These frank words were famously delivered by democratic strategist James Carville during Bill Clinton’s run to the presidential election in 1992, to put some exclamation marks on the driving force for prosperity. It was true then – and, well – sort of true, today. One of the key characteristics of the Trump administration was the redefining of norms. In general, the rule of voters casting ballots with their pocketbook seems to be a mainstay, but many votes cast for Biden were a rejection of the Trump method of governance: blunt and aggressive. (In order to fully discuss the election, we would consider many nuances, but that is generally outside the scope of our interest, here.) However, in selecting a Biden administration – even by default – voters generally understood that liberal policies lead to additional regulation.
Since taking office, a surprising number of executive actions have been introduced. The reentry of the Paris environmental agreement, a stoppage for new oil/gas exploration on federal lands and a funding halt for the southern border wall are just some examples of recent orders; each a reversal of previous executive action reversals – complicated ones, at that. It’s dizzying to track, but new administrations rush to undo prior administrative action, or in this case to loop back to policies brushed aside by executive action. Political nonsense aside, we are interested in how this impacts money, because we tend to agree with Carville on the economy.
A few of the key changes which could impact investors are related to energy use or development, thereof. The Keystone pipeline, crossing from Canada’s oil sand fields to the U.S. is one of dozens of transport methods, but it has become a talking point in our current push-pull style of government. In our view, the real impact will be seen in higher costs at the pump. Transporting crude to refineries off the coast of Texas is the current operation which may be reconsidered. The reimagining of oil transport will continue to occur due to policy pressures, as well as configuring ways to build refining capacity. In this case, we also see the private sector echoing administrative goals, as General Motors announced that it plans to sell only electric vehicles by 2035 (Boudette, 2021).
This is a great example of capitalism in action. GM seems to be responding to consumers, rather than governmental intervention (or a prohibition on combustion engine manufacture, outright). Of course, it is arguable that GM is reacting to political pressure, but the alternative would be to ignore the same pressure.
Can We Make Good of an Interfering Pass?
Conservatives may push against governmental regulation (correctly), but this is a private company moving in a new direction of its own impetus, as it appears. So a Biden executive order related to energy policy could propel a shift to electric vehicles. Great news, if you own technology, mining or battery component stocks… but maybe not great for Exxon. The oil companies must adapt, or risk tens of billions of dollars – and hundreds of thousands of jobs. Capitalism in motion. What if a new administration further changes course? Too much whiplash could hurt the market. That is the horror of governing by executive action – the crippling of capitalism. So, we mustn’t move too quickly in reacting to changing market conditions, due to this harsh reality.
Now, we should consider shifting political priorities delivered by penstroke with the backdrop of an additional COVID stimulus package. The opportunity for mistakes here create an interesting dynamic. Now, on the one hand – COVID has wreaked havoc on the economy, while on the other – equity markets are virtually at all-time highs. Some of the rise has occurred because investors are eager to see markets rise. There is a prevailing thought among many investors that markets only go up, and this is consistent with virtually all investor experience over the past 10 years! It’s a reasonable conclusion; some have never seen a big decline. One could see this as an indicator of American spirit and temperament to overcome adversity, if we’re looking at the glass half-full. Pushing the market up from sheer will (or, in the case of casual GameStop investors – boredom). Both are factors to overcome when we think about long-term investor goals.
Big Government and the Everything-Answers
Should we fear regulation in a recessionary environment? Or, perhaps the better question: are we in a recessionary environment? Because as investors, that is the question. Unemployment has moved from record lows, now spiking to more than 900,000 new weekly claims. Thousands of small and mid-sized businesses are shuttered and states are reeling from the fallout of COVID. Of course, federal stimulus has been earmarked and spent, and now what? Will these bereft businesses suddenly boom? How will thousands of citizens currently behind on mortgage or rent suddenly come up with thousands of extra dollars?
The widening gap between the haves and have-nots has been exacerbated by the pandemic; cracks in our economy have been revealed. These are not Socratic musings, but real questions that must be considered, because each of these questions has significant impact on how investors will allocate capital in and within markets.
Clearly, the fed has signaled a willingness to supply virtually endless supplies of money, (Smialek, 2021) but we fear that endless money supply may create a different set of future problems. Chief among them is how to wean the economy off cheap federal dollars. The money supply has risen at a pace previously unseen, with a greater than 20% increase in the past 12 months (Franke, 2021). In English, this means that there are more dollars in the credit system, and while that sounds like a good thing, the general theory of economics suggests that inflation will follow. OK, so should we fear inflation? Only if there is no corresponding wage increase.
Imagine that we have price inflation and prices increase 3% overnight. This would be a small inconvenience if it were controlled to a single price increase. But an across-the-board increase has the effective impact of a decrease in our wealth or income. Three percent – it doesn’t seem so bad… but as we think about it, this really starts to hurt. Typically, wage inflation precedes real inflation, so the felt impact is minimal. You have more money because of wage inflation, so you don’t “feel” price increases as much. In other words: there is little actual impact.
However, and you knew this was coming – in this case, the Fed may not be able to control inflation, because it has been artificially created (the cart was put before the horse in this case). Remember: typically, we see wage inflation first, then price inflation. Why would we experience price inflation now, on the heels of COVID? There could be many reasons, but the following quickly comes to mind. COVID relief has helped put trillions of dollars into the money supply, and companies may feel like this is a reasonable time to recover losses over the past year… by asking for more money in exchange for their goods and services.
The March Forward
Administrative priorities are now being driven by executive orders as the left sees significant gains and is eager to capitalize on them, circumventing the legislative process. Legislation often requires time, planning, coordination and even compromise. There was some speculation that a split government, with a democratic president and republican senate might be favored by the equities markets. After a bitterly contested battle in Georgia – where democrats flipped two seats – newly elected Vice President Kamala Harris now breaks the tie in the Senate to turn power in this forum over to democrats, as well (APM, 2021). However, the S&P 500 index has reacted positively since the election, with 10% gains as of market close last week (WSJ, 2021). In this case, ignorance might be bliss. After investing ourselves out of a worldwide pandemic, Wall Street might not see the shift in federal power to be wholly earth-shattering. Perhaps blind faith is driving investors to keep pushing forward as the Fed signals that, for better or for worse, it intends to continue to propel the economy forward. As divisive as the country may seem at times, from hedge fund managers to Wallstreetbet-ters – we have a common interest in our desire to prosper.
Ballentine, Claire, and Kamaron Leach. “Stocks Rally for Second Day Before Election Result: Markets Wrap.” Bloomberg.com, Bloomberg, 2 Nov. 2020, www.bloomberg.com/news/articles/2020-11-02/asia-stocks-head-for-muted-open-oil-rises-markets-wrap#:~:text=The%20S%26P%20500%20Index%20jumped,in%20more%20than%20four%20weeks.
Boudette, N. E. (2021, January 28). G.M. Will Sell Only Zero-Emission Vehicles by 2035. The New York Times.
Franck, T. (2020, August 5). The ballooning money supply may be the key to unlocking inflation in the U.S. CNBC.