The Narrative

Global stocks hit new highs and the dollar dropped a fourth day as investors leaned into the narrative.

Joe Biden’s first full day in office revolved around the new administration’s pandemic response. Apparently, Donald Trump’s testing and vaccination plan was “non-existent,” according to some sources, so Biden is effectively starting from scratch. Or at least that’s the feeling one got from scanning a dizzying hodgepodge of coverage Thursday. Biden will use executive powers to streamline testing and shore up America’s supply chain for PPE and other crucial supplies.

Jeff Zients, Biden’s COVID-19 task force coordinator, described the ad hoc strategy employed by team Trump as “so much worse than we could have imagined.” (It would be funny, if it weren’t a life or death situation.)

Biden will use executive orders and FEMA as jumper cables, but he and his surrogates were sure to emphasize in meetings with lawmakers that Congress must act and act quickly to approve funding for big-ticket aid programs.

Regardless of the logistical challenges, markets are pleased that someone is taking this seriously after months of watching America’s death toll climb and caseloads surge alongside hospitalizations. Global deaths hit a new daily record. In the UK, some hospitals were described as “war zones.”

Although the world’s largest economy muddled through during the second half of 2020, momentum in the US labor market evaporated in December. The American consumer is rolling over according to the latest retail sales data. So, it’s a relief that sweeping, comprehensive action is now the order of the day in Washington (and you can take “order” figuratively and literally).

That’s part of the narrative for markets. The other part revolves around the weaker dollar and the dual policy “puts.”

There’s no shortage of headlines around Republican “pushback” to Biden’s stimulus plan, but it’ll likely be passed in some form. The only question is how diluted the final version will be, and that, in turn, is a function of Biden’s tolerance for dithering in the face of an ongoing crisis. There’s a tradeoff. He’d like to tout bipartisan support for his first major legislative achievement. But not if it means waiting months to get badly needed aid to the economy.

Republicans are, of course, aware of this calculus. The fight to oppose Biden’s plan is futile and it may be politically perilous depending on how the GOP couches its opposition. In short, Republicans need to figure out a way to oppose parts of the plan in line with traditional GOP talking points without coming across as unduly callous and/or blind to the suffering of constituents. Trump leveraged the inherent peril of that balancing act late last year when he effectively told Republicans to send everybody in America $2,000 checks or risk… well, or risk being the party that didn’t send Americans $2,000 checks. He called it a “death wish” for the GOP. It was a crude maneuver, but it was also shrewd — if only accidentally.

Anyway, the dollar was weaker against all of its G10 peers Thursday, and while that was subject to change depending on the ECB, the overarching point is that expectations for more fiscal stimulus in the US and a Fed that’s keen to accommodate it while encouraging higher inflation, is positive for risk assets.

Despite the zeitgeist, some analysts caution that investors shouldn’t get ahead of themselves or, at the least, should keep their expectations anchored in reality. “Breakevens, steepeners, and gold are still appropriate inflation hedges for an inflation cycle that could break out of 20-year ranges eventually,” JPMorgan said late last week, while cautioning that an economy where output gaps and labor slack are prevalent isn’t likely to see a surge in core inflation.

On Wednesday evening, Chuck Schumer took over as Senate majority leader after Raphael Warnock, Jon Ossoff, and Alex Padilla were sworn in by Kamala Harris.

It must have been a surreal experience for Mitch McConnell, who was doubtlessly cursing at Trump, silently, in his head.

“There is much to do, and we’re ready to get to work,” Schumer said, promising swift and aggressive action to combat the pandemic and bolster the economy. McConnell congratulated Harris and extended a “welcome” to Warnock, Ossoff, and Padilla.

Eventually, tax hikes could weigh on equities, but that chapter of the book seems distant. “[The] US stimulus package and Fed’s bond-buying program continue to be positive for risk sentiment, sending equities higher and the dollar lower [but] the Democrats’ desire to impose higher taxes has the potential to derail this trend,” Bloomberg’s David Finnerty said Thursday. “Surely the dollar’s downtrend may extend if equities keep on rallying on a premise that the Democrats focus on stimulus and hold off on any tax increases until the second half of this year or 2022 even.”

Remember, folks, the government doesn’t “need” your tax dollars to “fund” stimulus. There’s nothing that says tax hikes must follow immediately after big government spending programs, and even if there was, the word “after” should tell you something about the reality of government finance in advanced, currency-issuing economies.


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