20 January 2021
1. Stimulus (inflation, interest rates)
- Some more notes on stimulus here in John Authers excellent comment piece
- The context on stimulus announced late last week. $1.9trn proposed, that’s in addition to $0.9trn pre-Christmas under Trump and $3trn earlier in 2020, that compares with $787bn in 2009, which is a huge difference. It consists of direct cheques to Americans, $15 minimum wage and support to states and cities to plug budgets. It had largely been anticipated by markets when it was announced last week. Stimulus potential is larger now post Georgia senate elections (which give Democrats a thin majority in the senate).
- Bond yields are slightly higher, up 20bps now since the election
- Investors piling into municipal bonds
- Initially post election the market received the “divided government” news positively on the story that there would not be too much stimulus, so rates would remain low supporting tech valuations. Now that the democrats have gained a narrow control of the senate, the story has shifted to the large stimulus may promote growth.
- Returns post election and post Georgia elections are very interesting. S&P up a bit but Russell 2000 +34% with Energy, Banks (most cyclical sector) are hugely up.
2. Energy & infrastructure policy
- Good document from Alcentra which can be found here. There is a high likelihood of a large clean energy spending plan. But 6 Democrat senators are from oil-producing states so a ban on fracking remains unlikely. This has big implications for the high yield and leveraged loan markets, although not so much these days for the equity markets. Maybe there will be fewer pipelines built interstate so an increase in incumbency is an advantage to existing pipeline assets. There are no more permits auctioned for drilling on federal lands.
- The Economist has covered potential infrastructure spending plans – this is welcome as much of America’s infrastructure is old and creaking, but the track record of making it work politically is not good. Let’s not forget that both Trump and Obama had headline grabbing infrastructure plans but the federal spending on infrastructure reached a record low in 2017. But much of Obama-era commitments to infrastructure remains unspent. Investors have preferred secondary deals (milking existing assets to building new ones).
- A third of American bridges are creaky
3. Environment / climate policy
- Re-joining the Paris accord commits the US to net-zero by 2050. But could it result in greater transition risks if regulations try and abruptly make up lost ground?
- Carbon Brief's article (written pre-Georgia so less bullish on Biden’s power in office, but interesting content on climate change).
4. China policy
- A reboot of the china relationship is on the cards. More stability in dealings with China and other exporters are likely – it’s not just tariffs but the threat of tariffs that destabilises. While it is likely to be more collaborative and less outwardly confrontational than Trump, there is still lots of support in America for a tougher line on China than pre-Trump. By no means certain that the Trump era orders will get unwound quickly. You can find lots of good stuff in this podcast here.
- De-listing story around Chinese firms on the NYSE – it is not clear that Biden would reverse the presidential order that underlies this. Any impact on US investors’ ability to own largest Chinese tech firms would have big potential implications for these share prices.
- Also relevant is the Huawei sanctions which ban the use of tools created by a US company to build Huawei products, which could extend to open source software. This has bipartisan support so it is not a given that Biden would wind back. We are only at the start of understanding what this could mean as potential rival tech systems get developed over the coming decades. There are general concerns in the US regarding protection of IP rights and data to Chinese companies.
5. Cabinet appointments
- The most diverse cabinet ever
- Last week’s episode on diversity & rebel ideas. This cabinet is more representative of the electorate and also the democratic coalition. Yellen as treasury secretary is key here. She is largely seen as “dovish” ie supportive of lower rates and more stimulus although sometimes this is overstated. Her record was more moderate generally. It is thought she would be supportive of running the economy hotter, especially in light of data showing that unemployment among minorities is generally worse than the overall stats say. This aligns with the new Fed strategy to let the economy run hotter without raising rates.
- Interesting podcast with her here from back in Feb 2020. There are some points of note:
- She signals back then that she considers fiscal policy needing to take some of the burden from here now that the monetary policy has less road to run.
- She considers the Trump tax cuts ill timed (could there be a push to reverse?)
- She has been a key proponent of a carbon tax regime of $43 a tonne increasing at 5% p.a. with the proceeds given out to households to make it politically palatable.
6. Tech antitrust
This was a big theme last summer when the tech bosses testified to congress and it seemed clear that democrat lawmakers were concerned about the power some of these platforms were exerting. However it remains unclear whether current antitrust laws would actually support any kind of crackdown.
Since then a test case has been launched by the Department of Justice against Google for suppressing competition in the search market through the deals it does with providers such as Apple. It is very similar to the case against Microsoft on bundling in early 2000’s. While Microsoft lost, it didn’t do them too much harm.
The arguments against each of the tech firms are quite different – some that they dominate certain markets too much (eg Facebook) and some that they use a dominant position exploitatively (eg Amazon) and some that they are anti-competitive. Current regulations focus on proving a detriment to the consumer, which is going to be hard to do. However, with a democrat controlled congress changes in the law are not impossible.
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