Wall Street will have to go look for another mirage to hype.
During the campaign, President Trump explained that he'd fire up the economy and create jobs by spending $1 trillion on infrastructure. It's in terrible shape and needs some big spending. It might have been material for rare bipartisan agreement.
The stock market has soared since the election, counting on this $1 trillion in new federal spending and "pricing it in." Infrastructure stocks were hot. But by the looks of it, some folks are going to end up holding the bag…
Because there is not a trace of this huge spending plan in the 2018 budget blueprint released by the White House on Thursday. Instead, the blueprint slashed the budget of the Department of Transportation by 13% and cut out some existing plans for infrastructure spending.
Yet on February 12 - just days before the first efforts to defund existing infrastructure projects began to seep to the surface - I wondered incredulously if Trump and California "suddenly see eye-to-eye on high-speed rail," because Trump, still brimming with enthusiasm about infrastructure spending, had told aviation CEOs this encouraging tidbit:
"And we have an obsolete plane system, we have obsolete airports, we have obsolete trains. We have bad roads. We're going to change all of that, folks. You're going to be so happy with Trump. I think you already are."
And when the stock market opened in Japan, a major supplier of train system to the US, this happened… Trump Promises "Fast Trains," Japan's Railway Stocks Soar.
Days later, everything changed. In mid-February, the Department of Transportation announced that it would withhold its portion - $647 million - of funding for the Caltrain Electrification project. Caltrain runs 45 miles between San Francisco and San Jose in parallel with the awfully congested Highway 101, straight through Silicon Valley, a stretch that generates 14% of California's GDP, and where 43% of the venture capital of the US is invested.
The $2 billion project entails buying electric trainsets to replace the diesel trains, installing overhead wire systems, improving tracks, etc. The current diesel trains move 65,000 people a day. After these improvements, it was hoped ridership would rise to 110,000 people a day and relieve some pressure on 101.
Caltrain estimated that the project would create 9,600 jobs in the Bay Area and throughout the US, including at a plant in Salt Lake City that would be built to assemble the new rail cars.
The budget eliminates funding to other transit projects, including Phase 2 of the BART (Bay Area Rapid Transit) Extension to Silicon Valley, and Phase 3 of the Purple Line Subway Extension in Los Angeles.
The budget calls for eliminating the Department of Transportation's New Starts program, which provides about $2.3 billion a year to commuter rail and other infrastructure programs. New Starts was expected to be a major funding source for the Gateway Tunnel under the Hudson River, designed to relieve the 100-year old Hudson River rail tunnels.
The budget eliminated federal funding that local governments have been relying on for all kinds of infrastructure development.
"It's hard not to wonder how those cuts jibe with the President's often repeated pledge to invest in infrastructure, "Brian Turmail, a spokesman for the Associated General Contractors of America, told the New York Times. "We had a sense that this was coming, but it doesn't mean that we like it."
Richard White, president of the American Public Transportation Association, lamented: "It seems to me, and to many other people, pretty inconsistent with all of the stated intents to invest in the nation's infrastructure."
OK, a presidential budget blueprint is traditionally DOA in Congress, where the power of the purse resides and is closely guarded. So that missing $1-trillion infrastructure spending boom could still materialize. Weirder things have happened before. Nevertheless, so far, there is no evidence that there will be massive infrastructure spending. For now it looks like there will be less infrastructure spending.
The Fed already expressed its doubts about any boost to the economy from federal infrastructure spending and apparently doesn't see that $1 trillion coming down the pike. At its meeting on March 15, it left its economic growth projections essentially unchanged from its meeting in December, with a median projection of GDP growth in 2017 and 2018 of 2.1% and in 2019 of 1.9% - the same lowly levels of past years, to be undershot, periodically by reality.
Where does this leave the stock market? The "Trump trade" was conditioned on, among other things, massive deficit spending on infrastructure projects that would distribute $1 trillion of taxpayer money to the companies involved in it. Wall Street has endlessly hyped this bonanza and has used it to rationalize the recent rally of already irrational stock prices. Now it looks like Wall Street will have to go look for another mirage to hype, or someone is going to end up holding the bag.
"Fake prices," metastasizing derivatives, bloodletting among retailers, the Snap IPO that turns stockholders into zombies, China's credit bubble that makes even the New York Fed jittery… Is Everything Out of Whack? Wolf Richter on the Keiser Report