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“China Announces Trade Concessions as Liu He Heads to U.S.”  This morning’s Bloomberg article leads with:

The Chinese government said it will extend a suspension of retaliatory tariffs on U.S. autos and include the opioid fentanyl in a list of controlled substances, two steps that could generate a positive atmosphere for trade negotiations due to resume this week.

Beijing temporarily scrapped the 25 percent tariff imposed on vehicles as a tit-for-tat measure on Jan. 1, after the White House delayed a rise in tariffs on $200 billion of products that had been due that day. The Ministry of Finance announced an extension of the suspension on Sunday, without giving a specific end date.

Vice Premier Liu He, China’s trade envoy, left for the U.S. on Monday, according to the Ministry of Foreign Affairs.

Chinese officials also pledged to tighten regulation on fentanyl from next month, a promise President Xi Jinping already made to President Donald Trump at a December meeting in Argentina. The inclusion of the drug as a controlled substance in a category of non-medicinal narcotic drugs and psychotropic substances will start May 1, according to the China National Narcotics Control Commission.

The moves signal China is trying to keep momentum in trade talks going as they enter what could be the final stretch before Trump and Xi are presented with a text to finalize or sign. Beijing is determined to prevent an escalation of the frictions that have hurt its economy and roiled markets, even as enforcement measures remain a sticking point in negotiations.

“This Time Probably Isn’t Different for Fannie, Freddie.”  This morning’s Wall Street Journal article leads with:

Shares of housing-finance giants Fannie Mae FNMA -5.08% and Freddie Mac FMCC -3.93% have rallied this year on expectations they could soon be released from government control. The exuberance is premature.

Nearly everyone agrees that the current system needs reform so that the two companies, which promote housing-market liquidity by purchasing and securitizing mortgages, don’t remain wards of the state indefinitely. But there are essentially two schools of thought on how to do this. Shareholders want to see them recapitalized and released from government control as soon as possible—something that could be accomplished by the Trump administration alone without congressional legislation. Advocates say the companies could be set up with enough capital and strictly regulated so that they never again pose a threat to the nation’s financial stability.

Currently, the shares are essentially worthless. They could become worth a lot, though, if the government were to end the current arrangement of directing virtually all of the companies’ profits to the Treasury, restructuring them into private, profit-seeking enterprises. Hence the shares trade as highly volatile bets on this eventual outcome.

Critics of such an approach, including many market-oriented conservatives, say it risks leaving an implicit taxpayer backstop in place for the companies should they run into trouble again. They favor a more comprehensive solution that would require new laws. Most “comprehensive” proposals envision an explicit federal guarantee on some mortgage securities and new private competitors to Fannie and Freddie.

I agree with this article’s conclusion that there’s very little chance of enacting legislation to reform Fannie and Freddie before 2021.

“Policy Risks in a Budget Crunch.”  This morning’s blog by American Action Forum President Doug Holtz-Eakin stated:

A central issue in the near-term policy outlook is the fate of the caps and sequester mechanism under the Budget Control Act (BCA). In the absence of a deal and accompanying legislation, the BCA will dictate sharp cuts to both non-defense and defense discretionary spending. The president’s budget accepts the cap on non-defense spending, but utilizes a budget gimmick (the Overseas Contingency Operations, or OCO, account) to add back $170 billion in defense spending. In contrast, the Senate Budget Committee passed a budget that accepts both caps, but embodies a mechanism to allow higher spending on both categories if the increases are offset.

That outlines the budgetary dimensions of a deal. But there is a risk that the dollars become divorced from the policy needs. Indeed, the BCA caps themselves are a tribute to this very risk. While they made the 10-year deficit smaller on paper, they were not built on a real policy foundation. Commenting on this defect in Simpson-Bowles, which featured similar caps, former Secretary of Defense Robert Gates once put it, “‘The truth of the matter is when it comes to the deficit, the Department of Defense is not the problem,’ he said. ‘I think in terms of the specifics they came up with, that is math not strategy.’” Nothing has changed in the interim.

Following the strategy of the president’s budget, for example, means that the $98 billion is in OCO. That means the budget isn’t scaled to anything like the budget caps. This exposes needed acquisition and modernization funding to funding risks. The National Defense Strategy (NDS) prioritized threats from near-peers (Russia and China) that will involve modernization to the nuclear triad. That means expensive systems such as the B-21 long-range bomber ($3 billion for FY2020), the Columbia-Class ($2.2 billion for FY2020), as well as improvement to ground-based weapons ($570 for FY2020), and nuclear command, control and communications systems ($2.5 billion for FY2020).

There are risks that are less high-profile, but not less important. For example, the current fleet is the smallest and oldest in the history of the U.S. Air Force and needs to purchase at least 72 tactical aircraft per year to support the NDS. Studies indicate the need for a future force structure that has equal parts of the latest generation (F-35 and modernized F-22) and previous generation fighters. The latest version of the F-15 (the F-15X) is the most economical way to make up the latter part of the force structure, as well as contribute to the homeland defense mission. These are often the jets “scrambled” to protect our cities, our major events and our people, coast to coast. One of the many issues facing Congress is funding the procurement of capabilities like the F-15X.

Policy decisions are rich with tradeoffs in the face of multiple threats. But those decisions should not be dictated strictly by budgetary considerations.

We Washington Budget Wonks understand the negative consequences of Congress’s broken budget process.

2020 Election: “What More Than 40 Years Of Early Primary Polls Tell Us About 2020: Part 1.”  This morning’s FiveThirtyEight article leads with:

How much can we learn from early primary polls? Back in 2011, FiveThirtyEight Editor-in-chief Nate Silver set out to answer this question and found that early national polling is at least somewhat predictive of who will win the nomination, especially when the results are adjusted for each candidate’s name recognition.

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About Pete Davis

Pete Davis

Pete Davis advises Wall Street money managers on Washington, DC policy developments that affect the financial markets. Visit his website here daviscapitalinvestmentideas.yolasite.com.

Articles by Pete Davis

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