Fiscal policy remains uncertain between now and mid-February but at a lower level of economic risk than was successfully managed from March 2020 through the early 4Q21 enactment of infrastructure investments. The outcome this month or next of President Biden’s economic agenda will matter to millions of American families, and shutdowns and defaults portend headline risk early next quarter. But for markets, 1H22 brings a more varied yet still consequential set of challenges than did this year.
Geopolitics
Former President Trump’s 2017 National Security Strategy identified Russia and China as the main threats to US sovereignty. Biden’s US Intelligence team reiterated that warning in early 2021, which does not seem less crucial now. Domestic and global considerations suggest both countries see value in testing the US administration.
- China: De-listing possibilities in the US and a call from Beijing to come home are two sides of the same coin for Chinese companies. Washington wants the SEC to enforce disclosures equally for all companies choosing to list on a US exchange. Beijing doesn’t want its companies to endure that scrutiny which might expose state interests. Neither country has incentive to back down here. Trade discussions, we expect, will gain momentum given statements from both sides, even if the Olympics presents temporary frictions. Already Beijing’s recalcitrance is clear as an official declares the December 9-10 US Democracy Summit a “joke”.
- Russia: A year of cyber confrontations very likely will spill over into next year, especially focused on midterm election disinformation campaigns by government and affiliated perpetrators organized by Moscow. Ukraine presents geostrategic risks as the US and NATO prepare for near-term confrontation after US reports of anticipated Russian military strikes next quarter. These are among the topics slated for a virtual meeting Tuesday between Biden and Russian President Vladimir Putin. All of this and midterms form a backdrop for adding money to the Pentagon and Intelligence Community baselines.
Regulatory
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Macroprudential banking regulators likely will be in place by the end of 1Q22. Our call stands that this new constellation of rules setters represents less risk to banks than is broadly appreciated. But Basel IV, possible amendments to the Community Reinvestment Act, and initial digital money rules merit attention for changes to income and balance sheet requirements and opportunities for banks as well nonbanks.
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Competition policy seems destined for an activity uptick now that Biden’s antitrust triumvirate are in place. Tim Wu (National Economic Council), Lina Khan (FTC), and Jonathan Kanter (DoJ) believe network effects are a growing competition threat among “moated” empires in technology and other sectors. The FTC and DoJ this week host a two-day workshop on labor market competition. Last week, Khan sued to stop NVIDIA’s purchase of a UK chip designer fearing the deal would stifle innovation. This administration wants broader competition at home and globally. Finally, the Consumer Financial Products Bureau chief, Rohit Chopra, said his agency also had interest in the risks big tech poses to US consumers around payment services if unregulated.
Economic
Fiscal and pandemic legislation this year was controlled by a relatively small, albeit active set of players. Supply chain challenges introduce a broader collection of local, state, international, and private actors which enhances uncertainty risks. Omicron’s emergence reignites the global vaccine imperative and highlights US legal fights over mandates.
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The president is due a global value chains (GVC) report before the end of February. More than an update of current circumstances and a 2022 outlook, this document will propose legislation necessary to improve domestic and international GVC functions, especially the manufacturing base for medicine and medical devices, climate-friendly vehicles, and microelectronics for national security and other uses. Congress likely will complete action on this year’s version of defense program authorizations, parts of which are increasingly targeted at ensuring a robust supply of chips. The Innovation and Competition Act likely won’t be part of the final defense bill but the chips-focused legislation very likely becomes law in 1Q22.
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Vaccine mandates seem to work when compelled by large organization managers in the public and private sectors. Nonetheless, litigation won’t be resolved until next year, Covid variants or not, and likely will be a source of market and voter angst in the new year.
The next three weeks likely determine the fate and political significance of Build Back Better. Our view that the bill passes Congress before Christmas hasn’t change (still $1.5 – $1.8 trillion). Very quickly, however, geopolitical, and other national policies of economic significance will occupy investors and elected officials’ hopes and fears.
Economic realities and perceptions usually outweigh other domestic policy developments and geopolitics when midterm votes are cast. We lump the coronavirus with economics given the implications for consumer and business behavior during the pandemic. We expect that geopolitics and domestic regulatory developments will be second tier concerns to midterm voters in 2022, even if they are primary concerns to markets.
