Biden’s Success With Immigration Perversely Validates Trump And Sets The Stage For Political Volatility The Markets Aren’t Anticipating: The Geopolitical — Stock Market Connection

Immigration is down and the economy is still humming, but Biden isn’t getting the credit Presidents usually accrue when Americans feeling richer. The reason for this conundrum has everything to with Biden and thus he’s poorly positioned to solve it. A return to GOP domination is in the cards and with it all the negative social and geopolitical aspects that made the late 2010s so taxing for Americans. But the markets are more concerned with earnings guidance at present and whether executives will validate the euphoria over future productivity growth from AI. Consequently the volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Oil's chart is signifying global growth. But there were also several negative factors across global asset classes. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days toward 4600 before correcting hard.

Biden’s approach to immigration recalls his success with Bill Clinton in passing a center-right crime bill that neutralized Republican claims that the Democrats were soft on crime and too culturally off-center. AXIOS notes “The Biden administration's proposal to change the English proficiency section of the U.S. citizenship test is drawing backlash from some immigration advocates. Under the proposed changes, applicants would undergo a speaking section to test their English skills. An agent would show photos of daily activities and ask the applicant to describe them verbally. The potential update would also include a multiple-choice civics section on U.S. history and government to replace the current oral short-answer style.” One immigration progressive noted that “Though multiple choice might sound easier to many people, it does mean that it's going from an oral test to essentially a reading test."

By cutting down on pathways for low-skilled immigrants to gain citizenship Biden is playing straight to the center, hoping this will substantiated “Bidenomics” as middle of the road policies that benefit the average American. But the result is progressive Democrats competing with the GOP in blasting Biden the loudest, a dynamic that leads to low poll numbers and the numbing possibility of a Trump comeback. The world rightly fears of a return of Trump and yet the markets are heedless of the domestic and geopolitical volatility that such a return would bring.

Biden faces the same dilemma Bill Clinton did in the 1990s where the progressive wing of the Party was an albatross that limited the Democrat’s electoral chances. But Biden has adopted a regressive posture that resonates of 1970s naivete instead of 1980s dynamism. Where Clinton’s success came from focusing on deficit reduction and presenting an energetic face of America Biden by contrast is blowing up deficits with huge spending on redistribution, nearshoring and social and ecological spending, all while gently pleading with Americans to get along. Clinton triangulated the GOP on cultural issues but was also lucky enough to face Ross Perot twice, securing re-election as Americans intuited him as a dynamic and sensible leader who represented a true middle way. Biden won’t likely face a credible third party and is clearly seen as a throwback to an earlier age of tax and spend with no capacity for self-renewal.

Biden believes his trump card is the latent productivity of the American worker, which can be unleashed with more manufacturing employment and more state-directed spending. This is false, as decades of research on productivity has failed to produce any consensus on what raises productivity, leaving the political divide unsettled. The left believes in equalizing education but this simply positions a worker for certain jobs, rather than providing the skills to grow their productivity. Only a modest minority of workers are able to boost their productivity through efforts of their own. The majority by contrast rely on the capital provided on the job and the direction provided by management, growing their productivity because the firm demands nothing less. Naturally the firm retains the benefits from this productivity growth in the form of profits and bonuses for management. So most workers simply get older and their paychecks simply keep up with inflation but only if they manage to avoid being automated into unemployment, while others less shrewd or lucky fall through the cracks. And even for those who maintain employment it’s their saving and investment behavior that determines whether they accumulate any wealth. Consequently inequality rises in a meritocracy for reasons that have nothing to do with bigotry, class or education, while productivity is mostly about capital rather than labor.

What distinguishes the minority of workers who dynamically improve their skills is a black box that academics have failed to unlock. And what motivates people to save and invest with probity instead of spending and speculating is similarly unknown to academics. Biden conveniently believes he knows better but his poll numbers suggest most Americans don’t credit him with any insight into what’s needed to help the middle class.

Biden’s policies will entrench inflation and low productivity growth and force the Fed to keep rates higher for longer in order to cool down consumption so that eventually there is less money chasing goods and services. With the work ethic in decline and identity politics making people increasingly uncertain about each other and more unpredictable, corporations are facing lost opportunities and inefficiency in routine operations. The resources allocated to compliance and diversity program is the visceral evidence of corporate inefficiency. The consequence for investors is low earnings growth and high interest rates leading to lower valuations, a scenario that will play out in the Autumn.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.