Today Joe Biden was inaugurated as the 46th President of the United States, a job that comes – we’re being understated – with some challenges.
Markets are always obsessed with what new Presidents may do or try to do, perhaps this time that applies double.
A few questions that are worrying investors:
1)Can he spend the US out of the troubles left by Covid and his predecessor?
2)If he does, what does that mean in the longer term for inflation, for national debt, for the stock market?
3)If he manages to unite a fractured nation, does America resume its place as the proud City upon a Hill, the last, best hope for mankind? Or is it too late for that, and should we assume that China and Russia will drive global traffic from here?
4)If he does decide to let loose the awesome (unlimited?) resources of the US Federal Reserve to solve the nation’s problems, at what point will investors panic, thereby undermining the mission?
5)Just how big can the US deficit become before it is a bigger problem than the one it is solving?
One answer to all of the above: no one knows, and anyone claiming to be certain is full of it.
But many do agree share prices are beginning to look toppy given debt issues and a sluggish response to the pandemic.
On Friday, the Dow Jones, a measure of the value of the top 30 US companies and thereby a snapshot, perhaps, of how the future looks, closed at nearly 31,000. So, it has almost doubled since March, when the world was ending.
That market was modestly lower on Friday because Biden had revealed plans for a $2 trillion stimulus plan, a deal that is either recklessly big or insufficient, depending on your point of view.
Interestingly, the notion that $2 trillion is not enough come from some quarters generally opposed to high government spending.
City veteran David Buik of Aquis Exchange tells me: “The Street of Dreams, having recently achieved all-time records, is starting to look a little frothy to me. President Elect Biden has a huge problem on his hands. Yes, he has agreed a $2 trillion stimulus package, way too late to have the real effect it should have had.”
Worse than that, jobless claims are dispiriting and the Covid death figures are so bad that they require the invention of a new adjective altogether. The US is going to take longer to recover, economically, physically, spiritually, than we thought just a month ago.
Shares could tumble.
Buik adds: “With 385,000 dead from Covid in the US and over 2 million suffering, the die is cast. Inoculation is not going well. As a nation the US is hopelessly divided. Consequently, I can see investors taking risk off the table from cyclical, banking, retail and energy sectors.”
For some including Buik, while there might be a bit more juice in tech stocks such as Zoom and Microsoft given that we are all mostly stuck at home, it might be time to take some money out of US shares and head east, perhaps to Japan.
Will fiscal policy stay loose? (Translation: will the government keep chucking about money it has just invented).
Yes is the clear answer, but how loose? Is this the time that Modern Monetary Theory, the idea that in times of trouble inventing money and dishing it out is a free lunch, gets the official seal of approval from no less than the President of the US?
Does the gap between monetary policy -- central banks controlling interest rates and inflation, and fiscal policy, governments spaffing money about -- erode altogether?
Can spending increase without taxes doing the same?
Neil Wilson at markets.com says: “This is the big one for me - is this the year we get the coordinated fiscal and monetary policy a la Modern Monetary Theory? MMT is basically saying you don’t need to raise tax dollars for spending plans – you print what you need and tax is all about redistribution, incentivising certain parts of the economy.”
Russ Mould at AJ Bell says: “Biden may not have expressed much support for Modern Monetary Theory - in fact he was once a fiscal hawk in the old style – but under a Democrat Congress and White House there would be no rush to reduce the deficit. In fact, Biden’s economic stimulus plans entail more borrowing. Whilst it is a stretch to suggest that Biden is a supporter of MMT, the economic and social backdrop has changed drastically in recent years and it is gaining traction in more corners of the Democrat machine.”
So, the thinking now is that there is no sense, from any point of view, in chucking millions of people on the economic scrapheap as a price to pay for low inflation.
Back in 1991, then UK chancellor Norman Lamont famously said: “Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying."
Not everyone thought him mean and mad. He became a highly paid City adviser.
Embracing MMT would be a bold experiment for sure, but since it is one that is out of the science lab and partly in operation anyway. What’s to lose?
Simon French, chief economist at Panmure Gordon, points out: “Spending trillions of dollars when the alternative is mass unemployment and scarring that lasts for years is not just good economics – it is common sense. The problem for a spend-thrift US government has been the lack of discipline in the good years.”
So the US, and the rest of us, might pay the price for not being more prudent years ago, before anyone had even heard of Covid.
If it had been more austere then, it could be more generous now, in other words. In terms of individual sectors, supposing Biden embraces the left of his party and pushes through a serious Green deal, one that hurts shale and traditional energy companies, perhaps that means the astonishing rise in Tesla shares has further to go.
Maybe founder Elon Musk, the inspiration for a movie super hero played by Robert Downey Jr, really is Iron Man.
For Google, Amazon and the rest, is the Biden administration going to be serious about cracking down on big tech?
Silicon Valley is politically pro-Democrat but that may not stop the new leaders from raising corporation tax and capital gains tax to teach it a lesson, to show who is really in charge.
What about that giant ginger biscuit, Donald Trump?
Mould says: “Investors will want to see any impeachment action against outgoing President Trump handled quickly either way. It is unlikely President Elect Biden wants to see the Senate spend too much time on this, as he will want to start his legislative programme and get traction in particular with his call for further fiscal stimulus and increased direct payments to those American consumers whom he feels need help the most.”
“Investors will also look for any guidance on how quickly and to what degree Biden and Harris plan to hike US corporation tax, as that will hit companies’ net profits and in the end it is profits and cash flow that matter more over the long run to share prices and equity valuations that pure politics. There is a school of thought that the narrow Senate majority, by dint of VP-Elect Harris’ casting vote, may mean the incoming administration chooses to tread carefully here, especially as the economic outlook remains fragile.”
Perhaps the main question for the UK on Biden is if we see a new-era of US-EU trade relations, and where the UK sits in between that.
Simon French notes: “The possibilities for greater UK-US trade are enormous – but to pretend that making this happen won’t create anger amongst farmers and healthcare professionals is naive in the extreme. Most observers conclude that neither Biden nor Johnson will walk-the-walk needed for a ground-breaking trade deal.”
Fraught times ahead then. Place your bets. And strap in.