Infrastructure and interest rates

Expectations are growing that the Trump administration will attempt to move a 1 trillion dollar infrastructure bill through the new Congress this January. Legislation of this size would reshape public spending priorities for the next decade. It would fulfill an important campaign pledge and place the needs of the working class front and center as a policy priority for the first time in a generation. Trump is, of course, a builder and it is assumed he would be deeply involved in the rebuilding effort. Questions surrounding an effort of this magnitude abound. What rebuilding infrastructure are we talking about? Is it our collapsing inner cities, our decimated manufacturing towns, our crumbling airports, our waste water and drinking water systems, our railways, our energy and electrical works? Or are we also speaking about our information superhighway and our move to G5 and beyond. You see the problem and the opportunity, there is an awful lot that needs fixing, but how many of us believe our government, factionalized and dysfunctional, could take on such an extraordinary task.

The Trump administration could pass this legislation though the tactic known in political circles as triangulation.

By working with the Democratic minority in the Senate and House he could smash the deficit hawks and take the prize. Republican deficit hawks will be furious but he can offer them a consolation gift, a right wing Supreme Court Justice.

At least, this is what the bond market is prognosticating. Since the election the 10 year US bond has moved 60 basis points, from 1.71 percent to 2.31 percent.

The market is also predicting with 95 percent certainty, that the Fed will raise rates 25 basis
points in December. Will all this come to pass? We believe a large infrastructure bill will pass Congress. As always, the devil will be in the details. Will an infrastructure bill become a tax cutting exercise for the private sector or will Trump deliver real dollars for real projects?  If 1 trillion dollars, or any amount close to that, moves through the Congress we expect GDP to smash though 2 percent and move north of 3 percent in 2018. Inflationary expectations are another matter and will be weighed against gains in productivity. One area of increased merger and acquisition activity will be technology infrastructure.  Cloud computing and data integration are central to project coordination. Those firms at the nexus of technology and infrastructure are expected to see increased profitability, accelerated buy side interest and enhanced valuation in the coming year.

Steven Malin

November 22, 2016