Blue Wave Makes A Splash In DC. Will Joe Manchin Be ‘Senator Gridlock’?

The Blue Wave made a big splash as Tuesday’s Georgia election results, reported late Wednesday afternoon, showed that both of the state’s seats for the US Senate were won by the two Democratic candidates. A tsunami of socialist policies implemented by progressives in the Democratic party is now likely.

A Blue Wave led by the incoming Biden administration, unimpeded by gridlock, certainly represents a radical regime change from the Trump administration. It is likely to be much more radical than the regime change led by the Obama administration. That’s because the Democrats in Congress are much more radical in their left-leaning political views than ever before.

The Democrats’ win in Georgia could be bad news for entrepreneurial capitalism. It could also be bearish for the stock market if the radical regime change causes a recession. That’s unlikely to be the case in 2021. Granted, the US Treasury bond yield pushed above 1.00% at the start of the week on preliminary news that the Republicans lost one of the two contested elections. I previously argued, even before last year’s elections, that the yield would be closer to 2.00% than 1.00% but for the Fed’s intervention in the bond market.

My analysis was based on the strong post-lockdown rebound in economic activity and the swelling post-CARES Act federal budget deficit rather than on a prediction of a regime change in Washington, DC. Now that the Blue Wave has prevailed, government spending will continue to boost economic activity, and federal deficits will continue to mount. And, most importantly, the Fed is likely to continue to buy notes and bonds in an effort to keep bond yields from rising too rapidly.

In other words, the Fed is likely to enable our deficit-financed government to get bigger under the Blue Wave regime. The Clinton administration was famously checked and balanced by the Bond Vigilantes. The Fed is implicitly assuring the incoming Biden administration that monetary policy will keep them buried as much as possible.

Now consider the following related observations about the stock market:

(1) Socialism isn’t necessarily bearish. Significant declines in stock prices are caused by recessions, not by socialist regime changes, unless they are so radical that they cause a recession. Socialism may be bad for entrepreneurial capitalism, but it provides fertile ground for crony capitalism. That’s as long as it doesn’t lead to communism. Under socialism, private property remains mostly private. Under communism, there is no private property; everything is owned by the state. In either system, the government gets bigger. Under socialism, the ruling regime enacts more laws and regulations that force businesses to manage their affairs increasingly to satisfy their socialist overseers rather than their capitalist shareholders.

(2) Betting on crony capitalists. In other words, making deals with the government matters as much as or more than competing in the market. That’s the fundamental nature of crony capitalism. Businesses become bigger and more politicized as the government gets bigger and more radicalized.

That’s not necessarily bearish for the stock market. However, it does mean that assessing the impact of government policymaking on business becomes as important or more important than traditional analysis of company fundamentals. Spreadsheets for individual corporations need to include columns for the number of lobbyists employed, percentage of business done with the government, cost of regulation, and so on.

(3) And the winner is … Previously, in my November 2, 2020 LinkedIn newsletter titled “Gridlock Is More Bullish Than Blue or Red Waves,” I observed that gridlock tends to be more bullish for stocks than a united government. I analyzed the performance of the under unified and divided government since FDR took office (Fig. 1). I calculated the percentage increases in the index from January-through-December periods during the two alternative regimes. I found that during the previous six Blue Waves, the S&P 500 increased 56% on average. During the previous three Red Waves, the index rose 35% on average. During the seven periods of divided government, the S&P 500 rose 60% on average. This suggests that gridlock is more bullish than the two unified alternatives, which are also bullish, but less so, with Blue Waves more bullish than Red Waves.

So not surprisingly, on Monday, stock prices fell because the Blue Wave is coming. Yet on Wednesday, they rose because the Blue Wave is even more likely to come! Go figure. While gridlock was the loser in Georgia’s elections on Tuesday, the winner will surely be $2,000 stimulus checks. That’s probably bullish for the economy and the stock market during the first half of 2021.

(4) Meet the other Joe, again. Perhaps investors figure Senator Joe Manchin (D-WV) will defend gridlock to the death. We first introduced him to our subscribers in our November 16 Morning Briefing. We wrote:

“If the Democrats pull an upset and get both seats, Joe Manchin could be the most important person in America. He is the Democratic senator from West Virginia. He is viewed as a conservative Democrat and has championed bipartisanship.”

On Monday, November 9, Joe Manchin was interviewed by Fox News. He said: “50-50 [control] means that if one senator does not vote on the Democratic side, there is no tie and there is no bill.’ He added: ‘I commit to tonight and I commit to all of your viewers and everyone else that’s watching, I want to allay those fears, I want to rest those fears for you right now because when they talk about, whether it be packing the courts or ending the filibuster, I will not vote to do that.’

“He continued saying that the ‘Green New Deal’ and ‘all this socialism’ was ‘not who we are as a Democratic Party.’ He remarked: ‘We’ve been tagged if you’ve got a D by your name, you must be for all the crazy stuff and I’m not.’”

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