU members, Kenya, others) will take notice as they ready themselves for potentially difficult and contentious trade negotiations this year with the US. President Trump is showing no hesitation in disrupting existing trade terms and relationships with individual countries to reset the terms of future trade with those countries. It's a high risk strategy that may or may not work in the long term.

Dumping Pence.

Rumors continue in some political circles that Vice President Mike Pence will soon be replaced by former South Carolina Governor Nikki Haley as President Trump's running mate. We don't believe it. The Vice President has been extremely loyal to President Trump on all accounts and has been important in keeping many parts of the Republican base unified over the last three years, particularly among social conservatives. Perhaps he doesn't offer the personal dynamism and relative youth of Haley, but he serves a more important role of keeping the base together, which is at the heart of the President's re-election strategy. He was also selected by the President this week to lead the administration’s effort to manage the coronavirus crisis, not an appointment that suggests he is leaving anytime soon. We all know that the President is well known for controversial personnel decisions, but we don't think the VP switch is something that will happen. That doesn't mean Haley won't get a big White House job at some point, but just not the job as number two.

Is Bernie Inevitable?

With Senator Bernie Sanders' (I-VT) win in the Nevada caucuses last Saturday, there has been a growing narrative that he may be the inevitable Democratic nominee. While Sanders is certainly trending in that direction, it is too early to coronate him, especially as the three primaries that have occurred only account for 2.5% of the total delegates. Senator Sanders is expected to finish in second place in South Carolina tomorrow. His real test will be on Tuesday when 34% of the total delegates will be awarded. If Sanders significantly outperforms the competition on Super Tuesday, it may be virtually impossible for any of his opponents to catch up. Sanders continues to benefit from a fractured field where more center-left candidates such as Biden, Bloomberg, Buttigieg and Klobuchar appear to be competing for many of the same votes. Sanders may have challenges winning the needed majority of delegates to win the nomination outright, but it will be difficult to deny him the nomination if he enters the convention with a plurality of delegates that is well above the amount of his nearest rival.