Late Stage Democracy

A day ahead of payrolls Friday, US equities looked to build on momentum from Wednesday’s absurd about-face that found stocks erasing another large intraday decline after Mitch McConnell offered Democrats a short-term deal to avert a technical US default.

Democrats characterized McConnell’s offer as a concession. “McConnell caved,” Elizabeth Warren said. “Now we’re going to spend our time doing child care, healthcare and fighting climate change.”

That’s one way to look at it. Another way is to simply say that December is now a triple-threat. McConnell’s deal means the final month of 2021 will be consumed with more bickering and more brinksmanship as lawmakers once again confront a government shutdown and a new “meteor” moment. If the former materialized and the Fed stuck to the taper script (e.g., reaffirmed a November timeline for paring bond-buying) at the December meeting, the 2018 analogue would seem even more compelling.

Between now and then, Democrats will presumably come to some manner of compromise on Joe Biden’s fiscal agenda. But that just means they’ll likely be in the process of pushing it through Congress with no Republican support (at least on the social spending side) just as the GOP is digging in for another fight on the debt limit and government funding.

“Around here, two months is a lifetime,” Bernie Sanders remarked. “We’re going to pay our debts [and] we have two months to figure out where we go from here.”

That was supposed to be an upbeat assessment. Or as upbeat as assessments from Bernie get. But it speaks to a truly dysfunctional political process.

“McConnell is succeeding in stringing Democrats along and into dragging out their own agenda,” JonesTrading’s Mike O’Rourke remarked. “Congress generally doesn’t pass major legislation without a deadline to force it over a finish line,” he wrote, in a Wednesday evening note. “With his very limited options, McConnell is fighting a legislative war of attrition [and] each day that lapses without forward movement on the legislation is a good day for McConnell.”

Mitch said his offer “will moot Democrats’ excuses about the time crunch they created and give the unified Democratic government more than enough time to pass standalone debt limit legislation through reconciliation.”

“Taking a page out of the prior debt ceiling negotiations playbook, Congress has made progress toward a temporary deal that would delay the issue until later in Q4 – adding to the drama around the Federal budget. Kick. Can. Repeat.”, BMO’s Ian Lyngen and Ben Jeffery said Thursday. “Suffice it to say we’re approaching the process with a baseline cynicism, but still assume US lawmakers will not allow the country to default or miss a bill payment,” they added. “Eleventh hour brinkmanship is a given in light of Congress’s prior approach to the debt ceiling and while pondering the catastrophe of a default is an interesting (and increasingly popular) exercise, it will ultimately be an academic one.”

Over and over since early September I lamented that anyone (myself especially) was compelled to dedicate time and space to this farce. Ignoring the patently absurd notion that the issuer of the world’s reserve currency would hold itself hostage at the risk of destabilizing the global financial system on purpose (“You wanna see crazy?! We’ll show you crazy!”), the fact that formalities are now potential catastrophes due entirely to petty spite is evidence that America has no functioning government.

We often speak of “late stage capitalism.” Maybe this is “late stage democracy.” America is dealing with both simultaneously.

Biden seems aware of this. “These bills are not about left versus right, or moderate versus progressive, or anything that pits Americans against one another,” he said, of his economic agenda. “These bills are about competitiveness versus complacency. They’re about opportunity versus decay. They’re about leading the world, or continue to let the world pass us by, which is literally happening.”

Yes, it is. It’s “literally happening.” America is a backwards nation socially and you could argue its economy made it to the finish line around a dozen years ago and then just kept on running into the deep, dark woods of predatory capitalism. (Everyone wants to blame the Fed for spiraling inequality. Well, we started down this road in the early 80s. Supply-side economics is a good jumping off point if you want to trace the history of America’s path to modern day serfdom. And, as I’m always keen to point out, too many upper-middle class Americans mistake themselves as beneficiaries of hyper-capitalism just because they can afford a nice house and last year’s BMW X5. Never mind that the gap between those folks and the real beneficiaries of capitalism grows exponentially in tandem with the market cap of the country’s largest tech firms. In short: You’re not capital. You’re labor. You just don’t realize it.)

Coming back to the local implications for traders, December’s deadlines will coincide with the onset of the taper and a deceleration in economic activity.

“From a market perspective, the only meaningful progress here was that the offer moved Senator [Chuck] Schumer off of his path to nowhere with meaningless failing votes,” JonesTrading’s O’Rourke went on to say. “Maybe that merits mild optimism, but it should end there,” he added. “Stating the obvious, the debt limit can is being kicked right into what we all should expect to be the start of the Fed taper.”