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Georgia on my mind…

Date: 01 February 2021

Ian Jensen-Humphreys

Portfolio Manager

UK: Suitable for retail and professional clients.

As Ian Jensen-Humphreys explains, despite the Democrats gaining notional control of the US Senate in the crucial Georgia ‘run-offs’, Mr Biden’s arrival in the White House is more likely to trigger a ‘blue ripple’ than a ‘blue wave’ for US policy.

While the last thrashes of a dying Trump administration may  have left onlookers shocked, the former president’s refusal  to accept what was, ultimately, a very clear cut presidential  election result and his continued assertions that he, and his  supporters, had been defrauded of their rightful win, was probably the most effective thing he could do to deter faithful Republicans from the Georgia election polls.

As Republican senator, Mitt Romney, was quoted as saying on  6 January, shortly after the run-off results were announced, “It  turns out that telling the voters that the election is rigged is  not a great way to turn out your voters”.

The run-off elections were required in January because the incumbent Republican senator, David Perdue, and the  incoming Kelly Loeffler (R) both failed to poll more than 50% of  the vote in November.

When the Democrats’ Jon Ossoff and Raphael Warnock  (Georgia’s first black US senator) succeeded in replacing both,  it delivered the party a 50:50 split in the US Senate and, thanks  to incoming Vice President Kamala Harris’ deciding vote,  notional control of the chamber.

Years in the making

This is the first time in six years that the Democrats have held  the House of Representatives and the Senate and the first  time in a decade that they’ve held both while also occupying  the White House. The last time this happened was back in  Barack Obama’s first administration when a strapping young  Joe Biden – then only in his late sixties – was vice president.

However, just like back then, we don’t expect to see the so-  called ‘blue wave’ of radical Democrat spending, stimulus and  taxation emerging. The nature of US politics means that what  we’re most likely to see in terms of US policy in the coming  years will be more of a ‘blue ripple’. Namely, bigger direct  stimulus payments, more aid to struggling states and backfilled  unemployment benefits in the short term and potentially more  spending to gradually improve the lot of lower-income America  over the longer term.

The prospects of all this were enough to push up US equity  markets and US Treasury yields when the results were  announced on 6 January, but that’s likely to be the end of the  matter as far as markets are concerned going forward.

More a ‘ripple’ than a ‘wave’

The first problem facing the incoming Democrat administration  is the tenuous nature of its control of the Senate; indeed, its  majority could not be any thinner.

In theory, a simple majority is necessary to pass new  legislation, but in practice a ‘super-majority’ of 60 Senate votes  is required. A narrow agenda can potentially be passed with a simple majority using the ‘reconciliation’ process, but this is  limited to spending, revenue and the federal debt limit and,  even then, to one bill per year affecting each subject.

Reconciliation bills cannot make changes to social security or increase the federal deficit.

To have the best chance of passing legislation, the Democrats  will need to ensure that every single one of their senators  votes the party line and to restrict themselves to issues  allowed within the reconciliation process. If history is any  guide, this exercise alone will be much like trying to catch the  wind in a net or the proverbial herding of cats.

Prior to November’s presidential election, the narrative on a  Biden ‘blue wave’ encompassed notions of huge stimulus and  worker support schemes, infrastructure and clean energy  spending, headaches for both big tech and Chinese trade and  big tax hikes in order to foot the bill.

However, the reality of a Senate majority that’s only really a  majority on paper, is that the more unpalatable items on the  menu such as steep tax hikes will be kicked into the long grass.  Simple political expediency will dictate that any measures put  before the Senate will need to be market-friendly enough to  attract Republican support and sufficiently broad to satisfy  both the far left of the Democrat party and the more centrist  Republicans.

Keep in mind that, despite his direct involvement in the Capitol  Hill riots in the first week of January, only 10 Republican  representatives voted in favour of Mr Trump’s second  impeachment; 197 voted ‘no’ while four abstained. This  underlines the strength of partisan ties in Washington.

The pull exerted by these competing poles should guarantee  that while new policy might have something of a blue ‘tinge’, it’s  likely to remain markedly middle of the road.

Dragging it out

The 60 vote practical threshold is a consequence of the  ‘filibuster’ – the practice of deliberately talking so long (about  anything at all) that the Senate has no time to even take a vote.  This can only be bypassed with a 60 vote ‘super-majority’ via  the aforementioned reconciliation process.

To many Americans the filibuster, which is still enshrined in the  constitution, was immortalised by actor James Stewart in the  classic 1939 film Mr. Smith Goes to Washington.

However, the Senate’s signature procedural weapon is actually  a cynical practice that’s been employed countless times by  both parties to keep unpalatable legislation off the books.

The current Republican minority leader, Mitch McConnell, is a  grandmaster of the art and he won’t miss this opportunity to  confound his Democrat foes.

The politics of the centre

Mr Biden was finally inaugurated on 20 January but on arrival  he needs to deal with more than the usual partisan divides;  he’s faced with a Congress that’s still deeply traumatised by  recent events.

It began the year literally fleeing from an angry mob. Next,  15,000 armed National Guard descended on Washington to  fortify Capitol Hill and erect barricades to defend the city from  American citizens during Mr Biden’s inauguration. Meanwhile,  Mr Trump’s inconvenient second impeachment will also  distract their attention during a period when Mr Biden needs  to make his cabinet appointments and forge ahead with his  ‘first-day’ campaign promises.

The most pressing of these is the new $1.9trn coronavirus  relief package he unveiled in mid-January. This requires  Congress to approve another round of emergency support  payments to Americans similar to the $600 they received at  the start of the year.

This time, the additional cheques will be for $1,400 and,  like this year’s first payment, it’s likely to push up US equity  markets as many recipients choose to speculate with their  relief payments.

Elsewhere on the domestic front, Mr Biden has promised to  undo Mr Trump’s tax breaks for the wealthiest Americans,  combat student debt and improve the minimum wage; all of  which are likely on the back burner for now with a pandemic  still raging and congressional approval required.

Other Biden calls to action include pledges on climate  including re-joining the Paris Agreement and convening  a climate world summit. This provided a healthy push for

numerous ‘green’ stocks at the start of the year but any real  progress could take years to deliver.

Meanwhile, trade, gun control, monopolistic technology  companies, improved terms for the cannabis industry and  immigration are also on the agenda with a promised “road  map to citizenship” for the country’s 11 million undocumented  residents.

The more things change…

Thanks to Mr Trump’s penchant for enacting policy through  emergency ‘executive orders’, some of Mr Biden’s agenda can  be accomplished with the stroke of a pen. Other measures will  require the congressional deal-making he prides himself upon  while some, thanks to partisan extremes and the use of the  filibuster, are destined to die on the vine.

Ironically, this is just how US equity markets like their politics. So  far, the arrival of a Democrat in the White House has coincided  with a flourish in cyclical sectors and the rare outperformance of  ‘value’ stocks over their ‘growth’ counterparts.

However, this juxtaposition is due to the progress major  countries are making with the roll-out of their immunisation  campaigns. Seen in this context, the Georgia run-off results are  little more than a blip on the screen for global equity markets.