New Year … Same Problems

Hey Influence Traders:

 

I hope that everyone had a wonderful holiday season and Happy New Year.

 

It is certainly a magical time that allows us to reflect on what is important and to plan for the coming year.

 

It also allows us to take some needed time off and to forget about day-to-day responsibilities.

 

But it does not make those responsibilities go away.

 

And it’s no different for business in the nation’s capital.

 

The last few months have seen President Biden’s approval rating plummet.

 

He’s battling quite a few problems, but the ones driving the ratings decline are rising inflation and prices at the pump.

 

Santa gave him a small win the other week with slightly lower pump prices.

 

But a bunch of Scrooge analysts are predicting that US gasoline prices could rise as high as $4 per gallon by the summer.

 

If the prices across the country look like California, it will not bode well for Dems going into midterm elections.

 

Here’s a look at some of the issues waiting on the president’s desk in the New Year:

 

COVID


Biden ran on a pledge to get COVID under control.

 

He hasn’t.

 

Cases are at previously high levels.

 

Despite evidence of much milder symptoms, Omicron continues to be a business disruptor.

 

New infections have risen to more than 200,000 per day — and the situation could get much worse.

 

The President is between a political rock and hard place. 

 

If Biden does nothing, he will be further viewed as ineffective. 

 

But his options are limited. 

 

The CDC adjusted the quarantine from 10 to 5 days to address business concerns, and the administration was immediately blasted.

 

The decision to cut isolation time in half for those with asymptomatic COVID-19 is seeing backlash among employee representatives and experts who say big business sparked the decision more than science.

 

United (Ticker: UAL) and Delta (Ticker: DAL) airlines might disagree.

 

They believe that the change will help to limit the cancellations that plagued travel over the holidays.

 

And it wasn’t just daily headlines regarding travel cancellations as the airlines dealt with a combination of Omicron sick days and weather delays.

 

The holiday season also saw closures at many venues, including Broadway.

 

The Delta variant was credited with severely impacting supply chains last summer.

 

Biden can’t afford Omicron doing the same.

 

Fortunately, the economic consensus seems to be that Omicron will have less of an impact.

 

While infections are up, the severity is down.

 

The one fear is that hospitals will be overwhelmed at some point because the quick spread will generate large numbers of illnesses in a short period of time.

 

Absent that, this wave of Covid is expected to have a smaller impact on the economy.

 

Inflation

Unprecedented federal stimulus helped the job market, stock prices and consumer spending exceed expectations in 2021.

 

Last month saw the unemployment rate down to 4.2%, and the year ended with all of the gross domestic product lost in 2020 being replaced, stock prices at record highs and consumer spending above pre-pandemic levels.

 

But it also fueled the highest inflation rate in four decades.

 

Tackling inflation could be the defining issue going into the midterms.

 

Manufacturers, suppliers, shipping companies and other key industries are still under immense supply chain pressures.

 

Democrats do not want to see persistently high inflation numbers, like the 6.8% consumer price index (CPI) number in November.

 

That was the highest level in more than 40 years.

 

The economic consensus is that inflation will continue to rise at least for the first quarter before leveling out.

 

Biden will take both blame and credit for inflation … but much of it is out of his control.

 

One key metric to watch will be pump prices, which are expected to spike in the first half of the year despite giving Biden a Christmas reprieve.

 

The Fed

To do its part to tame inflation, the Federal Reserve is pulling back on direct stimulus by finishing its purchase of treasury bonds by March.

 

It has also signaled that it is prepared to hike interest rates three times in 2022.

 

Fed Chair Jerome Powell explained that the Fed needs to balance the weak labor market against the pace of the recovery and the persistent hiring troubles facing many businesses. 

 

It is going to be a tough balancing act to slow the economy … but not stall it.

 

Labor Force Participation

The low unemployment figure does not tell the full employment story.

 

The fact is many people are not participating in the workforce which is fueling a false sense of employment.

 

The labor participation rate in November was a meager 61.7%.

 

More than 5 million Americans have yet to return to the workforce after the onset of the pandemic.

 

The inability of firms to hire has limited the ability for businesses to meet surging demand.

 

The hope is that as government benefits fade and households will face financial pressure to return to work.

 

But it will not be easy on employers as worker leverage has gained strength under the Biden administration.

 

Employers are facing the prospects of higher wages and signing bonuses to attract workers.

 

That might be a wash at best on the inflation front. 

 

Build Back Better

Biden’s signature piece of legislation was all but killed at the end of the year.

 

The President will have to hustle to try and revive the bill.

 

He might have to pick and choose pieces to pass.

