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BFI Capital
May 11, 2021

The Biden Era: Big Bets on Big Government

It’s only been a few months since President Biden moved into the White House, but there are already clear indications that the US is very likely going back to “business as usual”. The new administration’s appointments to key governmental posts, its economic and fiscal measures, and its foreign policy approach are all signalling a return to the very familiar, pre-Trump national priorities and goals that the country pursued for decades.

Many investors and ordinary citizens might find this outlook comforting, especially after the terrible year that was 2020. You couldn’t blame someone for hoping that this return to “normal politics” could usher in an era of stability and predictability. While we certainly share in these hopes, we also clearly see the risks and potential of the exact opposite scenario.

Returning to decades-old political playbooks and economic strategies is not unlike turning one’s own clock back and pretending the last four years never happened: that Donald Trump was never elected, that the covid crisis never destroyed the economy, that social unrest and violent riots never rocked the nation, and that the Capitol was never invaded. But it all happened, and the anger, the uncertainty and the sense of unfairness that fuelled it all are still present. Unless they are directly dealt with, the risks of further tensions and internal turmoil remain high.

Covid response

There is no question that the situation that President Biden inherited is extremely dire and, in many ways, entirely unprecedented. Any President, of any party and political persuasion, would have undoubtedly had a very hard time navigating these waters; the recovery after the covid crisis would be a titanic challenge. Nevertheless, the extensive economic damage, to a very large extent, was the direct result of the lockdowns, the forced shutdowns and all the other restrictions on private businesses that President Biden unwaveringly supported throughout the pandemic.

Whatever one might think about the necessity and the wisdom of these measures to combat the virus, their devastating impact on the nation’s economy is obvious, measurable, and extreme. Thus, it is to be expected that doubling down on these policies will inevitably exacerbate and prolong the damage.

Indeed, among the first covid-related measures of the new administration was an indefinite extension of the travel ban from European countries, Brazil and South Africa, a federal mask mandate, and the CDC’s empowerment to play a more active role in lockdown policies on a state level. In the first hours of his presidency, President Biden also re-joined the World Health Organization, which his predecessor withdrew from last July. Many of his appointees and cabinet picks have also been supportive of continued restrictions to business activities and harsher measures, including some that called for a nationwide lockdown.

The President himself has strongly criticized states that have adopted a more relaxed response to the pandemic, even just recently denouncing the move to drop mask-wearing mandates in Texas and Mississippi as "Neanderthal thinking”. In fact, despite the significant progress made on the vaccination front, Biden has urged all states to freeze their plans for reopening and even reinstitute restrictions, echoing the CDC Director’s fears of “impending doom” and a “fourth surge” of infections.

Meanwhile, public support for lockdowns and restrictions limiting business and social activities has plummeted even among Democrats, a record-high 41% of whom said they would be comfortable returning to their normal routine, according to a recent Morning Consult survey. Americans’ interest in covid-related news has also dropped to its lowest point since the pandemic began, according to a Pew Research poll published in late March: just 31% of adults are following the news closely.

“Going Big”

The historic $1.9 trillion covid relief package passed in March was celebrated as an essential step to restarting the economy, and as a crucial part of the President’s “Build Back Better” agenda. However, it is not entirely clear how this package can effectively reactivate the economy given the very limited support it provides to actual businesses and job creators. The bill included a third round of stimulus checks - up to $1,400 - increases in unemployment benefits, $350 billion for state and local governments, and just $50 billion allocated to aiding small businesses.

Total Deficits and Surpluses

Source: Global Gold Quarterly Digger, Congressional Budget Office

It is also unclear how this bill will contribute to the pandemic response and to addressing the ongoing public health emergency. In fact, according to the Centre for a Responsible Federal Budget, a bipartisan think-tank, “only about 1% of the entire package goes toward covid vaccines, and 5% is truly focused on public health needs surrounding the pandemic.

Meanwhile, nearly half of the package will be spent on poorly targeted rebate checks and state and local government aid, including to households and governments that have experienced little or no financial loss during this crisis”. A recent analysis by the Congressional Budget Office also highlighted that "more than a third of the proposed funding - $700 billion - wouldn’t be spent until 2022 or later, undermining the administration’s claim that the massive price tag is justified for urgent pandemic-related needs”.

Many conservatives and moderate Democrats have criticized the bill as politically opportunistic and wasteful, and as an indirect bailout of struggling Blue states that have mismanaged their budgets for years. On the other side of this argument stands the rest of Mr. Biden’s own party, that believes the bill did not go far enough and that sporadic relief checks are not sufficient. 50 Democratic U.S. representatives and 11 members of the U.S. Senate signed letters urging the administration to provide regular stimulus checks until the crisis is over, with Minnesota Rep. Ilhan Omar calling on the government to send out $2,000 to every citizen per month.

Still, the spending spree of the new administration has only just begun. Consistent with his promise to “go big” on stimulus efforts, just weeks after the nearly $2 trillion package was passed, President Biden unveiled his plans for further fiscal support: a $2.25 trillion infrastructure and green energy bill, which includes record spending on combating climate change and supports his administration’s ambitious targets to achieve carbon-free power generation by 2035 and net-zero emissions by 2050.

This is to be followed by yet another massive spending package, expected to cost a further $2 trillion, this one set to focus on education and childcare, including universal Pre-K and free community college. All this will be partially funded by drastic tax increases on corporations and on Americans earning more than $400,000, which together would represent the largest tax hike in generations.

