I have a bit of a running theory right now that the Republicans are setting up a Biden led-economy to absolutely tank in the next month or two (and onward), so l wrote it down and figure I’d let the internet yell at me about it. Here we go:
I’m going to start big and we’ll get where we’re going in due time. First of all, take a look at this chart of Covid cases in Canada after their Thanksgiving celebrations in Mid October. I don't see us dodging this bullet.
The data would suggest that what’s already a bad surge is about to get much worse when families return home and cough over the turkey together. With or without government shut downs it’s effecting behavior. Mobility trends are rolling over quite aggressively. Type in "New Mexico, United States” to see how lock downs are keeping people home, but also in place like "South Carolina, United States” where they’re headed down despite lockdowns. People are modifying their behavior either way.
Try it here:
So I think it can be expected that whether or not there are lockdowns, people will probably stop going out and shopping, or eating in restaurants at the exact time that most businesses are hoping is their last chance to make money this year. This, coupled with the fact that the ban on evictions ends December 31st, and that mortgage forbearance, with an extension will end for most people in February or March (add 12 months to this chart) doesn’t look good for an improving economy.
Anecdotally, I recently did an interview with a business owner who talked about all the debt he’s had to take on to weather this pandemic (I work in media and, believe me, I already hate myself more than you ever could so please hold your judgement). He told me he’s going to be servicing that debt for years. Something tells me a lot of businesses will do the same which does not bode well for hiring back employees, buying new equipment or investing in growth (i.e. re-inflation).
Meanwhile it looks like the Republicans are doing everything possible to pull liquidity out of the market. Mnuchin’s move this week feels pretty obvious. It’s not like the Treasury actually needs the money back or can spend it (it is earmarked as deficit neutral), but they’re weakening the backstops so any shock the the system requires Biden to go to Congress for help, where Republicans have the upper hand.
This is right out the the 2008 playbook, where Mitch McConnell and the republicans stood in the way of more relief after the initial bailout and rallied their base around the Tea Party Movement in the midterms 2 years later. You‘re already hearing republicans test these talking points.
They’re going to kill Biden on slow growth and a weak economy until 2022 where they can hopefully take back the house. The exact same people who are doing this now did this under Obama.
The oncoming crisis in small businesses, household debt (mortgages, student loans, auto loans) and eventually municipal debt seems to be getting more dire and I think may hit an inflection point with another Covid shut down exactly when the Trump administration is incentivized to do nothing and hand off a disaster to Biden. You can hear the right wing talking points as Biden tries to bail out cities who are going bankrupt. Anyone who was in and out of Detroit in 2011 and 2012 can attest to whether or not you think there should be a bail out, this get’s really ugly really fast.
So anyways, I know everyone’s pumped about the vaccine, but it seems to me like the tail risk of the current wave of COVID and the complete lack of a backstop is pretty huge. I keep hearing that they think we’re going to get a stimulus bill after the inauguration and I just don’t see any evidence that Mitch McConnell will let that happen.
There's actually some historical precedent for this looking farther back. When Grover Cleveland beat Harrison in 1892 contentious house and senate made an already bad depression even worse, blamed it on the Democrats and the Republicans won back control the next year. The Democrats didn't control of either house again until 1910. It's not a perfect analogy, but its happened before.
So, with Congress unwilling to do anything, fiscal policy responses are pretty much off the table in any meaningful way. That means the only significant tool a desperate Biden administration is going to have will be monetary policy, so while 6 months ago I didn’t think it was likely we’d see yield curve control I think it’s very possible in 2021 or 2022. Short of negative interest rates, I’m not sure what other options are on the table when we start missing inflation and employment targets.
Anyways this has been on my mind this week as we’ve already started talking about a re-opening rotation and the prospects for a great economy in 2021. Politics aside, we can discuss what should happen, but I currently think this will happen. I think financial journalists especially don’t seem to understand that one of the actors in this game is highly incentivized for Biden's economy to do poorly for the next 2 years. What that looks like, I don’t know, but it’s not as rosy as many think, in my humble opinion.