On Saturday, during the first day of a short visit to Walter Reed following his COVID-19 diagnosis, Donald Trump opened his Twitter app and implored lawmakers to strike a bipartisan deal on another virus relief package.
The nation, Trump said, in all-caps, “wants and needs stimulus”. “Work together and get it done”, he exhorted.
To briefly recapitulate, there are two stumbling blocks to a deal. The first is the gap between Steve Mnuchin’s $1.62 trillion offer and Nancy Pelosi’s $2.2 trillion, slimmed down HEROES Act. The second is Mitch McConnell’s inability to marshal GOP support in the Senate for anything beyond ~$650 billion in additional spending.
The divide between Mnuchin and Pelosi can be bridged. McConnell, on the other hand, likely cannot be swayed.
On Tuesday afternoon, less than 24 hours after returning to The White House, Trump, in an apparent rage, declared the stimulus talks dead.
“Nancy Pelosi is asking for $2.4 Trillion Dollars to bailout poorly run, high crime, Democrat States, money that is in no way related to COVID-19”, he said, kicking off a multi-tweet tirade. Here is the rest:
We made a very generous offer of $1.6 Trillion Dollars and, as usual, she is not negotiating in good faith. I am rejecting their request, and looking to the future of our Country. I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business. I have asked Mitch McConnell not to delay, but to instead focus full time on approving my outstanding nominee to the United States Supreme Court, Amy Coney Barrett. Our Economy is doing very well. The Stock Market is at record levels, JOBS and unemployment also coming back in record numbers. We are leading the World in Economic Recovery, and THE BEST IS YET TO COME!
US equities plunged. The dollar surged. And Treasurys rallied.
Trump, who is still on steroids, has just signed pink slips for thousands of airline workers and who knows how many other Americans. Many employers were holding out hope for another virus relief bill in the near-term. For small businesses, relief can’t come soon enough. Waiting another month could be a death sentence.
To call this ill-advised would be to understate the case. Trump has now asserted, without equivocation, that the economy is fine and can do without additional spending despite having said the opposite on Saturday while hospitalized with the same virus that plunged the economy into the worst downturn since the Depression just one quarter ago.
The president’s tweets come just hours after Jerome Powell again emphasized the necessity of more fiscal help for struggling Americans.
“The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods”, the Fed chair said, during remarks to the National Association for Business Economics. He then warned that without additional relief spending, the economy is at risk of succumbing to “typical recessionary dynamics, as weakness feeds on weakness”.
Incomes fell more than expected in August when supplemental federal unemployment benefits expired, and spending slowed, albeit not as much as expected.
Whatever Trump’s strategy is (assuming he has one), you can expect it to be called into question by analysts. It’s not clear why the president would want to deliberately push equities lower and imperil the recovery just weeks ahead of the vote.
Of course, the last pre-election jobs report is already on the books, so no subsequent weakness will make the headlines before Americans cast their ballots. Additionally, the third quarter GDP print is guaranteed to show a massive rebound. Trump likely knows most voters won’t understand that the bounce is the mechanical result of the Q2 plunge.
Whatever the case, doubling down on a strategy that at least in part entails betting that voters are excited about Amy Coney Barrett is risky, especially considering the ceremony for her nomination is now widely seen as the mini-super-spreader event which infected multiple GOP senators as well as the first lady and Trump’s press secretary.
As far as the economy goes, the structural damage is piling up (see examples here). And when it comes to Trump’s boast that “The Stock Market is at record levels”, I would remind you that equity ownership is concentrated in the hands of a relative few.
The fact is, the vast majority of Americans don’t care much about stocks precisely because they don’t own many shares. The bottom 50% likely doesn’t care at all. What stocks do or don’t do is irrelevant for them (figure below) unless the proximate cause of a given rally or selloff has broader ramifications for the economy and thereby for their own economic well-being.
While voters may indeed believe that a healthy stock market is indicative of American economic prowess and thereby be prone to expressing higher levels of optimism when headlines tout records on Wall Street, comparisons between, for example, employee compensation and the market cap of US stocks, can be misleading as discussed in “These Markets Are Nihilists, Donny“.
Speaking Tuesday, Powell warned that without more stimulus, “household insolvencies and business bankruptcies [could] rise, harming the productive capacity of the economy, and holding back wage growth”.
“The risks of overdoing it seem, for now, to be smaller” compared to those associated with too much stimulus, he went on to remark.
Needless to say, the risk of doing nothing at all is quite high, something Pelosi underscored.
“Walking away from coronavirus talks demonstrates that President Trump is unwilling to crush the virus”, Pelosi said in a statement on Tuesday afternoon.
“Clearly, the White House is in complete disarray”, she added, before invoking Powell. “Sadly, they are rejecting the urgent warnings of the Fed Chairman today, that ‘Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses'”.
Later, during a virtually non-stop string of tweets and retweets spanning at least four hours, Trump called on Congress to immediately approve airline stimulus and additional funding for the Paycheck Protection Program.