It will also be funded by further borrowing, of course - just for reference, the US national debt is already on track to hit $28 trillion this year. President Biden, confronted with concerns over the budget deficit that hit an all-time high of $1.05 trillion in the first five months of this budget year, interestingly countered that “every major economist thinks we should be investing in deficit spending in order to generate economic growth”.

Social Justice and Identity Politics

In the first few months of the Biden presidency, there has been a veritable tsunami of proposals, executive orders and special provisions hidden within larger, and often irrelevant, spending packages. They clearly show the new administration’s determination in prioritizing “social justice”, “equity” and “fairness”, as those values are defined and demanded by the Party’s most extreme leftist faction. In purely economic, measurable, and objective terms, such policies, more often than not, involve mechanisms of aggressive wealth redistribution or unevenly applied legal protections. And politically, their common denominator is divisive, fractionalizing rhetoric that contradicts the message of unity and national healing that Joe Biden ran on.

Number of Executive Orders by a New President

Source: Global Gold Quarterly Digger, Congressional Budget Office

On the gender politics front, the new administration has taken a number of steps that appear to be aligned with the wider leftist trend of pulling the focus away from traditional women’s rights issues and towards various LGBTQ or racial justice goals. For instance, on International Women’s Day, President Biden issued an Executive Order establishing the “Gender Policy Council”, a revamped version of what used to be known as the “Council on Women and Girls” that was established under the Obama administration.

The new Council’s purpose is to ensure that “every issue is approached with gender equity in mind”. As its co-chair highlighted, the GPC will “aggressively protect” the rights of those who “experience multiple forms of discrimination, including people of colour and lesbian, gay, bisexual, transgender, and queer people”. This policy pivot towards minority protections was also reflected in the President’s earlier executive order against gender discrimination which critics argued opened the door to transgender athletes competing in women’s sports.

The Biden administration has also taken practical steps towards tackling climate change and “environmental injustice”, by creating a new Presidential Envoy position, a new office in the Justice Department, a “National Climate Task Force” and yet another Special Council. Among the policy priorities, apart from directly relevant goals like cutting emissions, we also find things like the creation of “well-paying union jobs”, housing subsidies, and a pledge that 40% of the clean energy federal investment will be allocated to disadvantaged communities, all echoing calls to fight “environmental racism”.

On the highly controversial issue of racial justice, President Biden has continued to push for legislative progress and policy solutions. Apart from the barrage of executive orders meant to dismantle “systemic racism” that he signed upon entering the Oval Office, he and his appointees have also taken steps to tackle problems like “racial equity in transportation”, which would involve diverting federal funds and grants to “equity programs” and expanding the DOT’s authorities and mandate.

Geopolitics: US leads the re-globalization push

As soon as President Biden moved to the White House, a near-complete reversal of the nation’s foreign policy stance and goals took place, starting with the new President re-joining almost every international organization, pact, and agreement that Donald Trump had withdrawn from.

Far from this U-turn being a merely symbolic one, the new leadership has already demonstrated in a very real and practical way that it intends to revive the Truman Doctrine. As evidenced by his rhetoric and policy priorities, President Biden has embraced a worldview reminiscent of the Cold War: one that sees a global, existential struggle between allied democratic nations and dangerous authoritarian regimes, that not only justifies, but necessitates, American interventionism.

In his first foreign policy address, President Biden made it clear to US allies and foes that “America is back”. Indeed, barely three months into his presidency, Biden had already carried out an air strike in Syria and unveiled a raft of new sanctions against Russia. He also called Russian President Vladimir Putin a “killer” and took official and public positions on domestic affairs and internal political developments of other nations, like Turkey and Poland.

On China, his stance has also hardened substantially: from the vague policy framework of cooperation and diplomacy he presented on the campaign trial, the President now appears to have embraced a much more hawkish approach. Sanctions, tariffs, joint military exercises in disputed territories, an increasingly fiery rhetoric, have all dialled up the tensions between the two superpowers.

And yet, despite the bold, public vows to defend America's global leadership against the rise of China, the domestic policy choices outlined here don not seem to be very well aligned with the projected determination and resolute foreign policy stance. The new administration appears to be primarily concerned with social justice issues, identity politics and redistributive policies that are unlikely to improve the competitiveness of the American economy, especially vis-à-vis its Chinese rival.

,Implications for Investors

The unprecedented stimulus wave, the reassuring promises of further support and the media’s treatment of the new President have all certainly helped create a climate of optimism and boosted investor confidence, at least for some. Hopes of a swift recovery have also been lifted and there’s an aggressive risk-on attitude gripping equity markets. Fundamentals and relevant news, no matter how dire and alarming, do not seem to be enough to temper the rise of asset prices. And while there are still solid and fairly valued companies to be found, some corners of the markets are looking dangerously overstretched with valuations that simply make no sense.

Given all the risks and uncertainties outlined above, it can easily be argued that this overall exuberance and this general confidence that the “worst is already behind us” might be quite naive. In fact, all these areas of concern we discussed here are so closely intertwined and the internal economic and sociopolitical situation in the US is so fragile, that even if one of the adverse scenarios materializes, it could easily snowball and trigger a larger, much more serious crisis.

Overall, our outlook at Global Gold is best summed up as “hope for the best, prepare for the worst”. While mainstream traders and speculators might be entirely content focusing solely on hope and wishful thinking, we are already seeing quite a lot of conservative investors turning to physical precious metals and actively preparing for choppier waters ahead, a trend we expect to continue as the year goes on.

,>> Read more here, in the latest Quarterly Digger.

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