Wargaming The Stimulus Bill

Date: 09/05/2021
Author: Mr. X

It’s September, the traditional time for a market correction. The United States has more COVID-19 cases than it did for Labor Day last year, the jobs report released on Friday failed to meet expectations, and millions are at risk of losing their home or apartment after the end of the eviction ban. Financially, socially, and even just physically, many Americans are at the breaking point. (A recently released study found that most Americans have experienced sleep disturbances since the beginning of the pandemic.)

There are plenty of reasons to think a correction is coming soon. Still, correlations are not causations, and it’s not a law that every September is a bear market. However, there’s one thing that would be virtually certain to send the markets crashing. That would be if Congress and President Biden can’t pass any infrastructure bill. This is what will happen if the Democratic Party doesn’t find a way to move past its own divisions.

Those divisions are stark. They focus on whether the Democrats should remain satisfied with a bipartisan infrastructure bill or push for a second $3.5 trillion bill that spends far more money on more explicitly progressive ends. Democratic Senator Kyrsten Sinema of Arizona has already said that she would not support the party-line $3.5 trillion infrastructure bill. She also supports keeping the filibuster, a tool the Senate minority can use to keep any bill from going forward.

Democratic Senator Joe Manchin of West Virginia (a state that former president Donald Trump won by almost 39 points in 2020) recently wrote an editorial in The Wall Street Journal entitled “Why I Won’t Support Spending Another $3.5 Trillion.” Senator Manchin specifically identified inflation as a key reason for a “strategic pause.”

Senator Manchin also suggested that the pandemic might get “worse under the next viral mutation.” This is very likely.

Already, we are past the point where we can talk about vaccines preventing transmission altogether. The new “Mu” strain of COVID-19 reportedly can evade certain antibodies from vaccines. Dr. Anthony Fauci says that “we’re keeping a very close eye on it” but that doesn’t necessarily mean that “we” are going to be able to stop it from spreading. The last time we heard rhetoric like this, it was about the “delta variant,” which quickly became the predominant strain of COVID-19 in the United States.

Given that just one Democratic Senator’s opposition could keep the second bill from passing, President Biden has a difficult task. He enters this month with the lowest approval ratings of his presidency. The defeat in Afghanistan and the horrifying scenes of the retreat are being displayed across the entire media. Indeed, the press has really turned on him for the first time.

Polls show most people agree with the decision to leave Afghanistan but disagree with the way it was done. The good news for President Biden is that he may be able to rebuild his political standing with time. The bad news is that he is going into September holding an exceptionally weak hand. This temporary weakness is coming at the worst possible time.

History suggests that the party in opposition to the president usually picks up seats in the midterms. Of course, just like September with the stock market, history doesn’t necessarily have to move in one direction. However, the Democrats need to give their base a reason to turn out in 2022, especially if they don’t have the polarizing figure of Donald Trump to serve as a threat. Without a common enemy, they go into 2022 divided, with the likes of Senator Joe Manchin and Rep. Alexandria Ocasio-Cortez having to maintain almost complete unity. It’s a tall order.

There’s also a time limit. House committees are still drawing up the details for the $3.5 trillion bill. Majority Senate Leader Chuck Schumer wants the plans finalized by September 15, but that’s a blistering pace by congressional standards. Speaker Nancy Pelosi has promised a vote on the initial bipartisan vote by September 27. This provides a way for Republicans and moderate Democrats to say they voted for an infrastructure bill. After that, they can dodge voting for a second, more expensive bill that contains tax hikes.

President Biden has also, as the kids say, played himself. He initially praised a bipartisan approach to infrastructure. However, now, his pledges of bipartisanship and unity seem hollow. If he immediately forces through a party-line vote that wasn’t part of the initial deal, even anti-Trump GOP senators like Utah’s Mitt Romney are going to cry betrayal. On the other hand, if President Biden doesn’t deliver in a big way on infrastructure and presides over defeats in 2022, he will look feckless and ineffective. A new poll indicates that Donald Trump could take him in a national election if it was held today.

The ”best-case” scenario for investors really depends on your individual position. That said, the larger Democratic bill has more IRS enforcement, tax hikes, and potentially more rigorous cryptocurrency regulations. That’s probably trouble for most investors. It will be especially dangerous if we see a hike in the capital gains tax.

Not surprisingly, there is a massive lobbying effort on the Hill right now against tax hikes. Republicans, many of whom have been running on the same playbook since the Reagan years, would love to run against new taxes in 2022. Trust me on this – most of these guys haven’t moved on since 1980. The Afghanistan debacle and the persistence of the COVID-19 pandemic are just two other arrows in their quiver.

All that said, the worst case scenario would be no new infrastructure bill at all. While that’s unlikely, it’s possible. With Speaker Pelosi committed to a September 27 vote on the bipartisan bill, moderate Democrats like Senators Manchin and Sinema have every reason to string out negotiations and weaken the more expensive bill. At the same time, President Biden has to keep already impatient progressives on board.

Meanwhile, the GOP just has to stay united – and that’s far easier to do when you are in opposition.

At some point, someone has to blink and accept a compromise. If nobody does, we may not get anything – and the market has already priced in massive infrastructure spending. If it doesn’t materialize, the market will be in trouble.

Investors need to pay close attention to every in- and-out of this extremely complicated process. I’ll be briefing my RID subscribers every weeknight on what’s happening.

Of course, all of you probably want to put me on the spot – what specifically should we want? For most investors, I’d say the best case-scenario is the bipartisan infrastructure bill, a second watered down Democrats-only bill with heavy spending on a renewable energy, and no new taxes, cryptocurrency regulations, or IRS enforcement. That’s not what I think is best for the country, nor am I endorsing any bill. That’s just the outcome I think will be best for the stock market.

Democrats must walk a very narrow path to keep from falling off into a pit of failure and defeat. If they do screw it up, I think they’ll take the whole market with them. Depending on your politics, you might rejoice at that outcome. Unfortunately, if the White House and Democratic leadership plunge into the abyss, they’ll take the stock market with them, at least in the short term.

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 RogueInvesting.com three times a week to bring you news on what those with power are debating, planning, and doing.

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