When policy strategist Greg Valliere took the stage to share his 40,000-foot view of Washington at FSI’s 2022 OneVoice Conference, he told attendees, “I’ve been doing this for a long time and I have never had a stretch like the last year. There’s nothing comparable, whether it was Nixon, Vietnam or Watergate.”
Valliere, chief U.S. policy strategist at AGF Investments and keynote speaker at the FSI conference, was referring to the 20-plus point plunge in President Biden’s job-approval rating. Although many factors played a hand in this, including the U.S.’s abrupt pullout in Afghanistan, said Valliere, “the thing that I think is going to hurt him the most politically, unquestionably, is inflation.”
Persistent inflation, rising interest rates, the pandemic and geo-political unrest were among the topics Valliere addressed during the OneVoice session “But Wait, There’s More: Emerging Political and Financial Challenges” on January 31.
“I should say at the outset, I’m on the 50-yard line,” said Valliere, who has spent 40 years following Washington issues for institutional and retail investors. “I’m not here as an ideologue to tell you Biden’s great or Trump’s great.”
Labor Inflation is Chief Problem
Although the cost of certain goods — including oil and lumber — have contributed to inflation, the real problem that has propelled it is labor, said Valliere.
For example, his sister can’t find wait staff and cooks for the restaurant she runs without offering signing bonuses and much higher salaries — and she’s had to pass those costs along to customers, he said. “It’s like a snowball … it goes on and on and on.”
More immigrants could help fix the labor shortage, said Valliere, noting that “sometimes people boo and hiss” when he says this during his talks. “When you look at immigration law, Donald Trump did not just clamp down on illegal immigration. He clamped down also on legal immigration.”
Valliere noted that some inflation issues couldn’t have been predicted. “We were unwinding the worst pandemic in a century and there’s no textbook, it’s unchartered waters.” However, he thinks the Fed was too complacent about the threat of inflation.
Another contributing factor was Congress’s $6 trillion budget to stimulate the economy, he says, yet many states are running budget surpluses. “If you have an ailing patient and you give them too much medicine, there’s side effects,” he said, “and the side effect was inflation.”
Ongoing Inflation Triggers
“I don’t see inflation really being tamed for another year or longer,” said Valliere, pointing to additional factors.
First, ships can’t unload at the traffic-jammed ports of Los Angeles, San Diego and Long Beach, he said. Second, computer chips are in dire short supply. “I think the Fed knew this last summer but they were slow to acknowledge that as well,” he said. He thinks it’ll take a few years to see a noticeable impact from Intel’s recently announced new chipmaking plant in Ohio.
Debt and Taxes
Valliere thinks there’s a chance that Congress will pass one additional stimulus bill, for maybe $1.4 trillion or $1.5 trillion. Rents, for example have gone up, so there still are needs, “and there still may be something that [Sen.] Joe Manchin [D-W.V.] can approve,” he said. But, “is it necessary to stimulate an economy this hot? It’s an open question.”
It’s important to look at the long-term deficit projections, said Valliere, noting that total U.S. debt will exceed $30 trillion by mid-decade. “We’re all getting old. And I think the demographic problem here will make servicing the debt a real problem as we get later into this decade,” he said.
Without another big stimulus bill, new taxes are less likely, added Valliere. In that case, “I think we can pretty much write off any change to the step-up in basis, any changes to estate taxes, any change to the capital gains rate,” he said. Janet Yellen’s international tax increase and a tax on extremely profitable companies are probable, and there might be a 1% or 2% increase on very wealthy individuals, he said, “But the tax hit I think is going to be tolerable for the economy and the markets.”
Fed Hikes and More
Goldman Sachs and all the big banks are talking about four or five interest-rate hikes this year, starting in March, said Valliere, who anticipates just three to four hikes. “I think the Fed has had a fundamental awakening on how serious the inflation problem will be.”
Valliere said the Fed funds rate may rise to 1% if we have a pretty good year. He thinks the Treasury 10-year bond yield could reach 2.25%. “I think we can live with something like that quite well, so I’m not a bear on the economy,” he said.
Still, Covid will be a continuing part of the story, he said. Whether there’s another variant, more surges in cases and a lot of Americans reluctant to resume pre-pandemic activities could matter, he noted. “I’m an optimistic at heart … But I think we have to be adult and say that we’re not 100% out of the woods.”
Economic Outlook
Continuing to live with Covid could take a little bit off GDP in the next year or so, said Valliere. “But I think the turn has come and I do think that Covid is not going to dampen a very, very good outlook for the economy.” He noted the latest figures for GDP (6.9%) and unemployment (3.9%).
“But that’s not what Americans are thinking. They look at the price of gasoline and meat and groceries,” he said. “So that’ll still probably be the no. 1 issue for most Americans, but I think this extremely bitter mood has subsided a bit.”
Regulatory Themes
Biden may really try to focus on regulatory policy in the last two years of his term, said Valliere, and several themes stand out. The first is antitrust. “I think that any merger you hear about is going to be challenged by this administration, because they feel the concentration is way too much and is hurting consumers,” Valliere said.
Another big theme he anticipates is environmental. “Almost anything environmental will be favored by the regulators,” he said, pointing to the administration’s “animosity” toward fossil fuels, oil, coal, natural gas.
Other areas where Valliere expects to see stepped up regulatory scrutiny include gamification, financial indices, passive indices and special purpose acquisition companies, He also anticipates revised rules governing exempt private services, diversity and climate change, and new regulations for corporate transparency rights and money laundering.
“This is the most aggressive group of progressives that I have ever seen in the regulatory community,” he said.
Political Briefs
Valliere anticipates the House will go to the Republicans in the midterm elections. He thinks 20 seats will flip — which he says is on the low side compared with others’ projections. Why? “I think the Republicans could overplay their hand on issues,” he said.
As for Russia invading Ukraine, “I think the threat of an all-out war is still a little bit below 50%,” he said, noting he still expects a diplomatic solution. Among other factors, he said the sanctions Congress is working on would deny Russia access to the U.S. financial system and technology. But the Russians may feel they can move into eastern Ukraine while the ground is hard and frozen, he said, “So, I think there’s a window and from the end of the Olympics, to maybe the second week of March, if something’s going to happen, it might happen.”
“I think the acrimony between the U.S. and China will persist for quite some time,” he said. They haven’t been transparent about the virus, they’ve hacked into U.S. companies, and they’re “in a massive arms race in that part of the world,” he said. “You talk to people in Washington and there is a bipartisan consensus that the Chinese are not to be trusted.”
Jerilyn Klein is editorial director of Rethinking65.