As the Biden administration gets to work, watch for a tussle over exactly how the new leadership in Washington will pay for the spending Democrats feel is necessary to save the country from the impact of the pandemic, says Bob Iaccino, editor of the Stock Think Tank.
The tip-off will be a slowdown in housing, he said.
“Housing figures are going to slow dramatically,” Iaccino said.
“We’re actually had have had a rise in mortgage rates and they’ve risen substantially on a percentage basis — still historically ridiculously low — so what’s likely to happen is there’s likely to be a rush to buy homes with the idea that rates are going to continue to go higher.”
Since mortgage brokers and agents tend to push their clients in the direction of the closed sale, they’re likely to show people those rising rates to close more sales, he said.
“People that are less sophisticated on the Treasury market are likely to fall for that,” Iaccino said.
“I think people are going to rush to buy homes and we’ll see a little bit of a pop in the next month-and-a-half, two months on housing data, but then there’s like going to be a slowdown” if rates will continue to stay low.
It’s important to watch Treasury Secretary Janet Yellen and to remember that she’s no longer the apolitical Fed chairman but a member of a Democratic administration, Iaccino pointed out.
Yellen was the Federal Reserve Chairman under Obama and Trump before Jay Powell, the current chairman, took over.
“Treasury Secretary Yellen is now a partisan,” he said. “It’s not to disparage her ethics at all. That’s just to say that you are now able to see her politics.”
Yellen was picked by Democrats because she’s likely leans toward the policies that a Democratic administration would like to see, Iaccino said, for instance her comments about how “the fiscal side that the government should act big.”
Borrow and spend
Yellen seems to be square on the side of borrow and spend at low yields, Iaccino said, “which by the way is something outgoing President Trump had said very early in his administration, that with these low rates we should be borrowing and spending.”
“Janet Yellen seems to be on that same ilk, and if you look at her career as an academic she’s preached that, she’s talked about unemployment going to the depths and letting inflation run a little bit,” Iaccino said.
“As Fed chair she was not able to be this opinionated,” he said. “As a Treasury secretary she is able to be this opinionated.”
That backs the idea that in the short term stock should rise, Iaccino said. But also we should again be looking for yields to rise
“Because if she’s going to push toward borrow, borrow, borrow, that means it’s going to be a larger supply of Treasuries coming out than maybe has been over the last couple of months,” he said.
“That’s what I’m going to be watching for. How big are the issuances going forward based on the spending we need to do,” Iaccino said.
“Joe Biden is not likely to get all of his tax plan passed. The constitution says Congress holds the purse-strings,” he said. “Joe Biden’s tax plan is only that, it’s a suggestion of what taxes should be.”
He’s not likely to get it all, but he’s likely to get some of it and whether he’s actually able to spend with the Treasury issuing more bonds or with taxes getting raised, in the short term, that’s really a question for me, Iaccino said.