Infrastructure and Tax Hikes — Months to Go; Elizabeth Warren and Archegos

Insights and Market Perspectives

Author: Greg Valliere

March 31, 2021

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THE DEVIL’S IN THE DETAILS: President Biden will present the broad outlines of infrastructure reform today, but our sources believe it will be Memorial Day or later before a bill comes into clear focus.

THE MAJOR ROADBLOCK will be wrangling over the composition of tax hikes that theoretically will pay for much of Biden’s bill. As we wrote yesterday, the public wants to tax “the rich” and big corporations, but Republicans in Congress are virtually unanimous in opposition to new taxes.

TO COMPLICATE THIS DEBATE, several Democratic House members from high-tax states are threatening to vote against the infrastructure bill unless it abolishes reforms to state and local tax write-offs, which was included in the Trump tax bill. This so-called SALT provision has become a major issue.

NOT EVEN THE INFRASTRUCTURE PRICETAG IS CLEAR, as Biden apparently will not call for $3 trillion in new spending, as reported over the past weekend. In his speech today in Pittsburgh, Biden is expected to call for $2.25 trillion over eight years, an amount that activists immediately denounced as insufficient.

WE’LL HAVE PLENTY OF TIME to analyze the details as this bill moves slowly through both houses this spring. For now, it appears that Biden wants to spend about $650 billion to rebuild the country’s infrastructure, such as its roads, bridges, broadband, highways and ports.

THE PLAN WILL ALSO will include about $400 billion for home care for the elderly and the disabled, $300 billion for housing infrastructure and $300 billion to revive U.S. manufacturing (making an argument that the U.S. has to compete more aggressively against China).

AND IT WILL PROPOSE hundreds of billions of dollars to upgrade the nation’s electric grid and revamp the country’s water systems to ensure clean drinking water, among other major investments, the Washington Post reports this morning.

BOTTOM LINE: Biden will get something by autumn, which would heat up an economy that should be sizzling by then. There’s widespread agreement that the nation’s crumbling infrastructure needs help, and enough members of Congress concur. But they do not agree on the specifics of how — or whether — to pay for this.

THE BOND MARKET thus could face the worst of all scenarios — massive new spending programs without significant tax hikes to pay for them.
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ELIZABETH WARREN HAS AN ISSUE: What a field day for the progressives — the Archegos trading fiasco, which unquestionably will be the subject of Congressional hearings in April and pressure on regulators to investigate the hedge-fund industry, family offices, and allegedly light oversight.

WARREN TOLD CNBC YESTERDAY that the Archegos meltdown “had all the makings of a dangerous situation — a largely unregulated hedge fund, opaque derivatives, trading in private dark pools, high leverage, and a trader who wiggled out of the SEC’s enforcement.”

WITHOUT TRANSPARENCY AND STRONG OVERSIGHT, Warren declared, “the next hedge fund blowup could take the economy down with it.” We expect Warren to introduce legislation in the Senate Banking Committee that would target hedge funds, stock buybacks, excessive leverage, etc.

PASSAGE OF A TOUGH BILL in the 50-50 Senate will be difficult, but the industry faces headline risk and numerous hearings this spring that will pressure the activist regulators who have been appointed by Biden. These regulators want to send a message to the financial services industry.

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EDITOR’S NOTE: Barring a bombshell, we’ll take a few days off, leaving Washington and the growing threat of getting bitten by Major, the angry Biden German Shepherd who has struck again. Major may be permanently banished to Delaware, but we’ll be back on Tuesday morning . . .