24/9/21 12:36 Why investors shrugged off the Capitol riots | Financial Times

Opinion US economy
Why investors shrugged off the Capitol riots
A Democratic sweep and hopes for fiscal stimulus drove the market instead

RANA FOROOHAR

© Matt Kenyon

Rana Foroohar JANUARY 10 2021

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Normally when a financial market rises amid a coup or extreme political instability, it
is because the leftists are out and the animal spirits of business have been released.
But last week in the US there was a different kind of result. Stock markets rallied, even
as a group of pro-Donald Trump insurgents rampaged through the US Capitol. The
reason, in brief, is that investors were cheering that a new Democratic administration
that also controls Congress is about to take over.

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24/9/21 12:36 Why investors shrugged off the Capitol riots | Financial Times

President-elect Joe Biden will surely raise corporate taxes and increase regulation.
From the perspective of business leaders, that’s never a good thing. But in last week’s
elections in Georgia, Democrats won two Senate seats, giving Mr Biden’s party sway
over both houses of Congress. That means Democrats will also be more able to push
through fiscal stimulus in areas from infrastructure spending and healthcare, to
education and aid to states. That in turn will complement the huge monetary tailwind
still coming from the US Federal Reserve. Business, which had wrung all it could out
of President Trump, is desperate for that kind of synchronised combination of fiscal
and monetary stimulus.

For years, we have only had the latter. The actions of central bankers, combined with
trillions of dollars of passively indexed investment that simply flows to wherever the
market goes, have wiped out much of the market’s usual function of price discovery.
Yet the disconnect from economic reality won’t last for ever.

As investment sage Jeremy Grantham wrote recently: “The long, long bull market
since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme
overvaluation, explosive price increases, frenzied issuance, and hysterically
speculative investor behaviour, I believe this event will be recorded as one of the great
bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”

How could it not be? Low interest rates have encouraged a massive flood of debt, little
of which is productive. Since 1980, total US debt rose from 142 per cent of gross
domestic product to 254 per cent in 2019. As economist Atif Mian has pointed out: “If
all this additional credit were to be used for productive investment . . . we should have
seen an explosion in investment. Instead, the investment share of national output
declined from an average of 24 per cent during the 1980s to 21 per cent during the
2010s.”

Some of that decline is due to the rise of the digital economy and because technology
platform companies seem to require less capital investment. Another more troubling
issue is that companies also put much of their spare cash into share buybacks. At the
same time, public investment of the kind that creates broadly shared growth peaked
in the late 1960s. Yet history shows that deep productivity booms come when the
government invests in game-changing technologies — railroads or the internet in the
past; 5G or green tech today — that the private sector then commercialises.

Mr Biden’s plan to “build back better” aims to do just that in areas such as renewable
energy and broadband. The Democratic sweep makes it more likely that he can
implement his plan.

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24/9/21 12:36 Why investors shrugged off the Capitol riots | Financial Times

On top of that is the boon that Mr Trump will soon be gone. Even usually rightwing
business groups such as the National Association of Manufacturers have called for
vice-president Mike Pence to use the 25th amendment to remove him. That’s probably
not going to happen — and it doesn’t really matter if it does, assuming we get to Mr
Biden’s inauguration on January 20 without another debacle. More notably, it’s just
the latest in a series of corporate outcries against the president, now joined even by
longtime Trump supporter Steve Schwarzman, the co-founder of private equity group
Blackstone.

All this shows we are at the end of an era. “Financialised” growth, built on debt and
asset bubbles, has to be replaced by something real — just as the current president
needs to be replaced by an actual leader. Last week’s insurrection in Washington only
underscored that the future of US liberal democracy rests on the creation of a more
stable political economy — one that generates more and better jobs for people who
might otherwise be tempted to support the next homegrown autocrat.

The good news is that the Georgia results strengthen Mr Biden’s mandate to start
remaking the economy in ways that will ultimately be good for a broad chunk of the
country. Aid to beleaguered states rolling out the vaccines will rise. Climate-related
spending will increase, with renewable energy being perhaps the biggest winner. That
will mean more jobs in high-growth areas such as electric vehicles, green batteries and
modernisation of buildings. Fiscal stimulus will also rise. Barring any major new
coronavirus surprises, this will help economic growth in 2021.

But corporate taxes will rise, too, creating a headwind for stock prices. Furthermore,
as vaccination coverage increases and the economy recovers, that may boost inflation
and, possibly, interest rates — which will undermine asset prices. Mr Grantham even
predicts a market correction as early as this summer. That would be a bitter pill for Mr
Biden. But in our upside down world, investors should remember that a temporary
market decline may actually indicate that the fortunes of the country are finally on the
rise.

rana.foroohar@ft.com

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