The Poison Pill: ‘Trump May Have To Resort To Shutting Down The Government’

Listen, BofAML’s David Woo is going to keep talking about “chickens” until you listen, ok?

When last we checked in on Woo, he was putting out a “help wanted” ad: “chickens,” he noted, are “wanted for a showdown.”

These chickens have been pecking at Mr. Woo for months. If you’ve missed the “chicken dance” discussion, you can start here and work your way back.

Basically, there are two games of chicken at play on the (geo)political stage:

Trump vs. pretty much everyone on tax reform (competing agendas and the fractious character of the Republican party effectively means no one is on the same page, creating a scenario where there are effectively more than two political parties vying to advance their interests)
U.S. versus North Korea

There have been developments in both games since Woo last wrote and on Monday, he’s out with an update on the tax reform/cut issue. Long story short, Woo doesn’t understand why everyone got so excited last week when the GOP and Trump unveiled a proposal that was widely lampooned for being just marginally (get it?) better than the absurd 1-pager Cohn and Mnuchin trotted out back in April.

The thing about the tax debate is that it’s one of those issues which, despite being relevant for nearly every American, bores people to tears. That is of course a dangerous scenario. Things that are simultaneously important and boring have the potential to bring about disastrous consequences because by virtue of being boring, no one pays any attention to what’s being done behind the scenes until it’s too late. The quintessential example of this dynamic is probably CDOs in the lead-up to the crisis.

So maybe if we treat you like Trump and just give you the bullet points, you’ll be more inclined to make an effort to internalize things. Here’s BofAML:

Misguided perception

We struggle to understand the positive market reception to the unveiling of the detailed tax reform proposal last week. In our view, the plan, which is not even close to meeting the Byrd test, has little chance of becoming a reality in its current form. We see only two viable paths forward if failure is to be avoided.

Grand bargaining?

President Trump has signaled that he is prepared to work with the Democrats on both healthcare and tax reform. A grand bargaining deal, which would be transformational, is unlikely but not impossible. Should it materialize, it would be as extremely bearish for Treasuries as it would be bullish for the USD.

Poison pill

If a bipartisan deal fails to emerge, the only way left to do tax reform will be for the Republicans to find additional tax revenue to offset the proposed cuts. We think there are only two sources of revenue large enough to make a difference: a tax hike on the rich or a VAT.

Trump may have to resort to shutting down the government in December to get his party to swallow one of these two poison pills.

Our favorite tax reform trade

Interest rate vol, currently near 10-year low, is at odds with the fact that:

the “now or the never” moment for tax reform has arrived and

different outcomes will have extremely differently impact on rates.