This has been a week of political discovery for the markets and the economy. Three major events occurred.

  1. Democrats and Republicans moved to keep the government funded until December 3rd.
  2. A House vote attempt on a stand-alone bill for the $1.2T bipartisan infrastructure plan failed.
  3. Sen. Joe Manchin finally provided his goal for the social infrastructure/spending bill at $1.5T. 

Anyone following the internal “Machinations” of the House and Senate Democrats would not have been surprised by the first two. The third was a bit of a surprise but is possibly the best news for the economy and the markets. It represents an avenue to dramatically reduce the amount of additional spending into an economy that is clearly overheating from an inflation standpoint.

Given the Federal Reserve’s new inclusive mandate on employment and the desire of current Chairman Powell to be re-nominated as chairman, we know the central bank is not going to act as the brake on the dramatic price increases we’ve been experiencing and will continue to fuel them. Therefore, we are receiving thin gruel on over-stimulation via the Manchin news. Still, it’s helpful. 

Now, the real battle begins over the 2 spending bills and the debt ceiling. Clearly, the House progressives want their $3.5T plan and will vote down the bi-partisan $1.2T plan. Manchin, and likely Sinema, want a scaled down $3.5T plan to $1.5T. Moderate Republicans want the $1.2T plan, but are willing to force Democrats to go through a laborious process to raise the debt ceiling to block the $3.5T plan. The debt ceiling must be resolved within a mid-October to early November time frame according to Treasury Sec. Yellen and other analysts.

In the past, the debt ceiling was resolved by regular order and passed. Now, I don’t see any path for this process and a serious risk of a temporary default is rising. Or the fear of it. It hasn’t been priced into the short-term Treasury market, but it has been part of why stocks are now on very shaky ground. I believe the markets can trust the moderates in both parties to do the right thing. I don’t believe this when it comes to the progressives. Zealots make terrible leaders as they are wedded to the cause and not the outcome it brings.

Moving beyond this, here are additional events we should keep an eye on:

  • Any SCOTUS retirements. No set time, but Stephen Breyer? COVID Cavanaugh?
  • G20 Leaders meeting 10/30-31. Can’t wait to see Macron and Biden together
  • COP 26. 11/1-12 100 countries on climate change (just don’t expect to talk about current energy prices or material costs for solar panels or …)
  • White House Democracy Summit 12/9-10
  • Treasury report on crypto currencies
  • SEC on crypto currencies and ESG themed investments
  • Federal Reserve tapering 12/14-15
  • Funding US government (again) December
  • A rise in COVID cases like we had in December 2020

If the debt ceiling default happens, we’ll have bigger problems to worry about than any of these events. Yet, each one of these can be disruptive to either the economy or the markets or a specific sector. 

As we head into 2022, there will be little legislative action on the docket as US politicians turn to the midterm elections. This means we should turn our attention to the regulatory actions of key bodies like the SEC, FTC, FCC and FERC. These bodies will be able to make decisions affecting the valuations of companies in their area of jurisdiction. Big tech and energy producers will most likely see the biggest shifts in policy negatively impacting their businesses.

While we’d all like to put this week past us and start fresh, we’re going to be reheating leftover legislation and political fights for the next 6 weeks. Time for a diet?