Legal Developments 8/26/21

The Senate has passed President Joe Biden’s $550 billion infrastructure bill, which is expected to pass the House, but with conditions.  The largest has to do with Congresswoman Pelosi’s condition that a $3.5 trillion social spending bill must be passed along with it.  This condition took a major step forward today (Wednesday) with Senate passage of a $3.5 trillion budget framework, but the bill exposed division among Democrats with moderates voicing concerns and progressives wanting to tax the wealthy. A compromise with moderate Democrats forces a vote on the infrastructure bill by September 2, with House leaders seeking to finalize the spending bill by September 15. Part of the cost would be paid by rolling back the tax cuts for corporations and wealthy households that were former President Donald Trump’s signature legislative achievement, with some believing capital gains rate increases may be effective on introduction of the bill- on or before September 15.

Economic Observations

At the time of writing this note, Washington remains gridlocked on additional stimulus to confront the effects of the pandemic. Nevertheless, the markets remain positive but with a large divergence between the Dow (+.24%) and the NASDAQ (+30.08%), illustrating the anticipated strength of the tech sector and weakness in more traditional stocks. This tech sector strength is driven by the social disorder created by the Covid-19 pandemic,  where it has become essential to work remotely.  However, valuation multiples are elevated and close to all time highs in some markets.  Countries across the world are spending massively, with the EU vulnerable because some countries are over leveraged and went into the pandemic less prepared and with less financial strength than the US. Real interest rates are negative in the US and around the world.  There is a fear that weakening currencies may drive inflation, while making weak countries weaker.  A fear is that higher taxes with a Democrat controlled government will raise taxes so much that it will cause a spiraling down of earnings and equity valuations. On the positive side, near term retail sales are up (including big ticket items like housing and autos) and so is employment.  The increased monetary supply and low interest rates are buoying the negative effects of the pandemic.