by Greg Valliere, AGF Management Ltd.
AS THIS MISERABLE WINTER comes to a close in the next few weeks, it strikes us that the markets will encounter a different policy climate, and some major questions. Here are some:
1. Will an upcoming surge of liquidity — transferred from the Treasury Department’s enormous account at the Fed back into the markets — be viewed as simply a technical adjustment, or will markets become uneasy as money market yields potentially drop below zero?
It’s a complicated story, but one that could have major implications if a tidal wave of liquidity creates uncertainty in the fixed income markets and at the Fed. (We recommend an excellent article on the Bloomberg web site this morning.)
2. Can House and Senate negotiators agree on a minimum wage hike? President Biden said last night in Milwaukee that he’s willing to compromise, raising the current $7.25 federal rate gradually, perhaps stopping at $12 or $13 per hour in a few years. And Senate supporters of a hike indicated that they’re willing to boost small business aid in the Covid bill.
The big question here: will the Senate parliamentarian rule that a minimum wage hike is germane in a bill that will be passed via reconciliation?
3. Can Biden maintain peace with the unions? He will meet with labor leaders today at the White House; he certainly will try to convince them that his next big priority — a green jobs plan — will actually create jobs.
The unions want to spend $4 trillion, which is totally unrealistic, but they’re edgy and a little suspicious of Biden after the Keystone Pipeline was killed, costing thousands of jobs.
4. When do tax hikes enter the picture? With a Covid aid package — costing at least $1.5 trillion — likely to win enactment by mid-March, the next big issue will be higher taxes. Biden is stuck between a rock and a hard place — he continues to insist that the economy is very fragile, so why would he want to hike taxes?
Huge new taxes look less likely now than two months ago, but progressives will insist on higher taxes on wealthy individuals and corporations — not because they want to raise revenues; they want “fairness” as some people enjoy bubbles and others seek more assistance.
5. Can Biden make peace geopolitically? He has not ended tariffs on European Union luxury goods, he surprised Canada with the timing of the Keystone decision, his relations with China and Russia are cool at best, and Iran seems unwilling to make any concessions on the enrichment of uranium. A quick re-boot geopolitically will be difficult.
6. Are Republicans headed for a civil war? The savage smack-down from Donald Trump against Mitch McConnell last night was a gift to the Democrats. Will this battle persist? Yes. The key is at the state level, where GOP leaders are passionately pro-Trump. An irony: the pro-Trump faction might oust GOP moderates in primaries, only to lose in general elections.
7. Can Biden withstand lower expectations on Covid? Suddenly Dr. Anthony Fauci has said all Americans can be vaccinated by July, a reduced goal. And Biden said last night that everything will be back to normal by Christmas. By Christmas ?? Didn’t we just have Christmas ??
Moving the goal posts on Covid is risky politically. Will Biden pay a price at the polls as expectations are scaled back and the public loses even more patience? Schools won’t return to normal until fall, and that’s a major shift of the consensus in the last few weeks.
BOTTOM LINE: After a feel-good stretch, with the country relaxing after years of bombardments from Trump tweets, the U.S. is about to enter a period of change and uncertainty. This raises the biggest question of all: is there a risk of over-doing government policies? The Biden agenda represents a bold change, and it’s very, very expensive.
