Biden Administration Has to Consider a Scale-Back

by Greg Valliere, AGF Management Ltd.

IT’S BECOMING INCREASINGLY CLEAR that the Biden Administration doesn’t have enough support in Congress to pass another $4 trillion in spending — or impose major new tax hikes. The mood in Washington now focuses on scale-backs.

TOP BIDEN AIDES are reluctantly willing to consider a compromise (even though this will set off a fire-storm among the party’s progressives).

KEY REPUBLICANS WILL BE AT THE WHITE HOUSE for negotiations this week, which will confirm that Biden is willing to scale back his $2.3 trillion in infrastructure spending over eight years — if Republicans move off their low-ball plan to spend $568 billion.

WHAT’S CHANGED? TWO MAJOR NARRATIVES —

First, the economy is booming, with another strong unemployment report due on Friday. Most states are flush with money, thanks to the surging stock market; officials in California and other large states are debating what to do with their revenue windfall. Yet the White House mantra is that the economy desperately needs help — but that mantra is many months old, no longer valid.

Second, the Biden Administration simply doesn’t have the votes for massive new spending and tax hikes. With a 50-50 tie in the Senate, only one Democratic defector can scuttle the Biden agenda; Joe Manchin and other moderates will call the shots.

SO THE FOCUS WILL NOW SHIFT to a possible compromise. The most likely scenario would be to first pass an infrastructure bill — perhaps around $800 billion for highways, bridges, water pipelines, broadband, etc. Many Republicans would gladly accept this, even if the final price tag slightly exceeds $1 trillion.

THEN CONGRESS WOULD CONSIDER a bill to spend $1.8 trillion on child tax credits, education, etc. There’s no support for this among Republicans and only tepid support among moderate Democrats, which means Biden may have to settle for about $1 trillion or less. How would he pay for it?

WE REITERATE that major tax hikes are unlikely; modest tax increases are possible, with top individual rates rising a couple of points and the top corporate rate increasing by 3 or 4 points. The tax portion of this legislation is a mess, complicated by a huge potential roadblock over restoring the state and local tax deduction known as SALT.

WHAT THIS MEANS FOR THE MARKETS: The bond market, which had worried about a spending blowout, should be relieved to see the Biden agenda scaled back. The stock market, which worried about huge new tax increases, should be pleased to see provisions like corporate tax hikes scaled back.

BOTTOM LINE: We have written since passage of the $1.9 trillion covid aid bill that the rest of the Biden agenda will get a haircut, and there’s no reason to change that outlook. With shortages everywhere — from rental cars to semiconductor chips — the economy doesn’t need a massive new stimulus, and there are just enough Democrats in the Senate who agree.

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.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

©2021 AGF Management Limited. All rights reserved.

This post was first published at the AGF Perspectives Blog.