Because with Biden Tesoro and Fed will go hand in hand
Scenarios and perspectives on the Fed, tax authorities and more after Biden's victory in the US presidential elections. The analysis by Alessandro Fugnoli, chief strategist of the Kairos funds
A contemporary of Biden, a stainless man for all seasons, Mitch McConnell is currently the real winner of the American elections. From his position as leader of the outgoing Republican majority in the Senate, he is now the tip of the balance of American power. If the Senate remains Republican (and we will probably know it only on January 5 after the vote in Georgia), it will be he who will have the last word on fiscal policy, health reform, environmental policies and appointments for key positions in American power. , from the judiciary to the Federal Reserve.
Biden has spent hundreds of millions of dollars on his campaign. Trump spent his convalescence on an impressive election tour. However, both worked in the end for him, Mitch, who was comfortably re-elected for the seventh time by the Irish of Scottish origin who populate his loyal Kentucky with 58 percent of the votes.
The polarization of American society, the disappearance of the center, the radicalization of the political conflict, the fears of a coup d'état and civil war are now paradoxically translated into the at least temporary resurrection of the soft and pragmatic mediation policy of a Talleyrand like McConnell, who was Bushian with Bush and Trumpian with Trump , but always perfectly at ease talking with Obama yesterday and with Biden and Harris tomorrow.
We started with Sanders and Warren, with visionary and reckless projects of radical reform of American society and the redistribution of wealth in a climate marked by street clashes and then devastated by the pandemic and today we find ourselves a sort of commissioner management agreed between a house Weak white and a strong Senate in which Romney-like centrist republicans are still more than willing to dialogue with the Democrats. The pandemic, for its part, is de-politicized by magic and is declassified to ordinary health administration.
Markets started preparing for this election a year and a half ago. The idea of tanks in front of the White House, which appears ridiculous today, was a current hypothesis until a week ago. Mountains of money have been spent for months on buying volatility and feared loss hedges. Many made it a point of honor to show up unloaded on 3 November. Even though the Democratic agenda had progressively watered down, the imprint in the memory of investors remained that of Sanders and Warren.
At the same time, however, three consoling narratives were created to rationalize the rise in equities (largely due to monetary policy) and to hypothesize its stability. The first narrative said that a democratic avalanche would certainly bring taxes, but also an unprecedented volume of public spending. The second was that a divided Congress would make the most controversial measures impossible and leave the economy to quietly manage itself while the Fed made its monetary policy increasingly aggressive. The third was that, had Trump been confirmed, we would still have relapsed into one of the two cases described.
With unloaded and overprotected portfolios on one side and three bullish narratives ready for all eventualities on the other, it was inevitable that, with any electoral result, the market would be displaced and would have to rush to buy back. The worshipers of the god Fomo, a cruel god who forces you to buy even when you do not want to for fear of losing the rise, got the better of them and started buying without yet knowing what the outcome of the vote would be (which still we do not know).
Today, the prevailing narrative is that, in the hypothesis of Biden president and a Republican Senate, the fiscal package under discussion from August will arrive anyway by the end of the year and if it is a bit smaller (because McConnell likes it) the Fed will wake up from his electoral slumber and will give new vigor to Quantitative easing and economic support programs co-financed by the Treasury (funded in turn by the Fed). The collaboration between the central bank and the Treasury will be even closer if Lael Brainard, now an important board member of the Fed, becomes the new secretary of the Treasury.
More than Biden and Trump (who will not leave the scene and will likely re-nominate himself for president in 2024, when he will be as old as Biden is today), the markets will have to get used to looking at McConnell and Brainard, who is an archcule in his own right. in favor of extensive control of the yield curve.
How long will the ongoing recovery take? In the short term, a long way has already been made, especially in Europe, but the fund appears solid because, as the end of the year approaches, those who continue to be underweight for fear of Covid will have to realign, especially if the tax package is approved by December.
And what about the dollar and gold? With the fading of the more aggressive fiscal reflation assumptions, the dollar will weaken less than one might have thought before the vote, in particular against a euro depressed in turn by a monetary policy that in December will return to a very expansionary one in Europe as well. Gold, driven by the new global cycle of expansionary measures, will have room to resume rising.
As for rates, in the short term inflation will not change much and inflation will remain calm. It should be noted, however, that the signals coming from the research laboratories of central banks are multiplying. The reflationary nuclear weapon of the near future is now at an advanced stage. We are talking about the digital currency issued directly by central banks. It is so powerful that it is surrounded by a thousand cautions and a very cautious and gradual introduction is expected. We will talk about it shortly.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/perche-con-biden-tesoro-e-fed-andranno-a-braccetto/ on Sun, 08 Nov 2020 08:15:59 +0000.