Date: 12/17/2021
Author: Mr. X
When the Democrats took charge of Congress, their ambitions seemed unlimited. After the January 6 riot, the Republicans were on the defensive. Social media had banned their leader. The GOP seemed poised to turn on each other over who should lead the party. Meanwhile, economists rapturously predicted a new “Roaring Twenties” that President Joe Biden could inherit.
Things haven’t quite worked out that way. President Joe Biden and his party successfully passed an infrastructure bill. They also delivered $1,200 COVID-19 stimulus checks early in his Administration. Yet that payment was lower than what President Donald Trump himself had suggested. The national outrage surrounding January 6, 2021 has dimmed and hearings on the subject seem of more interest to the media than ordinary citizens. A GOP victory in the gubernatorial election in Virginia and an unexpectedly close race in New Jersey have Democrats fearing disaster. Meanwhile, the former president has largely kept his grip on the Republican party and could easily claim the 2024 nomination if he wishes it.
Investors who were gearing up for a major push into infrastructure, clean energy, and climate change need to readjust their expectations. New developments suggest that whatever the Democrats were going to do with their congressional majority… they’ve already done it.
President Joe Biden’s $2 billion Build Back Better bill has been delayed until at least next month. As usual, the stumbling block is West Virginia’s Senator Joe Manchin, a Democrat who represents perhaps the most pro-Trump state in the Union. While the senator is receiving heavy criticism from progressives for his tactics, he’s been very clear what he wants. Senator Manchin does not want to spend large amounts of money for temporary programs, but instead wants more dedicated investment for key social programs. Progressives want to push through more funding for temporary social programs, gambling that Republicans won’t be able to repeal them once established.
Yet Senator Manchin has the long view here. Over the last decade, we’ve seen ostensibly revolutionary political changes – arguably the largest political upset in presidential history in 2016, a challenge to an election outcome in 2020, and political polarization to the point that men like Ray Dalio are broaching the topic of civil war. However, if you take a deep breath and a step back, things don’t seem so revolutionary. The Democrats’ victory in 2018 and the Republicans’ likely victory in 2022 are simply the ordinary political tides coming in on schedule. The Democrats’ majority in Congress was always slim. A figure like Senator Manchin is not going to endanger his position simply to appeal to someone like Alexandria Ocasio-Cortez – and progressives are in no position to threaten him.
Still, it’s incredible that Democrats haven’t been able to unite behind some common-sense legislative items. For example, by lumping the extremely popular expanded child tax credit into the Build Back better legislation, the Democrats now risk having it expire on their watch. Incredibly, the Democrats also may have student loan repayments restart again next month – ending a pause initially put in place by President Trump. While younger Americans lean left, about half of Americans under 30 disapprove of the job President Biden is doing and less than 30% approve. With one Democrat after another announcing his or her departure from Congress before the next elections, it’s hard to avoid the conclusion that the Democrats are panicking.
What does this mean for investors? Republicans will clearly seize on the issue of inflation and seek to pin it on the president. However, if there is a Republican takeover, I wouldn’t look for sweeping political initiatives. We also should not take Republican rhetoric about “holding Big Tech accountable” very seriously. The GOP’s internal divisions – not least about Donald Trump – are still in place, and the best thing the party can do is nothing. If it takes Congress, it will continue that obstructionist approach, marking time until 2024.
Investors who were counting on massive federal outlays for clean energy should rethink their assumptions. That doesn’t mean that there won’t be massive spending. It just means that spending will be directed at different ends.
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Although President Trump partially rebranded the Republicans as the party of non-intervention, it hasn’t lasted. Republicans seized on the chaos surrounding the Afghanistan War, President Biden’s perceived softness on Russia, and the growing resentment against China to outline a more muscular foreign policy. Former Trump Secretary of State Mike Pompeo, a hawk, is widely believed to be preparing a 2024 run. A GOP controlled Congress won’t limit spending, but direct even more money towards the military and securing raw materials from the Chinese.
Key players will be MP Materials (MP), a company the US government will likely be dependents on because it can deliver rare earth minerals. Palantir [PLTR] has dipped lately but the company’s own alignment with Washington gives it an inside track for coverage.
Yet I think conventional military contradictors are where opportunity may lie. Lockhead Martin [LMT], Raytheon [RTX], Northrop Grunman [NOC] and other military hardware giants could benefit here. The smaller companies that often win contracts alongside these giants will also look attractive.
A Republican takeover of Congress looks extremely like. The Democrats have largely followed to get of their own way. Yet a Republican takeover won’t end federal spending or noticeably reduce inflation. Instead it will simply mean the redirection of resources from clean energy and social spending to the military. A year out from the elections, it might be best for investors to start preparing now.
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 to bring you news on what those with power are debating, planning, and doing.
