Special Report – US Elections: Part 3

Greetings,

To conclude this series of Special Reports examining the 2020 United States election, we want to take a closer look at one of President-Elect Biden’s cabinet picks, what the selection could mean for sustainability and fiscal policy, and developments at the Fed regarding climate change. Part 1 detailed our probabilistic approach to predicting a Biden win, while Part 2 dug into his policy platform, fiscal approach, and where we could see bipartisan support (hint: tech antitrust).

Election Outcome

As a quick refresher, let us first level-set on how things have shaken out since November 3. In a pattern many analysts suspected would occur, Republican voters turned out en masse for in-person voting on Election Day, giving President Trump and other Republicans early leads at the polls, but as mail-in votes were counted across the country, President-Elect Biden edged into the lead in a handful of key states and two runoffs were set for the Georgia senate races. President Trump contested the election results in many states, but elections were certified, and electoral votes cast by each of the battleground states in question (Georgia, Pennsylvania, Wisconsin, Michigan, and Arizona), guaranteeing a Biden presidency.

In Georgia, two hotly contested senate races determined the final composition of the Senate. At the caucus level, the final tally now shows 50 Republicans and 50 Democrats, with both Messrs. Warnock and Ossoff defeating Republican incumbents. We wrote in our final update to investors on October 27 that there was a 66.1% chance of a Blue Wave in D.C., including the scenario in which we have arrived. A surprise double Democrat win has given the incoming administration (with the vice-presidential tiebreaker) the ability to freely legislate. Caucus moderates, like Independent Angus King from Maine, and centrist Democrats from states with more practical, fiscally conservative electorates will be critically important to the passing of any legislation and are likely to serve as a dampening mechanism against some of the more extreme agenda items coming from the party’s fringes. However, we do expect this split to result in a streamlined nomination process for executive branch members and judges – expediting the rate at which we expect to see implementation of the President-Elect’s policy platform.

President-Elect Biden’s Cabinet

Partisan gridlock aside, the executive branch is expected to leverage its powers to advance its policy agenda, thus rendering the members of Cabinet ever more important. As is tradition in the Cabinet Room of the White House, the President and Vice President sit at the middle of a long table, opposite one another, with the members of Cabinet (e.g., department heads) organized around the table according to the date the department was established (and de facto, by importance). To the right of the President, and first ranking department head, sits the Secretary of State. And to the right of the Vice President sits the second ranking department head, the Secretary of Treasury.

Mrs. Janet Yellen, the nominee for Secretary of Treasury, needs no introduction. In her acceptance speech, the former Fed chair pointed to five issues as part of her agenda within the Biden administration: (1) inequality, (2) stagnant wages for non-college graduates, (3) communities that have lost industry with no new jobs to replace it, (4) racial disparities in pay, jobs, housing, food security, and small business lending, and (5) a gender disparity keeping women out of the workforce. While opinions differ on how to interpret the data to either support or refute those positions, one thing is clear, Janet Yellen, who as Fed Chairwoman said it was in fact “her job” to discuss economic inequality before Congress, will be attempting to address income inequality in America that may likely be as bad, if not worse, than it was after the Gilded Age preceding the Great Depression.

The Secretary of Treasury is the lead go-between for the executive branch and Congress on matters of fiscal policy and budgetary spending. Yellen can be described as a progressive Keynesian, believing that government intervention should be utilized as necessary to restore full employment and demand. She is a stated supporter of broader unemployment benefits and has been characterized in the media as “pro-labor.” As Fed Chair, her monetary policy toolset was limited to interest rate control and quantitative easing – as she navigated the post-crisis period, she maintained low interest rates, encouraging employment but consequently also causing asset price inflation which in many ways exacerbated the inequality issue.

