Why investors ignored the Capitol riots

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Normally, when a financial market rises in the midst of a coup or extreme political instability, it is because the leftists have come out and the animal spirit of business has freed itself. But last week in the United States there was another kind of outcome. Stock markets rallied, even as a group of pro-Donald Trump insurgents lashed out on the U.S. Capitol. The reason, in short, is that investors were applauding that a new Democratic administration that also controls Congress is about to take over.

President-elect Joe Biden will surely raise corporate taxes and regulations. From the perspective of business leaders, this is never a good thing. But in last week’s election in Georgia, Democrats won two Senate seats, letting Mr. Biden’s party win over both houses of Congress. This means Democrats will also be better able to push through fiscal stimulus in areas ranging from infrastructure spending and health care to education and aid to states. This in turn will complement the huge monetary tailwind still coming from the US Federal Reserve. Company, which had wrung out everything he could President Trump, desperately needs this kind of synchronized combination of fiscal and monetary stimulus.

For years, we’ve only had the latter. The actions of central bankers, combined with trillions of dollars in passively indexed investment which simply circulates wherever the market goes, have destroyed much of the market’s usual function of price discovery. Yet the disconnect from economic reality will not last forever.

As an investment wise man Jeremy Grantham wrote Recently: “The long and long bull market since 2009 has finally become an epic bubble in its own right. With extreme overvaluation, explosive price hikes, frenzied issuance and hysterical behavior by speculative investors, I believe this event will be recorded as one of the great bubbles in financial history, along with the South Sea bubble. , in 1929 and in 2000. “

How could it be otherwise? Low interest rates have encouraged a massive influx of debt, little of which is productive. Since 1980, the total debt of the United States has grown from 142% of gross domestic product to 254% in 2019. According to economist Atif Mian, highlighted: “If all this additional credit were to be used for productive investments. . . we should have seen an explosion of investments. Instead, the share of investment in domestic production decreases from an average of 24% during the 1980s to 21% during the 2010s. “

Part of this decline is due to the boom in the digital economy and the fact that technology platform companies appear to require less capital investment. Another more troubling issue is that companies are also investing a lot of their cash share buybacks. At the same time, public investments of the type creates widely shared growth peaked in the late 1960s. Yet history shows that deep productivity booms come when the government invests in game-changing technologies – the railways or the Internet in the past; 5G or green technology today – which the private sector then commercializes.

Mr. Biden’s plan to “rebuild better»Aims to do just that in areas such as renewable energies and broadband. The Democratic sweep makes it more likely that he can implement his plan.

On top of that, there is the advantage that Mr. Trump will be gone soon. Even right-wing business groups like the National Association of Manufacturers have called on Vice President Mike Pence to use the 25th Amendment to impeach him. It probably won’t happen – and it doesn’t matter if it does, assuming we get to Mr. Biden’s inauguration on January 20 without another debacle. Most notably, it is only the last of a series of corporate shouts against the president, now joined even by a longtime Trump supporter Steve schwarzman, co-founder of the private equity group Blackstone.

All of this shows that we are at the end of an era. “Financialized” growth, built on debt and asset bubbles, must be replaced by something real – just as the current president must be replaced by a real leader. Last week’s insurgency in Washington only underscored that the future of U.S. liberal democracy rests on creating a more stable political economy – an economy that generates more and better jobs for people who could. otherwise be tempted to support the next local autocrat.

The good news is that Georgia’s results strengthen Mr. Biden’s mandate to begin rebuilding the economy in a way that will ultimately benefit much of the country. Aid to struggling states deploying vaccines will increase. Climate-related spending will increase, with renewables perhaps the biggest winner. This will mean more jobs in high growth areas like electric vehicles, green batteries and building upgrades. The fiscal stimulus will also increase. Barring a major new surprise from coronavirus, this will contribute to economic growth in 2021.

But corporate taxes will also increase, creating a headwind for stock prices. In addition, as immunization coverage increases and the economy recovers, it can boost inflation and possibly interest rates – which will weaken asset prices. Mr Grantham even predicts a market correction as early as this summer. It would be a bitter pill for Mr. Biden. But in our upside-down world, investors should remember that a temporary drop in the market may actually be a sign that the country’s fortunes are finally on the rise.

rana.foroohar@ft.com

Follow Rana Foroohar with myFT and on Twitter


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