Any useful gauge of risks is based in part on expectations. One would expect that public opinion would be universally in favor of the GOP, considering President Biden’s handling of Afghanistan and the rise of inflation. However, his net disapproval rating has not yet translated to an improvement in any of the other team’s recent poll numbers – except one. The so-called generic preference vote favors the GOP, in step with historical reactions to a president’s first two years in office. In a global context, the US has weathered the pandemic and the resultant price spiral as well as any populous, open society, generally free-market sovereign.
Nonetheless, the economy broadly and a disruptive novel coronavirus in all its variations remain top concerns in public opinion polls (Ipsos, for example). Inflation and macroeconomic policymakers’ recent embrace of it has exacerbated a sense of ‘policy mistakes’. Consumers have taken a dimmer view of late but not yet as dim as two years ago and are still brighter than most of the decade following the Great Financial Crisis, according to the most recent Langer Research readings.
For these reasons, we find DC’s market risk profile elevated but much more on the known uncertainties of monetary policy, and the still untested ability of Washington to work together in the face of unknown geopolitical risk morphing into a tangible threat. Regulation, cultural disputes, and headlines about crime upticks provide political division fodder more than they represent urgent, indisputable risks to the republic, certainly in the nearest of terms. We break out two topics relevant to the 2022 policy discussion for your consideration and reaction.
Fiscal
The public discourse of yesterday and Sunday describing Senator Joe Manchin’s decision on the president’s economic agenda doesn’t point to an early January resolution of differences with the White House and other Democrats over Build Back Better. Part of the problem is the prospect of shrinking further a plan that has already nominally been halved in the past two quarters while still appeasing enough congressional Democrats. Key provisions we count as necessary for a new deal include:
It is not lost on us that Manchin at various times expressed opposition to the first and third items on our list. This merely underscores the fact that a bill costing $.75 – $1.25 trillion over ten years addressing those proposals is the bottom of a range capable of passing the House of Representatives. We do not believe even a ghost of BBB could garner 60 Senate votes, so the bill still needs reconciliation protection to pass that body. Manchin’s reported radio interview also backed away from reconciliation as an acceptable procedure. All of which means Manchin holds more cards than his caucus leader or the president which rarely is a sign of top-down legislative health. Deep differences and now acrimony between Manchin and most House Democrats isn’t a constructive look for the possibilities of bottom-up efforts to successfully put the BBB Humpty-Dumpty package back together again.
An interesting development yesterday came from the EPA but assuredly was blessed if not accelerated by the White House to either bolster progressives or lash out at Manchin (or both). Administrator Michael Regan before noon announced a tightening of Corporate Average Fuel Economy standards. The regulatory update emphasized the move would hasten the transition to electric vehicles, not something high on Manchin’s policy task list.
Midterms
Most Americans focus on absolutes, not comparable situations when responding to pollsters. But the question begs: Would you prefer to live in the UK with its never-ending Brexit challenges and more immediately ominous Omicron situation (even if temporarily)? China? Germany? Chile? Away from narrow cultural appeal, likely the answer is ‘no’. But electoral risk is a by-product of political risk. Even as the US enters a more active geopolitical risk phase and as economic risks dominate headlines (if not to the same degree financial conditions would suggest), political risk haunts majority parties unable to effectively message the other two.
For these reasons we believe DC’s risk profile isn’t materially different from the past year (it’s been elevated since March 2020). For markets this should seem like an overall benign reading. A unified Republican Congress seems certain in 2023, locking out tax increases, especially on wealth, a reversal of social safety net programs, fiscal expansion, and a much tougher environment for regulatory expansion. We’re not calling it yet but history and a seemingly weakened White House point generally in the direction described. Nor are we fast-forwarding through next year when macroeconomic, pandemic, and geopolitical risks – individually or combined – could significantly worsen Washington’s input into any macro risk model.
