Biden’s Heavy Load

Economics and Market Risks for Biden

In the aftermath of the November elections, we thought it worthwhile to revisit the economic and market risks Biden is facing.

Inflation.  Thus far this year, we have seen a drop in the dollar vs. other currencies.  We have also seen a pretty big increase in gold prices.  We see these trends as being linked to rising inflation expectations.  We also don’t see inflation risks abating from here.

Economic growth.  In the absence of a truly massive fiscal stimulus package, we find little in the way of credible arguments for an acceleration of real economic growth.  And if we have a divided Senate, we think that a massive fiscal stimulus package may be DOA.  From an arithmetic perspective, this implies that it will take a long time to dig ourselves out of whatever economic holes we are in.

Federal debt.  As Exhibit A of an economic hole, our federal debt is beyond huge.  And it is growing, even without a further massive stimulus expenditure.  And the nation faces the risk of an eventual increase in interest rates, which would cause the debt pile to mushroom.

The existence of these challenges is pretty well recognized, and I reference a recent article that summarizes the issues.

We would think the Biden team will do everything it can to keep interest rates low.  This policy is pro-growth, and further serves to hold the federal debt to a lower level than it would be under a regime of high interest rates.  On the other hand, it creates an extremely high risk (if not a certainty) of inflationary pressures.

Unfortunately, that is exactly where we have been thinking the economy may be going.  A Biden Administration may view inflation as one of the least of all evils because we could repay the mountain of federal debt with cheapened dollars.  Not that Biden would be alone in a tendency to gravitate towards inflation – we have sensed this instinct in real-estate developer Trump as well.

We leave it to others to contemplate the geopolitical aspects of all this.  What happens to the US Dollar as a reserve currency?  Does China become a more reliable trading partner than the US?  How do developed world electorates react to a diminution of their living standards due to economies with high inflation and sluggish growth?  What does it mean relative to armed conflict?

But we do have some thoughts about the corporate winners and losers this chaos may create.  It does not take an intellectual leap to conclude that most fossil fuel businesses will be adversely affected in a Biden Administration.  But even if Biden steers the country away from an economic calamity, there will be a lot of other companies facing grim outlooks, including banks, companies with products experiencing higher input prices (due to currency or onshoring),  and companies in environmentally-sensitive industries.

We will revisit these winners and losers in a future blog.

Early Looks at COVID’s Aftershocks

The pandemic is far from over, but COVID’s shattering effects on consumer behavior will be with us for a very long time to come. Not only are consumers foregoing crowds and living online, but what they buy, what brands they buy, and how they spend their time has already shifted.

These shifts are of fundamental importance to the restructuring practice. Sea changes in an industry create winners and losers. And this volatility can be just as threatening to a company as can a general recession or a massive spike in interest rates. Accordingly, we tend to pay a lot of attention to these dynamics in an economy as consumer-dependent as that of the United States.

Recently, McKinsey published the results of a study that looked at how consumer behavior has changed in the last several months.  A number of the noted effects are well-known and backward-looking (retail, travel, etc.). But many have yet to play out (brand shifting, how we spend our time and what we will do once we can go out freely again). How this transpires will affect future waves of insolvencies.

Commentary by Gordian Group CEO Henry Owsley