Stepping into her new role, Mrs. Yellen will have a wholly different set of levers to pull. With a second wave of Covid-19 spreading and vaccine rollouts being less successful than forecast, there is a good chance that as part of the follow-on coronavirus relief package to come after Inauguration Day, we see her reinstate the expanded unemployment benefits that expired last summer. She has also come out in favor of fiscal support for state and local governments, a contested view on Capitol Hill. She recognizes these entities as important employers, and notes that if they are not helped, there will be large layoffs and more difficult to solve problems in the future. It is important to remember that state and local governments are required to maintain balanced budgets and cannot raise money selling treasury securities like the federal government, meaning in times of low revenue (e.g., low sales tax revenue, low metro ridership), states and municipalities are required to cut costs (e.g., jobs, subway service). Abroad, she will be central to negotiating America’s position in trade deals, and as a believer in globalization, will likely be a measured, stark contrast to the outgoing administration. Finally, she has stated a desire to leave the system more guarded – the New York Times characterized it as, “putting training wheels on capitalism.” An example is her support for budgetary stabilizers, which would kick in when the economy declined and do not require Congress to vote and pass a fiscal package but would automatically increase unemployment benefits.

Given her background, we expect the Federal Reserve Bank and executive branch to be far more in sync, and for Mrs. Yellen, who has gone on record discussing how recent asset inflation has not carried over to working people, to be instrumental in shaping the country’s fiscal agenda.

Federal Reserve Joins NGFS

Last month, the Federal Reserve officially joined the Network of Central Banks and Supervisors for Greening the Financial System, a collection of central banks meant to exchange ideas and best practices to account for environment and climate risk in the financial sector. The Fed has recently began paying more attention to climate change and can thank former Chair Yellen for being the first Chair to begin examining the impact of broader economic and global issues on the financial sector. In April 2019, Mark Carney, former Governor of Bank of England and Chair of the NGFS, penned an open letter detailing four recommendations from the coalition’s first report seeking to translate commitments into action: (1) integrate monitoring of climate-related financial risks into day-to-day supervisory work, financial stability monitoring, and board risk management, (2) integrate sustainability into central bank portfolio management, (3) collaborate to bridge the data gaps to enhance the assessment of climate-related risks, and (4) build in-house capacity and share knowledge with other stakeholders on management of climate related financial risks. For a myriad of reasons, particularly given our investment strategy, it is both exciting and encouraging that the Federal Reserve is participating in the organization.

Together at the Group of 30, Yellen and Carney wrote that governments should treat climate change and fighting global warming like monetary policy, because both require considerable long-term decisions that can be undermined by short-term partisan pressures. Carney is pushing for all listed companies to report on their exposure to climate risks for by 2023 and substantiated his reasoning in a recent talk at the Dallas Fed. As governor of the BoE, he oversaw the insurance industry and noted that those who oversee property and casualty insurance, in addition to reinsurance, are keenly focused on climate change. Over the past decade they are consistently repricing coverage because, “what was once the tail has become the central scenario in terms of extreme weather events.” He went further to echo a sentiment we share, that it was necessary for the BoE to get involved in climate change because it was prudent responsibility. Ultimately they recommended a change to capital ratios for banks based off who they lent to – banks would be required to maintain greater reserves for lending to brown industries versus green. While on the surface this may seem partisan, it is important to recognize the following – as society slowly starts to more seriously consider these issues, climate policy will be stricter and banks could end up with very large stranded assets. As such, Carney believes that banks need to be stress tested for vulnerabilities associated with climate change in the same way they are tested for exogenous shocks after the 2008 crisis.   


The United States still faces a myriad of threats: the Covid-19 pandemic, a sharp economic downturn, and attacks on its democratic institutions. In 1936, as Roosevelt accepted his party’s nomination in Philadelphia he said, “Governments can err, presidents do make mistakes, but the immortal Dante tells us that divine justice weighs the sins of the cold-blooded and the sins of the warm-hearted in different scales.” It is our belief that recent events have not created an irreversible rupture in the social fabric of this country, and its result will be one of compromise to the exclusion of extremists. Trump’s impeachment process could mark the start of a new era of bipartisan cooperation. Like Roosevelt, the new Democratic president has the opportunity to implement far-reaching reforms through a Green Bipartisan New-New-Deal that will reform the United States infrastructure, increase income distribution and maintain its strategic role in the world for decades to come. Combined with Janet Yellen’s penchant for fighting unemployment and inequality, and the Fed’s increasing posture on climate change, we think that 2021 can be a big year for sustainability and investments that incorporate such thinking. We hope you enjoyed your holiday season; our team is excited for what’s ahead and look forward to you reading our future commentaries.

Sincerely,

The Norbury Partners Team

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