 

He has lost some key support for the bill, particularly with House and Senate members who are feeling vulnerable in the upcoming midterm elections.

 

Sen. Joe Manchin all but defeated the bill on his own.

 

Biden and co. need to get him back on board.

 

The Democrats are moving to claim that not passing the bill will have negative economic consequences for the country.

 

They are particularly focused on the end of the expanded child tax credit, which some argue will sap fiscal support for the economy as soon as next month.

 

Democrats are at odds with each other as to how to address these issues.

 

Some want to tackle individual parts of the bill to get them passed.

 

The progressives see an opportunity to pass an agenda, and don’t want to see their green and other priorities dropped from the bill.

 

Green Energy

A green energy transition remains front and center for this administration.

 

I do not expect that push, whether as part of the BBB or not, to slow down.

 

Some prognosticators argue the opposite, that the green push is dead in the water.

 

They are wrong.

 

Environmental issues have always been a core focus of the Biden administration.

 

With the midterms approaching and the chance of one or more houses of congress flipping, the admin knows that it has a narrowing window to transform the economy to green.

 

The Biden admin is slipping climate into everything, including the recent defense bill.

 

Last week Biden signed the $768 billion defense policy bill, which:

 

      • Increases funding for cleanup by the Army, Navy and Air Force of a class of toxic chemicals called PFAS
      • Ups funding for a Centers for Disease Control and Prevention nationwide PFAS health assessment
      • Restricts the use of open-air burn pits for waste 
      • Prevents the Defense Department from burning PFAS until there’s department guidance or a rule from the EPA on PFAS destruction
      • Requires the consideration of climate and environmental challenges in “core processes”

 

A greening economy will continue to benefit electric vehicle makers like Tesla (Ticker: TSLA) and Ford (Ticker: F), as well as lithium producers (more on that in the next week … but here’s a teaser).

 

Voters in Chile recently elected Gabriel Boric, a 35-year-old former student activist, as president.

 

A hard left socialist, he campaigned to expand the social safety net, increase mining royalties and taxes, and create a national lithium company.

 

One fifth of the world’s lithium is produced by Sociedad Química y Minera de Chile (Ticker: SQM).

 

The morning after Boric’s victory, SQM’s stock price fell 15%.

 

In addition to fears of nationalization, the Chileans are rewriting the country’s constitution.

They intend on making it the first “green” constitution in the world.

 

One of the things that they intend to do is to declare brine, per the constitution, to be water.

 

Lithium is done through brine extraction, which is currently governed by the mining code.

 

The new constitution aims to change that and bring mining under state control of water.

 

Chileans might make the regulation of mining, including its impact on local communities, constitutionally governed.

 

That never turns out well … see Venezuela.

 

That will hurt production of one of the world’s largest producers.

 

At the same time, lithium remains an essential component of batteries.

 

Lithium demand and prices will continue to soar.

 

If Chile, the world’s second-largest lithium producer after Australia, slows production on purpose or by accident, prices will further rise and demand will have to be picked up by alternative sources.

 

Cyber Attacks

The Biden administration must admit that we are in a cyber cold war.

 

2021 saw a record number of attacks and a heightened severity of attacks on public and private organizations, both large and small.

 

Private companies saw ransomware attacks on Colonial Pipeline, meat producer JBS USA, IT company Kaseya and scores of schools and hospitals.

 

The SolarWinds hack allowed Russian hackers to compromise at least nine federal agencies.

 

Chinese hackers were able to exploit Microsoft Exchange Server vulnerabilities to the detriment of thousands of groups. 

 

To end the year, Shutterfly announced it had been hit by a ransomware attack.

 

This federal government is forcing organizations and its own people to address cyber issues.

 

That will bode well for cyber and IT companies in that flow of tech updates. 

 

Crypto

Expect the administration to focus on further regulating the industry.

 

The rising interest in crypto and decentralized financial networks is drawing the attention of regulators.

 

Some Democrats see cryptocurrencies as nothing more than another venue for speculation and money laundering.

 

Dems also see an intense climate impact of cryptocurrency mining.

 

Look for new federal financial rules in the coming year to ease DC’s mind about this evolving industry.

 

The growing interest in crypto means that it won’t be going away, but DC will try to make them “safer” for investors and more transparent (for the IRS).

 

That does not bode well for prices of crypto in the near term.

 

And while crypto enthusiasts have long told us that digital assets are hedges against inflation and rising rates … they’ve never existed during times of inflation or rising rates.

 

This will impact not just the coins but the trading platforms.

 

Coinbase (Ticker: COIN) and others have already seen a 30% drop in trading volume.

 

It will be another volatile year for the asset class.

 

Cutting Through The Noise for You,

 

Frank

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