Daily Comment (April 29, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Good morning on this GDP day.  We cover the data in detail below, but the short take is that the data came in a bit below forecast.  Although consumption was robust, falling inventories reduced the overall number.  U.S. equity futures are higher this morning as stocks continue to trend higher.  Our coverage leads off with President Biden’s address to Congress and the spending plans.  The FOMC meeting recap follows.  Our roundup of China news is next, followed by international news.  An update on economics and policy follows.  Our usual update of pandemic news is next, and we close with technology.

The Biden address to Congress:  There is a ton of media coverage of the speech, so our focus is more on two things—what the speech (and policy) signals and the chances of passage.  In 1996, President Clinton’s State of the Union address is remembered for the famous line “The era of big government is over.”  To a great extent, this was obvious by 1996.  It wasn’t so much that the government has shrunk, but the confidence that it could solve problems was mostly lost.  Clinton’s line was less a birthing and more of a funeral.  The GOP had moved on from big government with Reagan; Clinton was indicating that the Democrats were too.

The Biden address has all sorts of details and spending plans, but the clear message is “big government is back.”  The Great Financial Crisis showed that the private sector alone couldn’t fix the problems of excessive debt, slow growth, and inequality, at least in a way that was politically acceptable.  So now, fiscal support and higher taxes are the order of the day.

What makes this change interesting from a political perspective is usually, these sorts of changes are accompanied by legislative dominance.  Roosevelt enjoyed a strong Congressional majority.  Reagan gained seats in Congress, reversing years of Democratic dominance.  Biden has a very aggressive program, about $6.0 trillion in total spending, with very narrow majorities in Congress.  The proposals include fiscal support for families, infrastructure spending, and funding to support the transition away from fossil fuels.  Included is a redistributive tax proposal to pay for it.  Getting everything through will likely require Congressional leaders to use reconciliation, which could reduce the scope of the proposals.

Here is what we are watching:

  • It’s important to remember that this legislative action is occurring in a period where party affiliations are in flux. The rising stars in the GOP are the “populist Turks” of Hawley, Rubio, Cotton, and Cruz.  They might not be very opposed to the Biden tax plans and antitrust policies.  There will be party differences.  We expect the GOP to be less inclined to go “green.”  However, the idea that the GOP is the party of capital is probably out of date.  If anything, Biden’s strongest opposition could come from the tech/finance wing within the Democrats (e.g., the SALT controversy).
  • President Biden, unlike most administrations, clearly realizes he is on the clock. We suspect he has another year, at most, to get everything done.  The GOP will likely regain control of Congress at the midterms; history is on the Republican’s side.  The problem is that because the administration is working with slim majorities, the chances are high that some of what he gets passed is undone in the next administration (either in 2024 or 2028).  In fact, this may be the greatest risk to investors.  Policy swings will likely become increasingly violent, thus making long-term projections more difficult and lead to truncated market trends.
  • If there is one trend we would not diminish, it’s fiscal deficits. In MMT, there are limited reasons to tax.  The first is to cool inflation by withdrawing liquidity (paradoxically, from a political standpoint, this requires taxing the less affluent).  The second is to tax things you want less of…so “sin” taxes or levies on unwanted behavior.[1]  Therefore, a government taxes the rich not to raise revenue but to reduce its influence.  Thus, a tax rate that brings less revenue isn’t the point.  Expect both sides of the aisle to mostly give up on fiscal austerity.  Of course, this will change at some point.  Inflation control is usually when that trend changes.  But, for the foreseeable future, high deficits will be the norm, and eventually, we expect that eventually yield curve control will be required.

The FOMC:  The Fed made almost no changes to policy or the statementRates are steady, as are bond purchases.  It did admit that the economy is doing better and inflation, though rising, is transitoryForward guidance indicates that policy is going to be steady for at least a couple of years.  Not a whole lot of news emerged from the press conference either.  The Fed is paying attention to the issues with money markets at what occurred with Archegos, but Powell made it clear he didn’t view high asset prices, in isolation, as a sign of trouble.  Initially, we did see a modest rally in Treasuries, gold recovered, and the dollar declined.  The market reaction was consistent with a dovish policy statement.

China:  German policy to China may change, the population is falling, and regulators that initially approved the Ant Financial IPO are probably in trouble.

International roundup:  Brexit is approved (finally!), and we continue to watch the German Greens.

Economics and policy:  Labor markets, semiconductors, and prices lead the news today.

COVID-19:  The number of reported cases is 149,718,851 with 3,530,418 fatalities.  In the U.S., there are 32,230,809 confirmed cases with 574,330 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 301,857,885 doses of the vaccine have been distributed with 234,639,414 doses injected.  The number receiving at least one dose is 142,692,987, while the number of second doses, which would grant the highest level of immunity, is 98,044,421.  The FT has a page on global vaccine distribution.  The weekly Axios map shows the majority of states are reporting either steady cases or declines.  Oregon, which had been reopening, has reinstituted restrictions due to a rise in cases.



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[1] One of our criticisms of MMT is that it ignores the financial markets.  Hyman Minsky is claimed by MMT as being part of its intellectual “family tree,” but Minsky argued that there can be situations where the government must reduce the deficit to improve financial confidence and reduce interest rates.  MMT obliquely relies on the central bank to address this issue.