Guggenheim’s Millstein Warns of Potential ‘Fiscal Disaster’

Congressional Republicans risk “fiscal disaster” if a recession hits as they push through sweeping tax cuts, Guggenheim Securities Co-Chair Jim Millstein warned. “What today is 6.4% of GDP as a deficit, a $2.4 trillion deficit, could easily expand to $4 trillion if we had a recession,” Millstein said in an interview on Bloomberg Television. The cost estimates of the current GOP package “assume consistent economic growth. So imagine we have a recession. In the last five or six recessions, the budget deficit actually blows out because tax revenues go down and spending increases.”

A key House committee advanced President Donald Trump’s giant tax and spending bill over the weekend. The Joint Committee on Taxation had pegged the total cost of the bill at $3.8 trillion over the next decade, though an analysis by the Committee for a Responsible Federal Budget says the outcome will be more dire. Long term Treasury yields have been rising this month in the wake of investor fiscal concern. Yields on the 30-year bond breached 5% Monday in the aftermath of Moody’s announcement Friday that it was joining other ratings agencies in downgrading US sovereign debt to Aa1 from Aaa.

Millstein recalled how in the 1990s it took the bond market pushing yields sharply higher to persuade politicians to bring the deficit down. He said it may be worth happening again, “because there really is no check on them right now.”

What You Need to Know Today

Jamie Dimon warned investors against complacency, pointing to a growing number of risks—everything from inflation and credit spreads to geopolitics (not to mention last week’s downgrade). The JPMorgan chief executive said the chances of elevated inflation and stagflation are greater than has been advertised, cautioning that America’s asset prices remain high and credit spreads aren’t accounting for the impacts of a potential downturn. “Credit today is a bad risk,” he said at the bank’s investor day on Monday. “The people who haven’t been through a major downturn are missing the point about what can happen in credit.”

Citing more than a decade of failure by the US government to arrest large fiscal deficits that have fueled nearly $37 trillion in debt, the Moody’s cut triggered dire warnings from many big names on Monday. But none of them—nor the dangerous reaction by the bond market—seemed to matter to investors bent on buying the dip.

Thomas Lee at Fundstrat Global Advisors said the downgrade is largely a “non-event,” adding that in case of any stock weakness, he would be “buying this dip aggressively.” Lee explained that, as he sees it, “there is no ‘surprise’ here, as Moody’s is citing facts we already know: the sizable US deficit. And we doubt any major fixed-income manager is surprised.” Here’s your markets wrap.

Warren Questions Pilgrim’s Pride, JBS Over $5 Million Trump Donation

The donation was the single biggest to the Republican’s inauguration committee, Democratic Senator Elizabeth Warren said. Read the Story

UBS Group is heading for defeat in the first round of its effort to water down a Swiss law that could force it to maintain up to $25 billion in extra capital. In a bill the government is to propose to parliament, the Zurich-based bank is said to be required to increase its ability to cover losses at foreign subsidiaries to 100% of the capital in those units.

While the potential for a full backing has been floated by the regulator, Finma, since last year, the government has yet to confirm its preferred level. The stance comes in spite of strong efforts by UBS executives including Chief Executive Officer Sergio Ermotti to push back, with bankers arguing they would be at a major disadvantage to global peers.

Israel will take over the entire Gaza Strip, Prime Minister Benjamin Netanyahu said on Monday, as the military announced it would carry out an “unprecedented attack” on Hamas. He also said he would start allowing aid into Gaza again, where international agencies have warned of critical malnutrition and starvation among the territory’s 2 million Palestinians. As of Monday evening, only nine trucks had been allowed into Gaza via the Kerem Shalom crossing, where Gaza meets Israel and Egypt, a United Nations official said.

Israeli Finance Minister Bezalel Smotrich, head of the Religious Zionism party, who had in the past opposed restarting the aid, said on Monday there was no choice, “otherwise, the world will force us to stop the war.” He also said that the military is now operating with much greater intensity.

“This time, the operational method is completely different: not raids, but rather occupation, cleansing and holding the territory until Hamas is destroyed,” Smotrich said. “Along the way, we are destroying everything that is left of the Gaza Strip, because everything there is one big city of terror.”