Levity, Levitation, And A ‘Violent Disagreement’

Things are “less complicated” in the Senate now that Democrats have apparently decided not to go to extreme lengths in order to push through a $15 minimum wage hike.

That’s according to Dick Durbin who, while expressing dismay at the situation, nevertheless indicated that Joe Biden’s stimulus bill will have a much easier time passing without forcing moderate Democrats to either back a convoluted end-around or vote with Republicans.

Late last week, there was talk of leveraging the tax code as part of a “Plan B” after an unfavorable parliamentarian ruling disallowed the inclusion of the wage measure in the process Democrats are using to push the stimulus bill through. Although Kamala Harris could override that ruling, such a move wasn’t seen as likely. Durbin effectively confirmed Harris won’t go that route. “I don’t think that’s going to work,” he said Monday.

The good news is, the stimulus bill almost surely will “work” without the minimum wage albatross. As far as anyone knows, removing that from the equation means there aren’t any serious points of contention that risk alienating any Democrats, where “any” basically just means Joe Manchin. Biden met (virtually) with Manchin and a handful of other Democratic senators on Monday.

The bottom line is that Democrats need to beat the clock. The federal unemployment supplement helping to keep some of America’s jobless afloat lapses in two weeks. Trying to herd cats around a proposal to implement a de facto minimum wage hike using tax incentives chanced missing the deadline. That was a non-starter.

So, stimulus it will be. And sooner rather than later. The minimum wage hike is still coming, most Democrats insist. But that’s later rather than sooner.

This is a good outcome for markets in many respects, and for the White House, it virtually ensures that Biden will be able to claim a quick signature legislative achievement that puts $1,400 in the pockets of many Americans. Critics (and I don’t mean Republican lawmakers, who oppose the legislation for a variety of reasons, some of which aren’t really “reasons” as much as they are partisan protest votes) continue to insist the plan risks an overheat. Larry Summers, for example, has joined the gig economy, working part-time for Bloomberg in a capacity that, at least over the past two months, has entailed maligning Biden’s relief plan on a bi-weekly basis on grounds that it’s too much.

I’m both kidding and not kidding about the “gig economy” bit. Bloomberg is paying Summers as a “contributor” and many of his “contributions” involve shrill warnings about an economic overheat. So, Summers is a gig worker. Literally. If Bloomberg ever decides to stop paying him, maybe he can apply for Pandemic Unemployment Assistance, the emergency program that provides benefits to self-employed freelancers.

There’s your levity for the day.

For you levitation, we go to US equities, which staged an almost comical rally, bouncing back from last week’s doldrums, and suggesting that stocks are ready to forgive rates for their recent bad behavior — or at least for a day. Big-cap tech was up nearly 3% into the US afternoon, erasing more than half of last week’s losses in a single session.

Tech is by no means out of the woods. It’s likely that yields will continue to drift upwards even if central banks succeed in averting the kind of erratic rate rise witnessed last week. Duration-sensitive assets and anything that’s stretched (from a valuation perspective) are likely to have problems no matter what “form” additional weakness in bonds takes.

“While the level of bond yields is still low, backing out of this low bond yield era is going to be complicated by the dramatic effect falling bond yields has re-rating other assets, most notably growth and defensive equities,” SocGen’s Andrew Lapthorne said Monday. “Factor performance last month really illustrated this, with many of the winning factors typically found on the ‘short’ leg of many quant models,” he added.

Monday was an “everybody’s a winner” type day, at least on a superficial read. While tech performed, so did small-caps. The Russell jumped ~3% for its best session since “blue sweep” day. The other green bar in the figure (below) is November 9, the day Pfizer released data from its COVID vaccine trial.

I suppose you could say Monday was a testament to the durability of the bullish narrative, although those with their “ears to the street,” so to speak, can always explain big moves in part by reference to flow dynamics not readily apparent to the “naked eye” or casual observer.

Those explanations won’t matter to Jane E*Trader, though. All she knows is that she bought the dip last week and was rewarded for it almost immediately. Same as it ever was. Pavlov lives.

I mentioned this over the weekend, but I’ll reiterate it here. Bloomberg data shows investors poured the most into equity ETFs in history last month — some $86 billion.

As you can see, the last four months have all witnessed large hauls, with election month also notching $80 billion in inflows.

After last week, rates weren’t far from investors’ minds. BofA suggested the Fed should implement a twist in order to “kill three birds with one stone.” Selling the front-end and buying the long-end would “pull up front end rates [and] stabilize back end rates… in a reserve neutral way,” Mark Cabana said. At the front-end, a surplus of cash is chasing scarce collateral, while the long-end is clearly in the throes of a tantrum. And then there’s the SLR issue.

“Monday’s price action was best characterized as an in-range consolidation [although] that oversimplifies the issue,” BMO’s Ian Lyngen and Ben Jeffery wrote, adding that “the belly outperformed not only relative to the wings, but also on an outright basis… represent[ing] a rethink of investors’ willingness to bring forward rate-hike expectations further into 2022.”

Deutsche Bank’s Aleksandar Kocic described “a search” for “a new consensus.”

“Less than a year after one of the most profound economic and social shocks and potentially one of the deepest crises in recent history, risk continues to probe new highs week after week, all this thanks to positive externalities created by the underlying policy response,” Kocic wrote. The market, he said, is “concern[ed] about losing those tailwinds, even if they are replaced by actual economic recovery.”

That’s a kind of retooled “good news is bad news” dynamic. And there was more “good” news on Monday in the form of a scorching-hot ISM manufacturing print.

“A pause and renegotiation… with the Fed are in order at this point,” Kocic went on to say. “After all, the 2013 taper tantrum was exactly that: a violent disagreement (‘tantrum’) with the Fed regarding their exit.”