Maybe It Is Time For A New Investment Strategy
Summary
- The political world has changed, the alignment between the parties has shifted and it appears that this has resulted in a shift in the way the Biden administration is working.
- Now, in order to regain voters it believes that it has lost, Mr. Biden and the Democratic party are stepping up spending efforts to directly benefit the voters lost.
- But, the spending effort directed in this way will impact the economy in a totally different way than past policy efforts and this will impact how investors should invest.
- Therefore, investors are going to have to analyze the new government policy efforts and see how they must adjust their investment strategies to best take advantage of the new structure.
For the past sixty years, investors in the United States came to be dominated by basically one investment strategy.
That strategy was buy and hold and not fight the Federal Reserve.
During this time, there was a massive swing in the financial markets as major amounts of funds were taken out of active investment management operations and put with passive investment managers. And, the markets went up and up and up.
The last leg of this trip was the time period between the Great Recession and now.
The number of new stock market highs reached in the past year has been remarkable.
But, now things may have changed. And, if they have changed, investors may have to check out their investment strategies and adapt them to the new environment they will be working in.
Change In Paradigms
The government changed its economic approach in the early 1960’s as the newly elected Kennedy administration worked on a program to “get the economy moving again.”
The Kennedy team basically built their policy strategy on a foundation of Keynesian macroeconomics and then added the results of the Phillips Curve, a statistical relationship between the unemployment rate and inflation
The effort build upon sustaining an expansive fiscal program of stimulus that would create a modestly higher rate of inflation so as to keep the unemployment rate at as low a level as possible without inflation becoming a problem. Monetary policy would support this fiscal effort, maintaining monetary growth, but only to the extent that it would underwrite budgetary policy.
In late 1968, Richard M. Nixon, running for the presidency, accepted this approach and stated “We are all Keynesians now!” Thus, it basically became the policy of the government to build on this policy approach, one way or another, whether they were Democrat…or, Republican.
I have referred to this approach as one of “credit inflation” and it has basically been followed…up to the present time.
And, I have mentioned this shift in the past, the latest coming just last week. Samuel Moyn, a Yale law professor, writes in the New York Times about what might be driving this change within the Biden administration.
What has shifted? Well, Mr. Moyn mentions the shift that has taken place in the labor markets. In the Kennedy days, and following, the emphasis of the political parties was to spur on lower rates of unemployment so the political party in power could draw support from labor unions and workers at the next election. The idea was that if the economy was stimulated by the little extra inflation the government created (the Phillips Curve) then the political party driving the economy forward could pick up support as the benefits of the stimulus “trickled down” to the working forces.
Now, however, the labor forces are not such a monolithic power. Mr. Moyn describes how the fear of Trump and a possible Trump run for the presidency in 2024 is behind the Biden efforts. Lots of people in the middle class and below, people who used to be in the contingent called “labor” who supported the aggregate efforts of the Democrats…and Republicans…to create lower levels of unemployment, now have other issues high on their minds and Mr. Trump is the one to whom they have turned to help them achieve their goals. Mr. Biden and the Democrats have lost the loyalty of this contingent of voters and want to try and get them back onto their side.
Reinforce and Rebuild The Middle Class
Patricia Cohen writes of this very effort, also in the New York Times. Ms. Cohen argues that Mr. Biden and his team have gone all the way back to the presidency of Franklin D. Roosevelt to find inspiration for their new view of the world, not FDR, not JFK.
The idea here, as Mr. Biden stated in his speech to the Congress this week, is to “reinforce and rebuild the middle class.”
The program Mr. Biden is proposing is not like that of the 1930s model, but one in which the government will build support for the middle classes and pay for this support with tax money from big corporations and the top 1% of the income ladder. The argument here is that the economic problems that now exist are structural and must be attacked in a different way than just relying upon “trickle down” economics.
The Democrats are attempting, Ms. Cohen contends, to win back the people that have shifted away from the “elitist” programs that have recently been supported by recent Democratic administrations and get back to their real base, broader than they experience in the 2020 race.
Financing Deficits Will Not Be Easy
The proposed spending by the Biden administration adds up. Estimates in proposed programs run up as high as $5.7 billion: $1.9 trillion for the Covid-19 relief; $2.0 trillion for infrastructure programs; and $1.8 trillion for family benefits.
One thing about these proposals is that they rely on “payoffs” to the programs benefiting the government in future years. Kate Davidson, writing in the Wall Street Journal, argues that the administration is counting on low interest rates to exist for an extended period of time so that financing costs remain low. This, of course, assumes that inflation will also remain low so that the inflationary expectations built into longer-term interest rates don’t rise. In addition, the results rely on the fact that future revenues connected with the programs will continue to pay off, some for ten years of more. I don’t need to talk about forecasts that go out for five year of more. Whew!
So, Ms. Davidson contends, there are a lot of factors that will impact the results of these spending…and financing…efforts, many of which, she argues convincingly, are beyond Mr. Biden’s control.
But, These Are Not All The Costs
Steve Hanke, professor of applied economics at Johns Hopkins University, presents another problem. Mr. Hanke argues that there are many other costs, hidden costs and excess burden “associated with the imposition of taxes. These are important costs, they are not insignificant costs, and they imply a lot of costs, like compliance costs, that most people don’t think about when composing an economic program.
One can read Mr. Hanke’s article to go further into the details, but he quotes Martin Feldstein, well-respected economics professor from Harvard, and William Niskanen, another well-known economist, who have done research in the area. They contend, in their separate research efforts that “the hidden costs plus excess burdens” of IRS administration and taxpayer compliance connected with the tax revenue connected add up to between $2.65 to $3.00 per additional tax dollar collected.
“Therefore, to determine the real cost of the big-government proposals put forward by President Biden in his first 100 days in office…” we find that the “sticker” price of his efforts to run up to a true cost of $17.1 trillion…or 80% of last year’s grow domestic product.
Mr. Hanke believes that Mr. Biden and the Joint Committee on Taxation and the Congressional Budget Office needs to fully disclose the real cost of the programs that are being proposed.
And The Longer-run
Janet Yellen, U.S. Treasury Secretary, has also been doing some talking to the Congress. Ms. Yellen is very much in favor of what Mr. Biden is proposing but she tells Congress that “the U.S. needed to contain deficits over the longer term.”
We don’t want to use up all of that fiscal space and over the long run deficits need to be contained to keep our federal finances on a sustainable basis.”
All the spending does not come at one time, she went on, and “the boost to demand is moderate because it would be spread over eight to 10 years.”
Consequently, she doesn’t see inflation rising and interest rate going up. But, if they do she has confidence that the Federal Reserve has the tools to moderate any unwanted movements.
But, we cannot lose sight of the need to have room to move in the longer-run, just because we want to spend big in the short run. We need to be able to move in the future when the need arises.
Over-All
Thee seem to be the majors issues that are being raised concerning the Biden efforts to push lots and lots of stimulus into the economy in a relatively short time.
These, it seems to me, are issues that are going to have to be dealt with, regardless of which side of the aisle you sit on. Major spending plans are being proposed for the short-run. These programs are focused differently that the government’s fiscal efforts from the past sixty-years, a time that resulted in generally rising stock prices and relatively steady economic growth over the full time period.
Disrupting the flow of “credit inflation” can have substantial impacts on stock prices and economic activity. Steady income/wealth growth may be less available. This may require a reassessment of how people invest their money. Starting to consider the possibility that a reassessment may be necessary, I suggest that investors begin to think about the changes that are taking place in government policies and how these changes might impact Federal Reserve support and financial market volatility. The time to change focus may be just around the corner.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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