Political look-ahead to year end

As Biden continues his head first dive into progressive policies with Executive Orders, there now comes the time that legislation needs to be passed in order to fulfill the recent rhetoric on taxation, climate change and racial equity, to use the syntax of the administration.

The reality of Beltway politics is now blocking the path for the Biden administration:

·         Taxation is a very intense and time consuming process, dealing with multiple legislative and legal details that cannot simply be detailed in a few sentences on social media.

·         Climate Change regulations would hit several industries in Democratic enclaves already suffering from job losses, which would further erode Senate support.

·         Racial inequality issues  are  beginning to upset centrist Democrats who view such radical changes as detrimental to their own interests in education and employment. 

These small details begin to pile up and siphon away  Democratic Senate votes for upcoming legislation, especially those Democrats facing midterm elections next year  and do so in purple states (see Manchin, Sinema and Kelly).  Senate Republicans have shown no compromise that would assist Biden in any of the progressive legislation, so it would need to be straight Democratic votes with maybe Collins as a swing vote, but that would be the extent of any GOP help.

Moving onto the pre-midterm run up, the outlook as of today looks bleak for the Democrats in both the House and Senate. Unemployment in reality is near 20% with small businesses struggling to hire workers away from the free money of unemployment benefits. Yellen and others have touted “full employment” by the end of the year, but they are using the very questionable U3 figures, oft criticized for not reflecting the employment situation accurately.  They would need to average 2-3 million jobs per month to even be on track for such a declaration, something that is yet to happen, with the electoral clock ticking in the background.

If the unemployment rate is still elevated, there will need to be scapegoats found to explain away the lackluster economy. One would be Trump nominated Jay Powell to  the Fed, Trump himself or a resurgence of COVID in the fall based on normal flu season uptick. 

On top of the political issues,  the Biden administration is now having to deal with food and gas inflation. This is probably the worst two issues any politician wants to deal with going into elections. 

Fed options to combat runaway commodity inflation: 

1. Quantitative Tightening and/or raising rates

2. Price Controls (would have to be President/Treasury option only)

3. Manufactured market correction(1 or 2 10-15% corrections)

The markets have been toying with the prospects of a massive infrastructure bill since Biden was elected. This is very unlikely since the complexity of Senate voting intentions have become problematic for a straight Dem vote. It was very evident that problems in its passage were afoot when the Biden admin immediately shifted to “reconciliation” process to try to force its way through. However, this is also likely to fail as progressives have inserted social issues labeled as “social infrastructure” which would trigger the Senate parliamentarian to deny the move as it does not comply with budgetary restrictions. 

The only way a bipartisan bill on infrastructure would pass is if there was a significant market correction, from a high enough market level wherein it does not impact the economy directly (eg 1987 crash or dot-com bubble bursting in 2000), but enables the Hill to come together and agree a stimulus/infrastructure hybrid bill to the tune of $4-6 trillion.  This would fall into line with our outlook that an engineered correction is likely on the docket for the fall, early enough as to not trip midterm election dynamics but with enough time to pass a bill.  As mentioned above, the likely reason in our opinion that the markets have gone this high, and been so aided and abetted by the Fed, is that they are paving the way for an economic soft landing after what will on the surface look like a severe market downturn. Nonetheless, we still believe that there is one last push to around the 4600 level in the S&P 500.

Such a risk-off adjustment can also provide some relief from the parabolic moves in commodity inflation. The only realistic options would involve the Fed in Quantitive tightening or the President enacting price controls as was done in 1970 by Richard Nixon. Neither would be a great look running into the next electoral cycle 2023-24.

Other systemic targets for the government would obviously be SPACs and Cryptos. Gensler is well known to despise cryptos and will move quickly to combat bitcoin which has affected both gold and equities. IRS has gotten the go-ahead by the DoJ to begin compiling a list of crypto beneficiaries who have avoided filing taxes for the past few years. This comes right after the completion of a new software system that can track cryptos on the networks.