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Chris Walker: “Goldilocks Gridlock?” – markets are celebrating a possible lame duck President Biden, but should responsible investors join the party?

On big tech and healthcare, a new president could make progress

Joe Biden’s “Blue Wave” turned out to be a “blue ripple”… and the markets loved it. The S&P rose 2.2 percent the day after the election, while the NASDAQ chalked up 3.9 percent, and by day two the weekly rise was closing on ten percent. This seems strange for those who had high hopes of Biden’s progressive environmental and social agenda, and who may have believed his 12 percent lead in the opinion polls. 

The narrowest of victories – if confirmed – doesn’t just deprive him of legitimacy. His failure to carry the senate – still in the balance – could have real political consequences. It radically limits both his agenda and his cabinet appointments. But while much of his environmental agenda may well now be lost, I believe responsible investors can still have hope for better social governance. The current general investor optimism is totally understandable. In their morning call on Wednesday, Goldman Sachs told investors “nothing to see here” – it’s basically ‘business as usual.’ 

Gridlock is built into the American political system. Enshrined in a written constitution that separates powers and enforces a series of checks and balances. Also, since the intended spirit of compromise has long ago broken down, a lot of the time nothing changes at all. House speaker Nancy Pelosi squandered the Democratic victory in the Mid-terms by pursuing an impeachment, and a series of partisan bills that were never going to pass the Senate. By rejecting compromise her only real action has been to delay the economic bail-out (a fact brutally exposed in her pre-election interview with the usually supportive CNN network).

And Markets love it. A ‘Blue Wave’ where the Democrats decisively took the Presidency, the House and the Senate would have meant real change, not all of it good for investors. Take Biden’s proposed tax changes (which will now lie dying on the Senate floor). Companies would have been hit with an increase in corporation tax from 21 to 28 percent, together with a new minimum tax on corporations with book profits of $100 million or more. 

He intended to double the GLTI (Global Intangible Low Tax Income) tax paid on foreign subsidiaries of US firms. And his tax rises for the wealthy would have only further undermined the market (capital gains tax was set to nearly double at the higher end).

Investors would also have had to cope with some rather ‘Trump-like’ ‘America–first’ tax changes from a strong President Biden. Take his proposed new 10 percent surtax on corporations that “offshore manufacturing and service jobs to foreign nations.” Or his intention to establish an ‘advanceable’ 10 percent “Made in America” tax credit for activities that ‘restore production’ in the homeland.

Of course, some of Biden’s tax proposals would have had a beneficial economic effect. For example, his intention to restore the “First-time Homebuyers Tax Credit” which would have provided $15,000 for first time buyers. But overall there was quite a lot for investors to worry about. The Tax Foundation General Equilibrium Model predicted nearly a one percent reduction in the US GDP growth rate resulting from his proposed corporation tax changes alone.

Considering none of this is now likely to happen, no wonder the S&P is roaring up. As Maclean’s observes, drug companies, health insurers and big tech stocks are rallying because “they’ve tended to benefit from a federal government that can’t actually do anything.” Mizuho Bank calls this “Goldilocks gridlock.”

All of this is true. But let us forensically examine the prospects for each of those market sectors in the current likely scenario. For responsible investors, there may still be some good news. I do not believe that all is quite lost.

The NASDAQ rally has been particularly sharp. Amazon went from a price low of $2952 on election eve to $3345 on the morning after. Facebook from $258 to $297, Google from $1624 to $1767. Uber, Lyft and Doordash had their own specific rallies thanks to the passing of Proposition 22 in California. Since August, these three have been intensively lobbying voters to support a measure which would exempt companies from complying with a law intended to force them to give gig workers employee benefits and rights.

For the rest of the tech stocks there are two major things to be relieved about. Trump had become a constant critic (he had taken to calling Amazon’s Jeff Bezos “Bozo”), and now there may be an end, or at least an alleviation, of his trade wars. The chances of Senator Elizabeth Warren becoming Commerce secretary (strong in the ‘Blue Wave scenario’) have also now evaporated. Warren had committed to breaking up the big tech titans. Given President Biden’s freedom to act on foreign policy, and obstacles on progressive cabinet picks, both of these assessments seem justified.

However, I have previously drawn attention to the remarkable political consensus on the need to tame the big tech titans. Biden is no push-over – he actually launched a campaign petition against Facebook – and has historic success in ‘reaching across the aisle.’ Also, consider the role which Vice President Harris may play in future. Silicon Valley is in her constituency, and she has considerable experience of working on technology issues. This may have led her not to support Senator Warren’s calls for break-up, but it may also lead her to be a more informed reformer.

Harris’s expertise may come to play in several important areas. There may well be cross-party consensus to take action on consumer privacy. Harris had tense exchanges with Mark Zuckerberg on this point when he testified before the Senate, and as California’s Attorney General she threatened app developers with fines for non-compliance with privacy regulations. Similarly, she may well come down against the industry on issues of encryption and law enforcement (Biden certainly has made concerned comments). And neither have indicated they disagree with Sally Hubbard, director of enforcement strategy at the Open Markets Institute that “the department of Justice case against Google is an incredibly strong one.”

Cross party consensus may also make some healthcare reform possible in certain key areas. Take ‘surprise medical bills’.

This issue may seem strange for European readers but as Slate.com observes “stories have proliferated about Americans facing demands for thousands of dollars from doctors they had no say in picking, and might not have even met.” God knows expensive American healthcare is frightening enough, but thanks to doctors being individually insured apparently one in six hospital patients find they are hit with bills of up to $100,000 if one of their doctors does not accept their insurance. The role of certain private equity firms (Blackstone and KKR) to defend this bizarre practice may deserve scrutiny here. May we hope that President Biden can build on cross-party consensus and overcome opposition?

Similarly, there is useful concern on both sides on the issue of drug pricing. Republican Senator Chuck Grassley co-authored the Prescription Drug Pricing Reduction Act of 2020 with Democrat Ron Wyden. This passed the Senate finance committee 19:9 in a bipartisan vote, before the issue was dropped because of the election.

In these areas of governance, Biden may not be so lame-duck after all. Maybe responsible investors can join the party.

 

Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.