Build Back Better… Back?

Date: 01/04/2021
Author: Mr. X

Once again, West Virginia will determine the fate of the nation. Or at least one of its senators will be, Joe Manchin.

As I’ve repeatedly said in this column, this is about politics, but not about right or wrong except as how it matters to investors. It’s not about what the correct policy is from a moral point of view, because everyone has different values. I’m a uniter. And what unites people more than anything is the pursuit of money.

Thus, the renewed Democratic offensive on Build Back Better and other legislation is of importance to us, but only insofar as it can impact investments. In the long run, this kind of spending could pose an existential challenge to the dollar’s status as the world’s reserve currency. It is now very clear that Russia and China are deliberately cooperating to make that a reality.

Still, don’t count the dollar out yet. First, there are few realistic alternatives at this point. The Chinese economy may be weaker than many think, as the Evergrande real estate situation showed. The United States economy is still viewed as a safe haven by most.

Second, the American economy is doing well by almost every conventional metric. Though we’ll get a better view of the position later this week, unemployment is down, jobs are up, and workers are in a strong enough position that they can pick and choose where they want to go. Indeed, Apple and Meta (formerly Facebook) are in a bidding war over programming talent for the future metaverse. (It’s not a meme – learn to code, if only so you can understand half of what is happening.)

Finally, the United States still has the world’s reserve currency and that will only change when geopolitical circumstances change. That could happen – Russia could potentially invade Ukraine, China could make a move on Taiwan, and Iran could destabilize the Middle East. China is also penetrating Latin America economically and is de facto taking over Africa economically. Nonetheless, it will take something truly startling – like losing a conventional military conflict or the breakup of NATO – for American power to be broken.

For my entire life, I’ve been hearing that the dollar was about to collapse, usually by people who were trying to sell me gold coins. The debt keeps piling up and the dollar remains at the top of the pile. As I’ve said again and again, currency is about faith, not math. As long as people perceive the American economic system as working, the dollar will reign.

Thus, when looking at Build Back Better, we should not assume that massive government spending will bring the whole thing crashing down. In the short term, the market wants more spending and certain sectors of the economy (notably clean energy) need it.

For that reason, whatever your politics, it’s probably a promising sign that the Democrats are entering the new year in a more combative mood. Senator Chuck Schumer is vowing to change the rules in the upper chamber to push through “voting rights” legislation. That’s less important for us than what it might mean for the “Build Back Better” legislation, which is still alive now that Senator Joe Manchin has restarted negotiations with the White House.

Senator Manchin is picking a strange target for his main objection – the child tax credit. Even some Republicans are supportive of that as a stand-alone bill, including former GOP presidential nominee and current senator Mitt Romney. This leads to the possibility that there could simply be a party line vote on the BBB legislation without the child tax credit.

What would that mean for investors? The Build Back Better bill would include so-called “green tax credits” that would provide rewards for purchasing electric vehicles, clearly something that would boost Tesla (TSLA) and conventional auto manufacturers like Ford (F) that are moving aggressively into the EV space. (TSLA is in the RID Model Portfolio).

Build Back Better also would provide tax credits for certain businesses to advertise with local newspapers. This is on top of additional legislation that would essentially provide subsidies for local journalists. Leaving aside the question of whether the government should literally be funding the media, this would be a boon to Gannett (GCI), the largest newspaper company in the country. The New York Times estimated that the company could receive $37.5 million almost immediately after the legislation is passed, with continuing revenue in the years afterward.

There are also billions of dollars for repairing public infrastructure. Construction companies, steel companies, and other infrastructure plays would be incredibly important here. Plays could include United States Steel Corporation (X), Nucor Corporation (NUE), and Southern Copper [SCCO]. “Clean energy” and ESG (Environmental, Social, Governance) stocks could also receive a boost.

Of course, accompanying all this would be numerous tax hikes, including on investments. Yet we must question whether those hikes would last. If you can count on Republicans to do one thing in Congress, it is to oppose tax hikes with utter ferocity and try to repeal them the minute they get the chance. The GOP leadership does not want to go back to Trump-style populism beyond rhetoric. They want to return to “fiscal conservatism” – which doesn’t really mean opposing deficit spending, but rallying against tax hikes.

The GOP is expected to take back Congress in November, but the Republicans may be overconfident. If the Democrats move aggressively, they could generate the enthusiasm which is now utterly absent in their ranks. They could also heal the breach between Biden style “moderates” and “progressives.” The Democrats may still lose seats in November, but they could avoid losing Congress altogether.

From an investment point of view, the best case scenario would probably be Build Back Better making it through Congress, with Republicans blocking or repealing tax hikes as soon as possible afterward. Inflation is going to continue regardless of what happens, which is why investments centered in raw materials (and with a hedge in crypto and perhaps some precious metals) may be the best path forward.

The BBB legislation is a classic case of the government picking winners and losers in the market. In a real “free market,” we would not have that. In reality, we are in a corporatist state where the line between public and private is increasingly irrelevant. I don’t particularly like that – ok, I completely hate it – but it’s the truth. And we have to deal with the truth, and the world as it is, when it is time to consider our bottom line.

Personally, if I was in charge, I’d just be sending out more stimulus checks.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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