Much More Money

“Much more”. That’s a rough estimate of what Nancy Pelosi needs to hear from Steve Mnuchin if The White House really wants to strike a deal with Democrats on another round of virus relief prior to the election.

The two sides are either miles apart or arguing over nothing, depending on how you conceptualize deficits, debt, and government spending. On Monday evening, House Democrats unveiled a “new” $2.2 trillion proposal, as expected.

As discussed here over the weekend, there’s a sense in which bickering over whether to keystroke $1.5 trillion into existence or conjure $2.2 trillion out of thin air is wildly ridiculous when viewed through an MMT lens. Inflation is nowhere near the Fed’s target (figure below), we still have no way to quantify the scope of the structural damage from the pandemic, and if NAIRU actually were observable, it’s safe to say we couldn’t see it from way up here.

“We can get this done”, Pelosi told MSNBC on Monday. “But he has to come back with much more money”.

“He” could refer to either Mnuchin or Donald Trump. One of those two men has plenty of money, both personally and in his capacity as head of the government agency that mints it. The other wonders if you can spare a few bucks for a guy who’s down on his luck and fresh out of tax loss carry forwards.

In any event, it’s hard to say whether market participants have priced in another fiscal package or not. For a couple of weeks in early August, one explanation for stocks’ buoyancy was that equities were anticipating more stimulus. Ultimately, it turned out that an institutional pile-on atop a retail investor options mania was likely driving at least some of the summer rally in part through the knock-on effects for dealer hedging flows.

By mid-September, it was clear that the odds of a fresh stimulus package in time for the election were considerably lower than most assumed in late July, when provisions under the previous rescue effort started to roll off. Once Pelosi and Mnuchin committed to a “clean” CR to keep the government funded, the odds of more stimulus appeared to dim further.

But just as it turned out that the latter stages of the summer rally likely weren’t predicated on stimulus assumptions, it’s unlikely that the bulk of September’s selloff is attributable to stimulus disappointment. Rather, the “de-frothing” process in tech, rebalancing flows mid-month, and election jitters, together conspired to trigger a correction.

Monday’s broad-based rally certainly helped, but one problem going forward is that between the Supreme Court drama and now the revelations around the president’s taxes (which could conceivably create more partisan rancor), the prospects for additional stimulus have become wholly ambiguous.

Consider that bitter enmity notwithstanding, both sides have an incentive to get something done ahead of the election. Trump would probably like to send out more physical checks with his literal signature on them (perhaps one to himself to cover next year’s tax bill), for example.

Democrats, on the other hand, would like to be able to say they talked The White House all the way up from $1 trillion to somewhere in the neighborhood of $2 trillion in the interest of securing “enough” money to make a dent in the crisis for working families.

Until there’s clarity on this (and it may have to wait until after the election), it will be impossible to move in the direction of running the economy “hot”.

“It will take two to tango in average inflation targeting — to run the economy hot, fiscal authorities must borrow and spend while monetary policymakers suppress real interest rates”, Deutsche Bank’s Stuart Sparks wrote, in a recent note, adding that “the glaring issue at the moment is that both monetary and fiscal policymakers are turning out to be wallflowers”.

It will be next to impossible to get anything done in the lame duck session if Trump and Biden end up with competing claims on the proverbial throne. Irrespective of the technicalities of passing legislation between the election and inauguration day, the idea that the two sides will be able to find common ground with The White House up for grabs and Americans protesting in the streets seems far-fetched in the extreme.

Sparks underscores this. “There is little reason to expect a fiscal agreement before the election, from a lame duck Congress, until any electoral disputes are settled, and potentially even following the swearing in of the next Congress and president, depending on the composition of the government”, he went on to say, in the same note, before cautioning that “if the Fed stands with hands on hips waiting for Congress to pick up the keys to the helicopter and negotiations for fiscal stimulus remain deadlocked, we think the likely result is a risk-off market challenge to policymaker inertia”.

This is something to keep in mind. In my own view, it’s also important to remember that Joe Biden’s fiscal agenda is by no means “radical”. It isn’t clear that the policy platform likely to be adopted under a Democratic sweep will be sufficient to bring about a real and true reflationary impulse in the economy. Trump’s balderdash aside, there is nothing “radical” about Biden, including his fiscal plan, expansionary and demand-oriented though it may be.

For risk assets, though, it’s the same story. The outlook may be as indeterminate as it’s ever been, but nobody wants to challenge the Fed. As one strategist told Bloomberg Monday, “the Fed is making it almost impossible for you to get too bearish”.

Speaking of “bearish”, SocGen’s Andrew Lapthorne rolled out an interesting statistic. While the distribution of market capitalization is still marginally positive YTD, he writes that after the September swoon, “the average stock is heading back towards bear-market territory for this year”.

All in all, US investors walked out of Monday richer, but no wiser when it comes to knowing what’s going on right now, let alone what the future holds.