by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
Author: 8
October 1, 2021
The Dysfunction Persists — Five Key Points
October 1, 2021
THE FRENZIED NEGOTIATIONS have failed; the rancor on Capitol Hill is intense. You’re probably as sick as we are of the infrastructure fiasco, so we’ll keep it brief this morning, with five major take-aways after this week’s debacle:
1. Joe Biden, in free-fall: He’s been president for only eight months, so it’s too soon to declare a failed presidency. But Biden is in a disastrous slump. His supporters have asserted that he’s a master negotiator; maybe he was 40 years ago, but he isn’t now. A Republican takeover of the House next year is increasingly likely — the issue is the size of their rout.
2. This week’s dysfunction bodes poorly for the debt ceiling fight: The longer Democrats continue to fight over the infrastructure bills, the greater the threat of a late October default. Mitch McConnell refuses to negotiate, and the Democrats cannot agree on the terms of surrender. We reiterate that the Federal Reserve will have to intervene.
3. All bets are off on tax hikes: Moderate Democratic Sen. Kyrsten Sinema is adamantly opposed to any new taxes, and she has the power to kill a deal that includes taxes. The growing likelihood of no new corporate or individual tax hikes — or, at worst, some modest hikes — is a positive story for the markets.
4. Joe Manchin, drunk on power: The other Democratic holdout in the Senate, Manchin has a list of demands that are bordering on the ridiculous. In addition to a mammoth cut to the $3.5 trillion social spending bill, Manchin wants the Federal Reserve to speed up its tapering of asset purchases. So does Joe Manchin want to dominate monetary policy as well as fiscal policy?
5. More talks to come: We would recommend a cooling off period for a few days, but the House will be back is session today. A vote on the $1 trillion basic infrastructure bill is still possible today, but Nancy Peolsi doesn’t have the votes; progressives insist on passing the second bill concurrently. The stalemate will persist unless Manchin and Sinema cave.
WE THOUGHT DURING THE SUMMER that chances of passing these two measures were no better than 60-40, with the social spending bill facing a major haircut. Even that scaled-back outcome is now in grave jeopardy.
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This post was first published at the AGF Perspectives Blog.
