By Michael Every of Rabobank
As expected, yesterday was all about the passage of the $1.9 trillion Biden fiscal stimulus package. Now let’s see what it actually achieves. Economic modellers are frothing at the mouth; but Nouriel Roubini –who has a villa in Gloomy Corner near my own little patch of grass– is also pointing out that pouring money into a K-shaped US economy is unlikely to generate the traditional results. In short, people who are already doing well and saving will do better and save more; and people who are struggling will get enough help to get by for a month or two (from checks) or a few months (via extended unemployment). Ironically, this bill was signed on the same day data showed US household net worth soared USD6.93 trillion in Q4 2020. How much of that mind-blowing sum did those with no home or 401K see?
Regardless, the traditional view that the US doesn’t do big stimulus packages “because America” is wrong. The ‘Overton window’ –the range of ‘acceptable’ political policies– has not just shifted, but has been removed, taking the wall with it. Indeed, yesterday saw chatter of the next USD2.5 trillion four-year infrastructure stimulus package to follow. That could be a structural game-changer, depending on how it was implemented: imagine it alongside ‘Buy American’ policies and high-wage contracts; and spent on projects that are needed, not white elephants.
Yet one doesn’t need any imagination to see that as reconciliation cannot be used again this year, the next fiscal package will need 60 votes in the Senate. Is that possible to achieve? It seems very unlikely on traditional ‘don’t give them the win’ electoral calculus. However, might that calculation perhaps change if: (1) the bill is all about “dual circulation” (i.e., protectionism) and has pork for Red as well as Blue states; and (2) Senators see that if such a bill is blocked in 2021, it can still be pushed through via reconciliation again in 2022, just ahead of the mid-term elections.
That’s just hypothesis of course, but it will be extremely important to keep a close eye on both how the first stimulus plays out, and how Republicans grapple with their own populism. Are Trumpists going to be populist fiscal conservatives, or expansionists? Up until recently, the populist Right globally has eaten the Left’s working-class lunch (even if many don’t like baloney and PBJs and eat caviar at home). What will the Right’s reaction be to the Left putting meaty stimulus back on the menu again if this policy looks popular? Will it be better to sign on to the Blue win in 2021 and call it bipartisan, or take a hard-line stance on hard money and hard budget constraints and watch the populist thunder be stolen back?
While we are watching fiscal policy, it is abundantly clear what monetary policy is doing. Yesterday I noted all central banks only have four choices: do nothing (or normalise rates! J); target bonds; target equities; or target data. (And thanks to the interesting reader responses posing serious questions over how US inflation data is measured.) So what did we see?
First, the ECB, projecting a relatively more upbeat economic future, also stepping up its pace of bond buying – in other words, de facto targeting bond yields (see here for more details). Then the BOJ, instead of stepping back from yield curve control, concluding the policy is a success; moreover, planning to shift its annual USD55bn ETF scheme so it only buys stocks when their price is going down, not up. Hilariously, Bloomberg interprets the latter as “BOJ stimulus being rolled back”. The correct interpretation is that the BOJ has an open policy of targeting equity prices – just as it and the ECB have of targeting bond prices.
We have to wait until next week to see what the Fed says. If they don’t read from the same script then BOJ and ECB “success” could be rapidly reversed. Will they also help dismantle the monetary policy Overton window to open up space for the fiscal policy shift already discussed? If so, how long until we coin “Bidenomics” to match “Abenomics”? Yet do recall that Abenomics didn’t work because structural reforms were never embraced, just extreme fiscal and monetary policy: and boy did we see swings in JPY! There’s a window to a possible future: yes, US fiscal stimulus is now seen as more likely to push USD up…but what if US yields aren’t allowed to follow? What then for EUR and JPY and their own “successes” on reflation and growth?
Meanwhile, China’s key policy-setting meeting has just wrapped up and, as even Bloomberg has to note, what we have learned is that “China won’t drive global growth in 2021”. What?! How can this be? What happened to all the flag waving and jazz hands that passes for market analysis and commentary just a few months ago? Instead, it’s “dual circulation”, which means buying more locally to boost incomes according to some, and not according to others (in which case the policy means nothing at all). Moreover, China is going to delever again, with tighter fiscal and monetary policy, even if the latter is via quantity and not price targets. So is Beijing really building bricks in front of the floor-to-ceiling, wall-to-wall Overton window it operates in compared to other economies? Perhaps: but does anyone recall how badly this has worked out each time they have tried it before? All the daylight gets blocked out, and that lovely view of a rosy future of retirement by the pool drinking cocktails. So each time, down come the bricks again – but only after other things, like markets, have come down first.
In short, while one can chase headlines here and there –and yesterday was a perfect example– one has to see we are moving two-steps-forward, one-step-back towards radical shifts on almost all policy fronts by almost all major economies. Each monetary or fiscal step alone would already be a huge market driver; adding them together in one country multiplies that effect; doing it in more countries multiplies it further; and seeing countries move in –or out– of synch on this process provides an even more complex picture. If the US and China run in opposite directions, what does it mean? If China reverses course and also stimulates, what does it mean?
One needs to start mapping out a mental list of who will be doing what: fiscally; and monetarily; and fiscal-monetarily; and yield-and-equity target-ingly; and tech and tariff-and-capital-control-ing-ly, to start to get the real window of where markets will ultimately sit. Or at least the parts of markets that are not targeted as part of this policy shift: perhaps I should qualify ‘the range in which markets are allowed to sit’.
You can see equities already pretend that they understand the new framework (“We go up, right?”) – they have the window-seat, so to speak; bond yields were both up and down yesterday as they tried to do the old math in a new world in their head; and key FX crosses are still really confused about the whole thing – and understandably so.