Washington Look Ahead: January 23 -27, 2022
Russia’s threatened invasion of Ukraine is dominating the attention of President Biden and Congress (NOTE: The House is out of session this week, the Senate is in session). For President Biden, the implications for the future of NATO, US credibility globally, and his political future are in the balance. For Congress and the markets, too, the question is what sort of sanctions might be placed on Russia and when.
This past weekend, a growing chorus of Republicans began arguing stringent sanctions should be placed on Russia now – not after any invasion takes place. However, the Biden Administration made it very clear they have no interest in punishing Russia while also negotiating a peaceful stand-down of tensions.
But if Russian President Vladimir Putin gives the order to invade, the menu of sanction options Congress could legislate seems quite broad. We are most focused on one reported in the Washington Post today where the Biden Administration would expand the reach of sanctions beyond financial targets to broader sectors and industries. Known as the foreign direct rule, it has been used only once before with stark effect against Chinese tech giant Huawei. In essence, it would extend sanctions to the technology sector – specifically, the semiconductor industry – with the aim of denying Russia access to the global cell phone, tablet, computer markets. The US would also look to other countries to go along with these sanctions (which, quite frankly, we do not see China agreeing to do). We will be writing more separately on what the markets should expect if Russia invades shortly.
Speaking of technology, we are seeing growing pressure from President Biden on Congressional Democratic leaders to get moving on passage of the US Innovation and Competition Act (USICA). We believe this legislation will be of particular interest to investors as it will impact not just the tech sector but infrastructure and job creation. The bill passed the Senate last year by a wide bipartisan margin but died for various political reasons in the House. In short, the bill would offer a variety of incentives to jumpstart hi-tech research, development, and manufacturing in the US (e.g., pushing to bring them back from China so the US can better compete with China.) We note Intel’s announcement last week of their intention to invest $20 billion in Ohio to build semiconductor manufacturing facilities as an example of what USICA seeks to achieve.
Following President Biden’s two-hour press conference last week, where he sought to hit a “reset button” on his legislative agenda, there are three key points we want to encourage you to focus on as things progress.
First, as we keep saying and as the President’s made clear, the stalled Build Back Better (BBB) package remains a top priority for him to get passed. But – as we have suggested in recent reports – it is most likely the White House and Congressional Democratic leadership will break BBB into, in the President’s word, “chunks” for passage. Notably, Senate Budget Committee Chair Bernie Sanders (I-VT) on Sunday called for such a strategy to get legislation moving – a signal that Progressive Democrats may be willing to sacrifice some of their legislative priorities to get victories on the legislative scoreboard.
Conceptually, that sounds like a smart strategy. In reality, it will be more complicated than it sounds. Meaning, for example, if the President and Congressional Democratic leadership put forward the expanded Child Tax Credit as a stand-alone bill, it will likely fail as being too costly. Whatever parts of BBB the President really wants to get passed into law will likely only be passed via the budget reconciliation process (which cannot be filibustered and only needs 51 votes in the Senate). Otherwise, Republicans are not interested in giving the President and Congressional Democrats any major legislative victories this year on top of philosophically opposing the significant expansion of the social programs the President wants.
Therefore, we continue to believe we will see the emergence of a stripped down “BBB” in the coming weeks with the aim of getting it done (or within sight of final passage) in February in advance of the President’s State of the Union speech March 1st. No doubt that will be a highly ambitious timeline and considering BBB’s troubled history so far, anything could happen to derail that timing.
Second, we want to remind everyone the fighting within the Democratic Party over BBB has been over the size/scope of the social programs. It has not been over the proposed tax increases. Investors need to keep this in mind. Perhaps Democrats will scale back the tax proposals in proportion to the size of the scaled-back package – but to date, we have not heard any such suggestion coming from Democratic leadership. Corporate and individual tax increases are not only still on the table but likely in a slimmed-down BBB.
Third, Congress will be watching the Federal Reserve meetings this week for indications of the timing of rate increases and their assessment of inflation and overall economic growth. If the Fed indicates we should expect prolonged economic challenges, it could force even more scaling back of BBB. Moderate Democrats led by Senator Joe Manchin (D-WV) have pointed to inflation risk and economic uncertainty as a reason for not moving BBB forward.
We hope this quick overview is helpful. Please let us know if you have any questions.