Next Stimulus Bill is Complicated by the PPP Pig-Out

by Greg Valliere, AGF Management Ltd.

NOTHING STIMULATES ANIMAL SPIRITS LIKE FREE MONEY: The recent pig-out over the Paycheck Protection Program sent billions of dollars to well-connected firms that didn’t need help. This has embarrassed Congress — and has complicated efforts to pass another stimulus bill by early August.

WE STILL THINK THERE WILL BE ANOTHER BILL, but it’s not a slam-dunk, and it will take time — which will be in short supply when Congress comes back in the middle of this month before leaving again for most of August.

CONGRESS CLEARLY WILL HAVE TO AVOID PPP give-aways like the ones in the last bill, which seemed corrupt even by Washington standards. Details reported earlier this week showed that lobbying firms got money, hedge funds got money — even Kanye West got money, much of which is considered “forgivable loans.” And the banks that processed these translations got huge fees.

REFORMS COMING: Sen Marco Rubio, chairman of the Small Business Committee, is proposing PPP reforms in the next bill, which may only affect firms with 300 or fewer employees, and the firms must show that they have suffered significant losses. Rubio, from Florida, would focus on seasonal businesses and companies that make at least half of their profits in low income areas.

THIS CONTROVERSY OVER THE NEXT BILL COMES AS THE ECONOMY seems to be leveling off, with millions of Americans staying at home in California, Florida, Texas, Arizona, etc. The media continues to focus on idiot kids at the beach and in crowded bars, but they’re a minority; polls show a majority of Americans are increasingly unwilling to go to restaurants or malls.

THE GREATEST IMMEDIATE NEED still appears to be aid for reeling state and local governments. This is not just a New York problem; this morning’s Washington Post details the increasingly dire situation in deep-red Texas, where revenues have
plunged and spending has spiked. Massive government layoffs will continue throughout the country; states are not allowed to run budget deficits.

THIS NEW SPIKE IN COVID-19 has convinced most of Congress — including Mitch McConnell — that another stimulus bill is necessary, but the details are still in flux.

WHEN CONGRESS RETURNS IN MID-JULY, lawmakers will have to move quickly to address the $600 in weekly unemployment benefits, which expire at the end of this month. This is widely considered a disincentive for people to return to work, so it probably will be lowered or replaced by a hiring bonus.

OTHER PROVISIONS: McConnell is insistent on passing Covid-19 liability protection. Aid to states seems mandatory. Another round of stimulus checks is increasingly likely. And the PPP program probably will get a little more money, with eligibility standards tightened dramatically. New infrastructure outlays are unlikely in this package.

WHAT’S THE PRICE-TAG? That also is in flux, with $1 trillion — McConnell’s goal —
a likely floor. President Trump may seek more money in an effort to boost the economy ahead of the election; something around $1.5 trillion seems likely.

WILL $1.5 TRILLION BE ENOUGH? We suspect that amount may be so insufficient that another measure could emerge in the fall, perhaps attached to fiscal 2021 spending bills. The virus hasn’t gone away; Congress will have to do more — while curbing pig-outs.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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This post was first published at the AGF Perspectives Blog.