Gordian Perspectives for March 2021

Biden and Corporate Distress Clouds Forming

In the aftermath of the Presidential Election, we wrote a piece discussing some of the economic challenges facing the Biden Administration, and how Biden’s actions may stir inflation and create sets of corporate winners and losers.  Now that the Biden team has started to implement its agenda, we thought it would be interesting to revisit these issues.

Stimulus Packages

When the Democrats won both Georgia Senate seats, they put the prospect of massive stimulus programs back on the table and made it harder, parenthetically, for Biden to govern from the center.  If the current $2 trillion package is enacted as it currently stands, we don’t see a lot in the way of monies being used to significantly boost the private sector.  Instead, the package targets many Democratic political priorities, and we view it as a huge wealth transfer.

Oil, Gas and Energy Industry Effects

Biden has already established his pro-green, anti-oil bone fides.  Cancelling pipelines and making it more difficult to pursue unconventional plays has significantly driven up crude prices already.  While higher oil prices make green energy less economically uncompetitive, the policy shift will pretty plainly transfer wealth from consumers to certain oil producers through energy price inflation (From the Biden/AOC perspective this will be an unintended consequence).  We suspect Biden might seek to impose some form of “windfall profits tax” on the industry, as was done after the OPEC embargo of the 1970s.  And, of course, legions of oilfield workers will be laid off.

Biden is also pursuing his version of a “Buy America” program, and there seem to be significant glitches already, as described in this Bloomberg article.

RELATED: Energy Sector in a Financial Crisis. Déjà Vu All Over Again

Effects on the Automotive Industry

Carmaker and other OEM demand has exceeded current steelmaking capacity, driving up steel prices, but many steelmakers are reluctant to reopen facilities that they may need to re-mothball (an expensive proposition) if the recently increased demand proves to be ephemeral.  Meanwhile, we will need to import foreign steel at higher prices.

Will Labor Rates Increase?

It certainly seems that many input prices are going up.  Labor rates may soon follow a higher trajectory as well, due to minimum wage laws and collective bargaining.  With an inflationary cycle in which interest rates rise (from near zero), corporations with pension plans will face huge headwinds as their pension portfolios get hit by higher bond yields and lower P/Es.  Higher interest rates and higher risk spreads will also clearly hit high yield credits that will experience refinancing problems.

However this all plays out, we suspect that the related social cost of inflation may be a whole lot greater than many expect.  And based on very early data, it appears that a lot of the burden may be borne by manufacturers that cannot raise output prices as much as their increase in input costs.  Not to mention junk bond issuers that will have to face materially higher costs of capital.

RELATED: Apocalypse Soon?  Part II


 

Commentary by Gordian Group CEO Henry Owsley