As Job Biden prepares to take over at the White House, there are several reasons to be concerned.
Firstly, the US went into recession with a Federal budget already deep in deficit ($1.0368tr, year-to-March 2020), courtesy of Trump’s ‘supply-side’ dogma. For sure, the US was creating jobs, but true supply-side revolutions require some semblance of control over spending. Federal government outlays were already rising sharply in the run-up to the pandemic.
Secondly, the US trade deficit is widening. Trump’s attempts to control and reverse the tide of US imports from China have singularly failed. December’s trade report out of China showed a big rise in the bi-lateral surplus vis-à-vis the US.
Thirdly, the US stock market has responded to the pandemic by bidding up share prices for tech and related companies. Many of these gains have been the culmination of a long bull market that this commentary has been touting since 2014.
However, political trends could put this in jeopardy. A determined assault by Congress on ‘big tech’ is not the real issue.
QE has worked historically when governments recognised the need to control spending once an economic crisis has passed. It is far from clear that this administration and, in particular, a determined (angry) Congress, emboldened by a split in the Republican movement, understands this core tenet of economic policy. Once investors sense that the political class has no interest in controlling public sector finances, stocks will suffer.
There are already warning signs, with the S&P 500 helped this week by resurgent energy stocks and a pop in financials. IT and communication services fell.
