by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
Author: Greg Valliere
August 25, 2021
SOME ANALYSTS DESCRIBED YESTERDAY’S HOUSE VOTE on the two infrastructure bills as a victory for Nancy Pelosi. It was not. She bought a month, until Sept. 27, but there’s still a fatal flaw in the Democrats’ strategy.
THE FLAW, OF COURSE, is the delusional view among House Democrats that they will get to pass a $3.5 trillion bill, loaded with tax hikes, once it has been approved by all Senate Democrats in the reconciliation process. But all Senate Democrats are not in agreement.
THERE ARE ONLY THREE SCENARIOS:
1. Passage of the $1.2 trillion infrastructure bill and the $3.5 trillion package of new social spending, partly paid for by major tax hikes. Chances: Zero %.
2. A total breakdown, which was narrowly avoided this week, whereby Pelosi and House progressives refuse to accept half a loaf and reject the $1.2 trillion bill unless it’s accompanied by something close to the $3.5 trillion measure. Chances: 40%.
3. A tortuous deal that enacts the $1.2 trillion package and imposes a major haircut on the other bill, which might spend $2 trillion, possibly less, with watered-down tax hikes. Chances: 60%.
THE PROBLEM FOR DEMOCRATS is that they didn’t do as well as expected in last November’s elections; they simply don’t have enough votes to thwart a few moderate Democrats in both houses. There’s no question that Democratic Sens. Joe Manchin and Kyrstin Sinema will not agree to anything close to a $3.5 trillion bill.
THE HOUSE MODERATES prevailed yesterday with a little-noticed side-deal: Pelosi will not agree to a vote by Sept. 27 if it’s clear that the Senate will not pass the $3.5 trillion bill. Well, it’s clear now and it will be clear next month — even with reconciliation, the Democrats don’t have the votes in the Senate.
WE GET THE ANALOGY that yesterday’s vote moves the ball down the field, but the math won’t change much in the next month. Can Pelosi accept half a loaf or will she reject the $1.2 trillion infrastructure bill unless the Senate agrees to another $3.5 trillion? She stonewalled all of last fall on a Covid aid bill, and she’s likely to stonewall on this as well.
MERCIFULLY, THIS ISSUE WILL FADE for a while as the country focuses on a messy end-game in Afghanistan, needlessly complicated by a line in the sand, Aug. 31 — just as Pelosi has needlessly complicated the infrastructure bills with a Sept. 27 line in the sand.
FOR THE GIDDY MARKETS, seemingly oblivious to any bad news, the risks are rising as Covid cancellations increase, the Federal Reserve begins a late-year tapering, and the expected fiscal stimulus looks a little less likely.
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This post was first published at the AGF Perspectives Blog.