All’s Well That Ends… Well?

All’s Well That Ends… Well?

The first week of 2021 ended with US equities higher, but we’re really stretching the boundaries when it comes to the old “all’s well that ends well” adage.

The cynical among us like to joke that no matter what happens between a given Monday and Friday, “it’s all good” as long as stocks post a weekly gain.

I’m not sure if that applies to weeks that include the President of the United States inciting a riot on Capitol Hill, but as usual, I’ll leave it to readers to make their own judgement. Small-caps outperformed thanks to Democrats’ victory in the Georgia runoffs and the associated reflationary mood across markets. It was the best stretch for the Russell 2000 since “Pfizer week.”

In addition to featuring the first armed insurrection in 160 years, this week also found Georgia electing its first African American senator while simultaneously sending the youngest person in four decades to the Senate.

The results out of the Peach State prompted market participants to price in more stimulus, most obviously in rates. 10-year yields were the story. At the highs Friday, benchmark US yields rose above 1.12%.

Joe Biden was keen to make it clear he intends to deliver on the fiscal side. “We need more direct relief flowing to families [and] small businesses,” he said, speaking from Delaware on Friday afternoon.

He pledged to “finish the job” when it comes to sending Americans $2,000 in stimulus checks, and bemoaned the fact that “people are lined up for miles… waiting to get a meal to put on the table for their family.”

His remarks came after the December jobs report showed the first decline since April. Almost 500,000 jobs were lost in leisure and hospitality, most of which were concentrated in restaurants and bars.

There was more than a little chatter this week from Fed officials around a possible taper late in 2021. Clarida, speaking Friday, played it down, although he also said he’s not concerned about 10-year yields above 1%. (And, yes, that’s where we are — in a position where policymakers have to reiterate that US Treasury yields above 100bps is not a catastrophe.)

The pandemic raged unabated across western nations. With apologies for the colloquial cadence, people are dying all over the place. For the first time, daily fatalities in the US topped 4,000, while both the UK and Germany reported record deaths. Spain reported an all-time high on new daily cases.

Despite demand worries tied to the pandemic, the Saudis’ decision to unilaterally cut output helped propel crude prices to an outstanding week. Brent breached $55 and has logged just one weekly loss since October. This is another manifestation of the reflation trade.

Note also that crude is ignoring, for now anyway, the prospect of a less friendly backdrop for fossil fuels under Biden.

“Attention should now focus on the peaceful transition in which the self-proclaimed ‘oil man’ gives way to the ‘climate man,'” PVM’s Stephen Brennock said, in a Friday note. “The incoming Biden administration is seen as a boon for financial markets due to the prospects of more fiscal stimulus for the US economy [but] the same cannot be said for the US oil industry.”

I suppose that’s a worry for another day, just like the tax hikes that many swear are bound to accompany expensive stimulus measures.

For now, all anyone cares about is that “the lone ranger,” as Brennock described Trump, is leaving, and apparently peaceably, according to his own account.

Despite adopting a more conciliatory tone on Thursday evening and also on Friday, Congress is taking no changes with Trump. Nancy Pelosi told the press she spoke to the Pentagon about ways to prevent him from ordering a nuclear strike at some point over the next several days.

There was no indication that Trump is pondering such a thing, but perhaps that’s the point.

In a letter to Democrats, Pelosi said she and Mark Milley chatted about “precautions for preventing an unstable president from… accessing the launch codes.”

So, it’s come to that. Just as so many said it probably would.

Quite honestly, I was running low on adjectives by Friday afternoon when it came to describing the political situation stateside. There are jokes, but some don’t find them funny. And there are lamentations, but how many different ways can we say the same thing?

Headed into the weekend, there was still no word on whether Trump would be removed or resign prior to January 20. He did say he won’t be attending the inauguration, which everyone but Lindsey Graham already knew.


6 thoughts on “All’s Well That Ends… Well?

  1. H, it sounds like you’re dismissive of the idea that tax hikes are coming when you say, “just like the tax hikes that many swear are bound to accompany expensive stimulus measures”, but aren’t they kind of necessary? And, before you go all MMT on me, let me clarify what I mean by that.

    As I understand it, as a gross simplification, there are two ways to look at funding the stimulus. The traditional view is that the stimulus is funded by borrowing, and that borrowing eventually needs to be paid back. The alternative viewpoint, through the lens of MMT, is that governments don’t need to borrow money to fund a spending priced in a currency they issue, they can simply “print” more money (at least until the true limit on spending, inflation, begins to rear its head).

    From the traditional viewpoint, tax increases are necessary to pay back the debt raised to fund the stimulus, unless the stimulus can generate sufficient growth that the resulting increase in revenues is enough to pay back the debt. Looking at it this way, higher taxes seem likely.

    From the alternative viewpoint, it seems to me that most of the advocates of MMT also come from the progressive end of the political spectrum. This means that they tend to be very concerned about the yawning gap in wealth distribution. Assuming the stimulus is successful, it will go to those most in need. Those people will spend that money almost immediately (because they need it). Given the structure of the modern economy, this means that the vast majority of that money will flow directly into the coffers of large corporations, which are almost entirely owned by those in the top 10%. Unless confiscatory taxes are put in place on the wealthy and/or corporations, this will result in a large transfer of wealth to the top 10%. Since this would lead to a further widening of the already yawning gap in wealth distribution, it seems likely that anyone taking this view would also push for higher taxes.

    Based on the above, it seems to me that regardless of what a policymaker’s view is on the theoretical underpinning of funding the stimulus/deficit spending, the likely outcome will be a push for higher taxes (albeit for completely different rationale).

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