Divided we stand
Might political realities trip up Biden's massive agenda?
Did you watch President Biden’s first speech before both houses of Congress on Wednesday evening? Not many did. An estimated 27 million people across 16 networks, the smallest audience for the annual presidential speech since at least 1993. In their first addresses before Congress, President Obama had 52 million viewers and President Trump had 48 million. At 53% approval vs. 40% disapproval, Biden is running 13 points ahead of Trump at the same stage of his presidency but below every other elected president at the same time dating back to WWII. Given presidents typically enjoy a “honeymoon” in their first 100 days, Biden’s likely near his popularity peak. This is a problem as he pushes for the largest expansion of the federal government in more than 50 years. Even though he won the 2020 election by more than 7 million votes, he carried the “tipping point” states that determined the Electoral College by just 65K votes. Down the ballot, Democrats barely held onto the House and expected gains in the Senate failed to materialize, leaving it gridlocked at 50-50. Divided we stand. Yet it seems Biden read the surprise Georgia election results as a larger mandate and is pressing his bet voters want more government. It’s said he fancies himself as a modern-day Franklin Delano Roosevelt, but FDR had much larger congressional majorities to work with. Indeed, for all the “unity” rhetoric, Dems are focused on spending measures that can be passed by a simple majority. Divided we stand.
Sell in July and go away? Extremely bullish sentiment suggests caution, but momentum—and credit—historically trump sentiment, and both remain favorable. With the calendar turning and stocks around all-time highs, the “Sell in May and go away’’ adage keeps popping up. But Renaissance Macro says July, not May, typically marks the point where volatility turns up and tougher seasonality kicks in. For now, fundamentals are driving stocks, with companies posting much better-than-expected earnings on accelerating economic growth. So far this reporting season, 87% of S&P 500 companies have beaten consensus by an average 23.5%, both the largest-ever record gaps, according to Refinitiv data dating back to 1994. Overall, S&P Q1 earnings growth is on pace to reach 44.7%, which would be the best in a decade. 2022 forecasts haven’t gone down, either, a sign 2021’s faster and more powerful recovery isn’t borrowing from next year. Collectively, S&P forward revenues, earnings and profit margins are at record highs. The quick recovery in margins is especially impressive, Yardeni says. It shows how companies rapidly adapted to a challenging environment of social distancing, soaring input costs, and both worker shortages and supply-chain disruptions. These factors, along with cash representing 22% of individual investor portfolios and households sitting on $2 trillion of pandemic-driven savings, undermine concerns that the Value trade has run its course, especially with the Fed remaining ultra-supportive. Chair Powell in Wednesday’s post-meeting presser reiterated it’s still not thinking about thinking about tapering.
Notably, during Powell’s presser, asked whether he intends to visit the homeless encampment near the Fed’s Washington headquarters, he initially said, “I’ve been very busy.” Then, “I’ve met with homeless people many times.” And finally, “I’ll do it when there isn’t so much public attention on it.” This reflects the Fed’s new sensitivity that the full employment mandate is a “broad and inclusive goal.” However much this may sound like nothing more than political correctness, Trend Macro says it in fact attaches directly to the potentially regime-changing abandonment of the Phillips Curve (the tradeoff between unemployment and inflation) as a policy tool. The Fed’s aware deliberately causing recessions in order to keep the economy from “overheating,” as it’s done for generations, primarily punishes minorities and the less educated. A brave new world, and divided we stand. Republicans are banking on rising inflation due to Biden’s massive spending, higher energy costs as a result of his energy policies, and higher taxes (close to $3 trillion over the next 10 years, or roughly 1.3% of GDP and nearly three times larger than tax increases averaging 0.4% of GDP over the last 40 years from Obama, Clinton, Bush and Reagan) that will leave suburban voters feeling they’re worse off. The question may be how quickly they start feeling this way. Midterm elections are 18 months away, and the previous 21 midterms saw the party controlling the White House lose an average of 30 seats in the House and four in the Senate. A recent Economist/YouGov poll found 57% of Republicans and 46% of Independents feel the worst of the pandemic is behind us, but only 38% of Dems. Divided we stand. With regard to whom voters trust, 40% trust Biden and an equal 40% distrust him, with Biden underwater among Independents. His initial July 4 target of socially distanced outdoor barbeques with small groups of family members while wearing masks was criticized as being out of touch and a more appropriate goal for last July. If mask mandates remain heading into the midterms, it could get ugly for the president and his party. After the State of the Union, a national news station talked to an “average American.” “How is it going with Biden so far?” The respondent said he’s much happier “because now we’re back to boring.” What?? With $5 trillion of new spending and $6 trillion more on the drawing board? You could scarcely get less boring.
