Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don’t favor any party, and partisan ideology invites bias—dangerous in investing.
Zip-a-dee-doo-dah, zip-a-dee-day! It looks like departing House Speaker John Boehner cleaned the barn[i] as promised, and his successor, Paul Ryan, will have a clean(ish) start to his Speakership. A bipartisan compromise to suspend the debt ceiling and fund the government for the next two years passed the House Wednesday and is on its way to the Senate—a rare instance of our elected representatives not waiting till the last possible second to compromise. As usual for a Federal budget, it creates winners and losers, setting the Beltway ablaze with blather. Some applaud the deal, some hate it, but however you feel about the tentative budget agreement, it is mostly symbolic, with precious little economic or market impact.
The tentative agreement has two major highlights: It increases projected spending by $80 billion over next two years—$50 billion in fiscal year 2016 and $30 billion in fiscal year 2017—divided evenly between defense and domestic spending programs.[ii] This lifts the sequester spending caps in place since 2013, an olive branch to the White House virtually assuring Democratic support. The deal also suspends the debt ceiling to March 2017—which some claim is a huge positive because it averts “default.” However, that is overstated to the point of inaccuracy—default was never a real threat. Now, not hearing about the debt ceiling for a spell will be nice, but that’s about the biggest plus of this plank. The budget proposal also introduces minor tweaks to soften cost hikes for Social Security and Medicare—particularly important with a presidential election year coming up.
Folks on both sides of the aisle are cheering and jeering the deal. Some see it as the best-case outcome in a situation lacking great options. Others are far more critical, blasting the negotiations’ opaque and last-minute nature and the fact the deal boosts spending, which they see as fiscally irresponsible. Still others look at this deal in the context of the future: What will this mean for the incoming Speaker of the House, Paul Ryan? What are the implications for 2016’s presidential race? But in our view, this speculation is a wee bit overwrought. The real impact isn’t as far-reaching as it’s being made out to be, presuming it passes.
In our view, this latest budget agreement is essentially Congressional business as usual—nothing radical or meaningful has changed, despite the commentariat’s suggestions. Some party leaders say this deal represents a (rare) triumph of bipartisanship, a real accomplishment for the Beltway putting the economy on firmer footing.[iii] Which is overstated. Congress has a proud history of squabbling for months on end, then begrudgingly compromising at or after the last possible second. In summer 2011, the US found itself in a big debt ceiling kerfuffle. Politicians presented a looming August 2 deadline as doomsday, in which the US would default on its “obligations.”[iv] However, our fine legislators struck a bipartisan deal defanging the debt ceiling until 2013 on July 31, “saving” us from doom.[v] Welps, when 2013 came around, the debt ceiling—accompanied with a government shutdown—once again became a hot topic issue. Again, an 11th hour reprieve pushed the debt ceiling to January 2014. And shortly before hitting that deadline, Congress agreed to a continuing resolution in December that secured government funding until 2015. Now, in 2015, we get a deal that raises the debt ceiling through mid-March 2017 and boosts spending through fiscal 2017 (more detailed spending bills must be passed by mid-December), conveniently kicking the can past the 2016 election. That lets candidates use it as a wedge issue in the campaign—a favorite pastime—while also keeping DC fireworks at a minimum on the race’s home stretch. It also gives the next president a couple of weeks to ready him or herself for battle after entering office.
Like any bill, this tentative budget creates winners and losers—and some of the rules could potentially impact a lot of folks. One proposal requires oil sales from the Strategic Petroleum Reserve (SPR) from 2018-2025. The SPR, originally created as a counterweight to Middle East oil embargo in the 1970s, is outdated and unnecessary today, especially given the shale oil boom. Doing away with the SPR—a relic from another era—seems sensible enough[vi]. However, considering oil’s sharp price decline over the past year, Congress’s scheduling liquidations now calls their market-timing capabilities into question.[vii] Maybe oil rebounds three years from now, though, making them look wise—just doesn’t really seem like it today. Another part of the budget deal reauthorizes the Export/Import Bank, legislation that was overwhelmingly approved by the House on Tuesday. While touted as a triumph for both business and labor, the Ex/Im Bank has a very narrow focus, materially benefiting only a handful of firms, limiting its overall macro impact. This will help the bank’s primary beneficiaries, but it isn’t a significant economic driver.
Arguably, the deal’s single biggest takeaway for investors isn’t noise about the debt ceiling, government spending versus austerity or any other macro-topic. Rather, it could be a provision tweaking Medicare premiums. As this Wall Street Journal article points out, 30% of the 50 million seniors in Medicare Part B—about 15 million folks—faced a 52% jump in premiums. Part of the budget bill would reduce those premiums to 15% instead—covered by a federal loan from the Treasury—as well as limit an increase in deductibles for enrollees. The loan would be paid back by those 15 million folks via a $3-a-month charge, spreading the cost increase out over a number of years. If it passes, this arguably could be the most tangible impact of the budget bill for many investors—an example of how legislation doesn’t have to dominate headlines to meaningfully affect regular folks.
[ii] There is also an additional $32 billion increase to emergency overseas defense spending not included in that $80 billion
[iii] We award no “huzzahs.”
[v] And S&P still downgraded US debt a few days later. And despite their report including a several-trillion dollar math error! The nerve!
[vi] Though they aren’t doing away with it entirely—the planned sales are a drop in the bucket … err, well.
[vii] Something they have in common with regular folks!