by Greg Valliere, AGF Management Ltd.
THERE’S NO AGREEMENT — NONE — BETWEEN THE TWO PARTIES on virtually every key issue that Congress will address in the next few months. That’s not necessarily a negative for the financial markets.
THE REACTION YESTERDAY to trial balloons on tax hikes was a loud thud. It’s likely that no Republican in Congress will vote for higher taxes, and several moderate Democrats have reservations.
THAT’S CLEARLY A PLUS for the markets, which may not have to worry about big new tax hikes; a “wealth tax” is out of the question (perhaps not in a few liberal states), and other radical ideas like a Wall Street transaction tax have no chance.
SHARPLY HIGHER CORPORATE AND INDIVIDUAL TAXES ARE LOOKING LESS LIKELY: If there are any hikes, they will be moderate, because the 50-50 Senate would block anything radical.
THE KEY, AS WE HAVE WRITTEN FOR WEEKS, is a handful of Senate moderates — led by West Virginia Democrat Joe Manchin — who will not accept huge tax hikes or lavish new spending on infrastructure.
COULD A CHANGE IN FILIBUSTER RULES MAKE A DIFFERENCE? President Biden said yesterday that he favors some changes (but not elimination) in filibuster rules; the likelihood of no major changes would be still another plus for the markets.
A MOOD SWING: If there’s been a change in recent days, it’s a growing sense of unity among Republicans, who see an opening on the issue of government over-reach. Some state officials are outraged that the $1.9 trillion stimulus bill contained $350 billion for state and local governments with a major stipulation: even states with surprisingly strong revenues cannot use any of that money for tax cuts.
THIS WILL LEAD TO LITIGATION and cries that states have a right to use the money in any way they see fit. Democrats will be on the defensive on this issue, and they’re clearly on the defensive as an immigration crisis deepens on the southern border.
SO WE WILL MAKE A BOLD CONCLUSION: Passage of the $1.9 trillion Covid aid bill may have been the high-water mark for the Biden Administration. Progressives will howl, but a huge new infrastructure bill may bog down; a more modest bill, focusing on roads and bridges, may pass.
THE SIMPLEST WAY TO ANALYZE WASHINGTON is to figure out who has the votes. Biden barely had the votes for the Covid aid bill, but he may not have the votes for a huge tax increase — and that’s a plus for the financial markets.
FOR THE MARKETS, the big story in Washington will be the Federal Reserve, which will be in the limelight this afternoon as Chairman Jerome Powell once again asserts that while the economy is healing, the Fed is in no rush to end its accommodative policies.
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This post was first published at the AGF Perspectives Blog.
