Stimulus Looks Pretty Unlikely. Unless You Pencil in a Market Crash First…

Investors seem to be assuming we can get a stimulus without a crash.  It may be that we need a market crash to get a stimulus.  People (and the market) are assuming additional stimulus (unemployment checks and PPP).  I am far less confident.  Unless you pencil in a market crash.  Absent that sort of shock, inaction may rule.  Part 1 is below, Part 2 to follow shortly.

The yearning for fiscal stimulus is growing out there.

It is starting to sink in that the unemployment checks and PPP handouts loans have been doing most of the heavy lifting out there in the real economy.  That stimulus has worked incredibly well.  Much better than I expected.  A big reason why I have been so totally wrong on the market since March (I promise to write up a “lessons learned” piece eventually).

That success pains a lot of Republican-leaning investors.  Why?  They are desperate to avoid the obvious conclusion that future stimulus should look like that successful model.  Giving money to poor people (who immediately spend it into the “real economy”) instead of squandering it on tax cuts for rich people (who squirrel it away in the “asset markets economy”).

But that is a problem for later.  A market drop would pain them even more.  So Wall Street is begging for stimulus.  I see a lot of commentary assuming that stimulus will happen. The basic line of argument is “They have to do it if they want to be re-elected.  The Republicans will hold their noses and vote for something larger than $1 trillion. The Democrats will hold their noses and vote for something smaller that $2 trillion…”

That argument is based on the collective, top-down interests of the Parties.  It makes a lot of sense.  But it breaks down when you look bottoms-up – counting votes in the Senate and looking at the power dynamics.

I Have Not Seen a Credible, Inside-the-Beltway, Count-the-Votes Analysis That Delivers a Stimulus Absent a Catalyst (Like a Crash).

The Republicans need to summon the collective will to act in their collective self interest.  But their individual self interests may be pulling too hard in the direction of a collective failure.

I worry we have a situation where “the base” of neither party will forgive a compromise so close to an election. Especially the Republican base which is a more unitary force driven by rhetoric that equates compromise with weakness.  Exacerbated by a President with a track record of throwing Republican Congressmen under the bus on delivery of a hard-fought, necessary “compromise” package.

15-20 Republican Senators seem to have come to the conclusion that compromise is not in their personal best interest.  Republican Senators up for re-election in 2020 may be desperate to pass a bill, but their colleagues facing voters in 2022 and 2024 are thinking about how that vote will play down the road. Especially those eyeing Presidential bids (e.g. Ted Cruz**).  Everyone wants a deal, but no-one wants to lose their seat for it in 2020, 2022, or 2024.  With that in mind, lets set out the “known knowns” from the bottom up.

McConnell/Senate:

  • We know 15-20 Republican Senators (29%-38% of the 53 total), were NOT on board when McConnell floated his @$1 trillion proposal back in July. Notably, that proposal never emerged as an actual Bill. McConnell never risked an up/down vote. If reports from yesterday are correct, $500b is the largest number McConnell thinks he can actually pass next week.
  • It is VERY hard to see how he gets 5-10-15 Democratic Senators to cross the aisle. That is impossible with a $500m bill and unlikely with $1 trillion.  As the price tag goes higher, McConnel will gain more Democratic votes, but lose more and more Republican votes.  It all probably doesn’t add up to 51.
  • The above is why McConnell was sidelined in the July/August negotiations. He can’t deliver a majority of votes for any bill that might pass the House.  At least not with a Republican majority.  McConnell could pass a $2 trillion bill in a heartbeat with a majority of Democratic votes.  But he’s not going to do that – especially with his own election fight to win in 2020.
  • So the White House’s reported $1.3 trillion number probably can’t pass the Senate without heavy lifting by Trump.  Active, loud, unequivocal support.  Air cover, pressure, and veiled threats for those wavering Republicans to (hopefully) push through and sanction the compromise deal.
  • If Bernie filibusters (requiring 60 votes to over-ride), any package is probably dead in the water.  Oddly this gives Bernie & Co. the final say in the process.  Just like back in March when 4 Republican Senators tried to scale back the $600 unemployment benefit at the last minute.