- This is what a V looks like Conference Board consumer confidence jumped in April to its highest level since February 2020, consistent with above-trend economic growth. Michigan consumer sentiment also rose above expectations. In March, consumer spending and personal income soared as more vaccinations and a new round of stimulus checks fueled a further reopening of the economy—the 21% jump in personal income represented a record increase.
- This is what a V looks like Except for trade (see below), the first take on Q1 GDP reflected broad improvement, with personal consumption rising its second-most since 1965, and capital expenditures and residential investment up nearly 10% and 11%, respectively. At 6.4% overall, real GDP climbed at its second-fastest pace since Q3 2003, exceeded only by last summer’s reopening-fed burst. Real GDP is now only a percentage point below its pre-pandemic peak. Nominal GDP is at a new high.
- This is what a V looks like Core capital goods orders rebounded in March to a new record high, Evercore ISI’s proprietary trucking survey (which has the strongest correlation with GDP of all its surveys) hit its highest level in 21 years and regional indicators of manufacturing activity in Texas and Chicago jumped, with the latter rising to its highest level since 1983.
- You can’t buy what you can’t find March pending home sales rose marginally and well below expectations, with the National Association of Realtors (NAR) again citing thin inventories relative to prospective buyers. The ongoing shortage is starting to slow housing’s up-trend and are feeding ever-rising home prices—the Case-Shiller gauge shot up in February by the most in 15 years. Still, the NAR expects stronger economic growth and continued low rates ultimately will lift sales 10% this year.
- You can’t buy what you can’t get Congestion at U.S. West Coast ports due to pandemic-induced labor shortages has shipping containers piling up on ships and shores, causing a global shortage that’s distorting trade data. Even so, March’s trade deficit widened to record highs on a monthly and 12-month basis, a gap the GDPNow model expects will subtract 1.1 percentage points from Q1 growth.
- Here it comes Inflation rose more than expected in March, with the PCE headline index up 2.3% year-over-year, with the core rate up a more modest 1.8%, though still four-tenths higher than March. The Labor Department’s employment cost index, considered the best gauge of wages, rose 1% in the first quarter. Expectations are that inflation will trend sharply higher in coming months vs. its collapse last spring during the pandemic, but Powell insisted again this week that the Fed views these increases as temporary.
I’m watching the dollar It typically weakens whenever the government eases fiscal policy beyond what’s necessary to close the output gap, as is the case now even before potentially new rounds of mega-stimulus being pitched by the Biden administration. This suggests the dollar’s path of least resistance over the next 12 months is downward, with global growth momentum rotating from the U.S. to the rest of the world as the Fed remains ultra-dovish and the U.S. finances its burgeoning trade deficit.
Don’t expect a China “put” on inflation In the 40 years up to 2015, China’s working-age population increased 97%, creating downward pressures on global inflation as originally very cheap Chinese labor was integrated into the world’s supply chains. Since 2015, however, China’s working-age population has been declining and it’s expected to shrink another 12% over the next 20 years.
Why don’t our leaders work on loopholes and the effective tax rate TIS Group shares that highest marginal tax rate was 91% in the ’40s, 92% in the early ’50s, 91% in the late ’50s before it fell all the ways to 70% in 1964, and then 70% all through 1981. Imagine the excitement when the top marginal rate was lowered to 50% in 1981. Throughout this entire span and into the new millennium, federal receipts as a percentage of GDP have remained relatively constant.