You wanna bet on Joe?
A tax and spending bonanza looms.
Sorry, President Biden. I’m talking about Manchin. Reconciliation could come any day and seems certain to include the largest tax increase since 1968 and the largest spending package in more than 100 years. A massive re-writing of the safety net: cradle-to-grave social policies, big incentives to change the production and consumption of energy and a health-care bill bigger than Obamacare. Also, a range of tax increases, including an excise tax on stock buybacks, treating them as dividends; a CEO tax if pay disparity with workers hits a set ratio; deduction limits and higher capital gains for highly compensated workers; myriad rules changes raising taxes on small businesses. And, of course, higher corporate rates. There’s even talk a tax on imported carbon. “Carbon tax” is a 4-letter word in West Virginia, Manchin’s home state. Maybe that’s why he pushed for a highly publicized “pause.” Strategas Research reminds us Joe voted for the $2 trillion Covid relief package in March, a month after he vowed he wouldn’t, and for the Dems’ voting reforms bill weeks after he said he couldn’t support it. Might his high-profile media days provide cover to vote with progressives? Their “gross” spending number is $3.5 trillion, but fiscal bills tend to be measured on a “net” basis to account for offsetting tax increases. These amount to $1.75 trillion in the reconciliation instruction Dems, including Manchin, approved in early August. So, Manchin and fellow moderates can say they cut the price tag to a “net” $1.75 trillion, half of what progressives sought. Of the 13 (!) House committees drafting reconciliation bill, only Ways & Means requires an offset, meaning huge chunks (education, housing, energy) can be put on a credit card. And new spending could be counted over five instead of the typical 10 years, again lowering the sum to $1.75 trillion (even if the spend rate remains $350 billion over 10). Say it ain’t so, Joe!
Wall Street firms all over are cutting estimates for Q3 GDP as the delta variant and supply chain disruptions weigh on growth. Americans are traveling less and eating out less, and as slumping car sales show (more below), can’t buy what can’t be sold. Businesses are confronting similar issues, with container ships piling up at ports and chip makers scrambling to ramp up output. This isn’t a demand problem. Flush with cash, households and corporations want to spend. Bank deposits have surged $154 billion the past two weeks, a $4 trillion run rate. I wouldn’t bet against this. What we’re really talking about is growth deferred, not derailed. Depleted inventories will have to be rebuilt. There is lot of residential construction activity in the pipeline—less than 10% of new homes for sale have been completed, the lowest on record. Capex is strong and rising, abetted by surging S&P 500 revenues. Architectural billings are expanding, supporting a rebound in structures investment. Aggregate wages and salaries are at records despite a labor market still millions of jobs in the hole (more below), indicating incomes should keep climbing. Covid angst and cases are hurting sentiment. But unlike a year ago, no one is talking shutdowns or massive restrictions. Just masks and vaccine mandates, except for President Biden’s 6-point plan and all the hoops businesses would have to jump through. Former FDA commissioner and Pfizer board member Scott Gottlieb suggested on CNBC that there’s no way all the policies could be fully implemented until Q4 2022. He said we’re certain to be at herd immunity one way or another well before then.
Back to school is schooling everyone on shortages. Many school districts, including in my hometown, can’t find enough drivers for buses. A strike at food giant Mondelez promises snack shortages. KFC isn’t advertising chicken tenders because it doesn’t have enough. Shippers are working as fast as they can—Evercore ISI’s proprietary gauge of trucking activity is near a record high. Markets climb a Wall of Worry and the litany of risks—shortages, sticky inflation (more below), the timing of Fed taper, D.C. drama (don’t forget the looming debt ceiling and need to fund government by month’s end)—is a good wall to work with. Several Wall Street firms have downgraded their view on equities on these factors. But the 10-year Treasury yield this week hit a 2-month high, oil has rebounded 15% off its summer slump and China equities are up 15% the past two weeks. These, and an economy where the problem is supply, not demand, favor another leg in cyclical names, even if it gets messy over the next few weeks. Meanwhile, over in the swamp, do you wanna bet on Joe? Or Nancy? I’ve got all my chips on one.
- The global Covid situation is improving JP Morgan’s Covid activity tracker of high-frequency data points across the globe shows new cases peaking in both emerging and developed markets, with progress in several mobility indicators. Public transport searches are up in most countries, with the broad direction of policy focused toward reopening.
- Moving toward normalcy New and continuing jobless claims declined in the latest week to new pandemic lows, a sign Covid factors are not causing faster job loss and that the recent slowing has been more about hiring flows, i.e., supply (more below). Notably, continuing claims continued to fall faster in states that cut off bonus jobless benefits early.
- The issue isn’t jobs … There are plenty—July job openings jumped to nearly 11 million, a record high, 2.55 million above the number of unemployed and nearly 4 million above pre-pandemic levels. It took five years for openings to fully recover during the last downturn. In this expansion, the recovery was less than a year.
- … the problem is supply Companies are struggling to find qualified job candidates. The NFIB says hard-to-fill openings are sky high, and the Labor Department reports the participation rate holding near pandemic lows. It seems many potential workers are unwilling to seek jobs, possibly due to Covid fears or generous jobless benefits that expired this month.
- How do you define transitory Core PPI rose 6.7% year-over-year (y/y) in August, its fastest rate since the new gauge was adopted 10 years ago. The headline y/y rate jumped 8.3%, led by energy and food. Trade service prices (a good high frequency metric for retailers’ profit margins) rose 1.5% month over month.
- You can’t buy what you can’t find With automakers cutting production and inventories due to chip shortages, total vehicle sales in the U.S. fell nearly 12% in August to 13 million annualized from 14.75 million in July, the lowest this year and well off April’s 31-year high of 18.5 million.
We’ve seen this play before 10-year Treasury yields were range-bound (between 1.4% and 1.8%) in the second half of 2012 as the economy confronted a pending fiscal drag and political brinkmanship over the debt ceiling. Yields didn’t break out until a fiscal cliff deal was struck on Dec. 31, 2012.
“Minsky moment” ahead? U.S. stocks have gone almost 18 months without a double-digit drawdown. Such calm is likely to trouble devotees of Hyman Minsky, who showed that excessively long periods of market stability breeds countervailing episodes of violent instability. The question, Gavekal Research wonders, is what might cause such a transition to a more volatile market.
I wouldn’t bet against this It’s been a record-breaking 12 months for initial public offerings, with 1,257 new companies coming to market, raising $213 billion.