Pelosi/House

  • Pelosi understands the dynamics above.  That is why she isn’t negotiating with McConnell.  He’s a bystander.  Trump has to deliver the deal.  So she’s dealing with Trump.
  • She has three yawning trust gaps.  1).  She doesn’t trust Mark Meadows personally.  2). She doesn’t trust that Meadows or Mnuchin can deliver Trump.  3).  She doesn’t trust Trump.  Personality issues aside, Trump always tries to re-negotiate deals at the last second.
  • So Pelosi isn’t going to move until Trump moves.  Whatever Meadows, Mnuchin, or even Trump promise is worthless.  Action is all that matters.  She will wait to see Trump tweeting in support of an actual, marked-up Senate Bill.
  • She can deliver the House.  Or walk away. The Speaker has tremendous power.  Reports of a “revolt” in her caucus are 1).  Probably stage-managed to give moderate Democrats political cover.  2).  Functionally irrelevant.  If Pelosi doesn’t want a bill hitting the floor, it isn’t hitting the floor.
  • She knows Bernie can stop any bill in the Senate.

Trump/Administration

  • Who knows what sort of deal Trump is willing to promote?  I have no idea.  Meadows and Mnuchin likely don’t know either.  All we know is that we don’t know.  Until Trump sends out a few tweets.  Even then…
  • We know that, rhetorically, Pelosi has done all she can to paint Trump into a corner where any deal is seen as a climb-down “compromise.”
  • We know that Trump hates anything that smacks of “compromise.”  And he will likely refuse to accept anything that looks like a “loss.”
  • Could Trump spin an eventual deal as a “win?”  He can try.  Pelosi seems pretty intent on denying that.  The day the deal gets passed, she is going to be out crowing about a “win” and “making Trump back down.”  The louder she celebrates, the more it hurts Trump.  Pelosi will find a way to make her celebration go viral.  Fox news can drown out a lot, but an NFL-style touchdown celebration (perhaps literally?) will be pretty hard to ignore.
  • Just step back and ask the simpler question.  Does this seem like Trump’s style?  With an election coming up?  Has he ever really done this before?   “a huge lift by Trump.  Active, loud, unequivocal support.  Air cover for those wavering Republicans to (hopefully) push through and sanction the compromise deal.”

Put all the above together and a deal looks pretty unlikely.  I’m inclined to take Pelosi’s stated frustration at face value.  Facing the above, she is negotiating over exactly what with exactly whom?  Promises made on behalf of a President who routinely breaks them?  On a bill that McConnell’s Senate can’t/won’t actually pass?

This hole looks too deep and wide for Pelosi to bridge.  Even if she wanted to.  Her own political calculus argues for NOT enacting a stimulus – provided she avoids the blame for it. More on that in my next post.

The longer the negotiation theater goes on, the harder it is going to be for the market to ignore.  Risking a market crash.  A market crash that would almost certainly catalyze a new stimulus package.  A pre-election market crash that also serves Pelosi’s longer-term interests.

We May Need a Crash to Get a Stimulus…

The complacent consensus response to the above tends to be a shrug.  “They will eventually do a deal.  They always do.”  Relying on the (said-with-a-sneer) “compromising Democrats” to pull the “principled Republicans” out of a ditch.

What if Pelosi & Co don’t play along with the game?  “Everyone” expects them to compromise for the long-term good of the nation.  What if they stand firm and play this for short-term political gain?

Win the election and deal with the damage done in February.  After the last 4 years, what would you choose?

We all know that is what Mitch McConnell would do.  The longer this negotiation theater goes on, the more it looks like Pelosi is following that same playbook.

What does that imply?  A much higher chance of a market crash (and incipient economic crisis) in the next 2 months.  This doesn’t seem to be what is expected or priced in.

 

** I note Ted Cruz because he is the archetypal Republican politician of this era.  Opportunistic.  Focused on power.  Flexible to the point of indifference on policy or even principal.  Look at this situation through his eyes.

  1. He is looking at the 2024 presidential election and his own re-election.
  2. Voting for a “stimulus bill” threatens him in both.  He doesn’t want to see “bailout Ted” or Stimulus Ted” or “RINO Ted” commercials against him from an even-more-far-right primary challenger.
  3. What about risking the Senate majority?  That’s not Ted’s problem.  Ted takes care of Ted.  He has his own elections to win.  Its easier being the opposition anyway.  No responsibility and lots more room for fantasy economics (tax cuts create growth!) and fantasy science (clean coal!).
  4. Risking Trump’s wrath? In 2024, Trump’s is either running for President again (against Ted) or a lame duck.  Arguably Cruz wants Trump to lose.  Its going to be a lot easier to run “against” Biden instead of “for” another 4 years of Trumpism.  That also gives Cruz et al 4 years to try and pry the party away from Trump and his dreams of a family dynasty.  For our sake I hope they succeed.
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