Blackstone’s James: Trump may have hard time on tax reform

President Donald Trump may fall short of some of the sky-high expectations the stock market set for tax reform, Blackstone Group’s Hamilton James said.

“My own view is he’s going to have a hard time delivering on [tax reform], and the stock market’s overvalued that,” James said at Yale School of Management last week. He noted that the initial effort by Trump and House Speaker Paul Ryan to repeal and replace the Affordable Care Act was unsuccessful.

The S&P 500 is up nearly 11 percent since Trump’s election. Market optimism in recent months was dubbed the “Trump Trade,” in light of the new president’s openness to limiting regulation and reducing corporate tax rates.

“There’s a lot of political risk in Washington,” Blackstone’s president and chief operating officer said. “It’s not being discounted at all in the stock market.”

Blackstone developed close ties to the president during that period. Blackstone Co-Founder Stephen Schwarzman chairs Trump’s strategic and policy forum, which includes business leaders from a variety of industries. Global Head of Real Estate Jonathan Gray was in the running to be treasury secretary.

James, a major Democratic donor, said maintaining relationships with people “on the other side of the aisle” is important.

The Affordable Care Act replacement was roundly criticized by the conservative faction of the Republican Party for leaving too much of Obamacare in place. Democrats and moderate Republicans also opposed the bill for its estimated impact on the U.S. insurance market.

The nonpartisan Congressional Budget Office estimated it would have reduced the number of people enrolled in insurance by around 24 million.

The GOP’s failure to replace Obamacare could limit the scope of comprehensive tax reform, which both Ryan and the president championed before Trump was elected According to James, Trump is beginning to back away from some of the more aggressive stances he took on trade and taxes during the campaign.

That may spell trouble for Ryan’s tax plan, which eliminates many of the deductions taken by middle-income individuals and families, as well as the deductibility of interest expense, which would hurt many PE portfolio companies.

“It won’t be the Ryan plan. It’s too radical. Trump’s uncomfortable with it, as is the Senate,” James said. “The unintended consequences of fundamental changes all at once are unpredictable and dangerous. And I don’t think the president wants to be Herbert Hoover.”

The White House press office did not respond to a request for comment.

Land mines

While Trump’s business-friendly positions spurred optimism in corporate America in the administration’s early days, James also noted that the White House has been plagued by a series of unforced errors in its relationships with key allies and trading partners.

Last month, the White House alleged a U.K. intelligence agency had spied on Trump at the request of former President Barack Obama. At a February rally, Trump alluded to a Tucker Carlson report that tied violent crime to Sweden’s refugee population. Leaders from the U.K. and Sweden denounced Trump’s claims.

“Donald Trump is stepping on land mines. Who can offend Sweden? The U.K.? I mean, honestly,” James said. Those issues will be minor compared to looming trade disputes with major partners like China and Mexico, or geopolitical showdowns with historic foes like Russia and North Korea, James said. “I see risks everywhere, honestly.”

Trump softened his protectionist stance on China in recent weeks. James said he expects the president to retreat from the 45 percent tariff on Chinese imports he had advocated throughout the presidential campaign. President Xi Jinping will meet Trump for the first time at Trump’s club in West Palm Beach, Mar-a-Lago, later this week.

Even amid geopolitical uncertainty, James said the U.S. is unlikely to enter a recession in the near term.

“I don’t see another 2008, I don’t even see another mildish recession for awhile,” he said. “The expansion is long, but we’re still below the level of economic activity seen [prior to] recessions.”

Action Item: More on Blackstone Group: www.blackstone.com/

Tony James, president of Blackstone, speaks during the Reuters Investment Banking Summit in New York on Nov. 14, 2006. Photo courtesy Reuters/Keith Bedford