Daily Comment (January 7, 2021)

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

[Posted: 9:30 AM EST] | PDF

Where do we start?  Yesterday witnessed violent protests in the legislative buildings in Washington that disrupted the confirmation of the Electoral College vote.  We discuss the event below.  Equity markets are higher again this morning, with the dollar recovering modestly.  In the wake of the Georgia elections, there was a clear market shift toward reflation.  Small cap stocks jumped, for example, and technology lagged.  Next up are the Fed minutes and policy.  China news comes next, with potential delistings and arrests in Hong Kong.  Pandemic news follows, and we close with Russia/Sweden news.  Being Thursday, the Weekly Energy Update is available; we discuss the recent decision by Saudi Arabia to essentially return to the “swing producer” role.  As we addressed last year, the Asset Allocation Weekly will no longer be part of the Daily Comment but will be linked as a separate document in this report when it is published tomorrow.  Here are the details:

Yesterday:  As our regular readers know, we pay close attention to history in our research.  The word “unprecedented” gets used a lot, but usually, something similar has occurred before.  The reason we discussed the Election of 1876 (here and here) was to offer readers context about how disputed presidential elections have been resolved in the past.  The echoes to 1876 had some familiarity—Congress did decide to contest some of the state results.  However, one major difference was that there were no competing electoral slates this year, meaning that the protests were mostly pro forma.

The violence that occurred yesterday against Congress is truly unprecedented.  Yes, there have been violent events in the Capitol before, but nothing quite like what we saw yesterday, where a mob disrupted the workings of government.  Because such events are rare, it was clear the congressional security was completely unprepared.  In the end, order was eventually restored.  Congress did certify the election this morningFour people died, and 52 were arrested.

As we noted above, financial markets have mostly moved on, as they usually do.  With the government under complete, but narrow, control of one party, there are expectations of additional fiscal stimulus.  Equities that benefit from stronger economic growth rallied, while technology lagged.  Although we could see action to raise taxes, the Democratic majority is so narrow that any tax hike would have to pass the “Manchin test,” and we doubt anything major is likely.  Even with all the turmoil, long-duration Treasury yields moved well above 1%, suggesting little fear among investors.  Fiscal support and an accommodative Fed overcome political turmoil.

What happened yesterday does matter, but exactly how it does will take time to discern.  However, there are a few things we think are likely:

  • The establishment/populist division within the GOP is now laid bare. Events like yesterday usually force people to commit to one side or the other.  There have been several GOP members of Congress who have attempted to straddle the divide, but we are seeing many fewer supporting Trump’s brand of populism now.  Meanwhile, the RWE is clearly trying to regain control of the GOP.
  • The business community tended to be ambivalent about the Trump presidency. It liked the tax cuts and regulatory policy but was uncomfortable with immigration and trade policy.  Opposition now is evident, with some leaders calling for the removal of Trump from office.
  • This event may severely reduce Trump’s future influence; if his legacy becomes yesterday’s unrest, getting him to support a politician’s future candidacy almost writes its own opposition advertisements. Even after announcing he will foster an “orderly transition,” he still disputes the outcome of the election in the same statement.  One fallout from yesterday is that he probably won’t be a candidate in 2024.  Again, we are sure commentators said similar things about Nixon after 1960, so there is a clear risk of being wrong.  The combination of age and the impact of yesterday probably means he can’t freeze the field in the next presidential cycle.  If this analysis is correct, it means a wide-open field for the GOP in four years.  However, that doesn’t mean the voters that Trump attracted are going away; populism isn’t dead by any means.  But, if populism is going to gain ascendency, it will require a higher level of political expertise.
  • We would expect aggressive efforts to muzzle President Trump to prevent him from doing much over the next two weeks. There is talk of invoking the 25th Amendment to remove him from office.  We doubt that will occur, but it is being considered.  The threat alone, coupled with the fact that several members of his administration are resigning, probably makes it hard for him to do a whole lot in the very near term.
  • One of the positions we have held for some time is that the U.S. is backing away from its hegemonic role. The events of yesterday have likely undermined America’s standing in the world and may be seen by future historians as another major point on the path of America’s decision to walk away from its superpower role.

Fed minutes:  It is always important to remember that the minutes released are heavily sanitized for current consumption.  In 2025, we will get the actual transcripts, which show what really happens in these meetings.  If you ever have a week to dedicate to the project, reading a year’s worth of meeting transcripts can be interesting.  There were no major surprises in the latest minutes.  There were no hints of additional stimulus, no evidence of substantial disagreement, and a promise of a clear signal before policy changes.  Although we have doubts about the real impact of QE, the FOMC does not share those concerns.

  • President Evans of the FRB of Chicago suggested the U.S. needed to revamp its financial regulation. We consider Evans to be a “financial sensitive,” meaning he considers financial conditions when setting his policy.  The Fed has been struggling with regulating the shadow banking system.  In March, the Fed expanded its purchase programs to stabilize markets, but their actions open policymakers to the charge they are creating moral hazard.  In the 1930s, the response was Glass-Steagall.  It remains to be seen what policymakers will do to reduce risk in the financial system.

 China:  There are two headlines of note—arrests in Hong Kong and further actions by the U.S. to deny China access to U.S. capital markets.

COVID-19:  The number of reported cases is 87,343,709 with 1,886,348 fatalities.  In the U.S., there are 21,307,125 confirmed cases with 361,312 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 17,288,950 doses of the vaccine have been distributed with 5,306,797 of first doses injected.  This map from Axios indicates rising severe infections.  The Rt data show that only nine states have a reading of less than one, with Oklahoma having the lowest rate and Iowa with the highest.


Russia:  For much of this century, Russia has become increasingly belligerent, invading Georgia, annexing parts of Ukraine and engaging in widespread cyberattacks.  Eventually, such actions trigger a counter reaction.  Sweden, a nation with a neutral foreign policy, has started to expend military spending and cooperation in NATO in response.

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