For weeks Congress wrestled with the details of two bills:

1. $1.2 trillion on "hard" infrastructure - roads, bridges, electrical grid, national high speed internet access

2. $1.75 trillion on "soft" infrastructure - child tax credit, childcare funding, universal pre-K, climate change mitigation, low income housing construction

The "hard" Infrastructure Investment and Jobs Act passed the Senate in August and passed the house this past Friday evening.

Details of the "soft" infrastructure plan, known as the "Build Back Better" bill are still under negotiation. There is only a 50/50 chance this bill will go through given continued opposition from Democratic Senators Joseph Manchin and Kyrsten Sinema.

Given that no Republican senator will vote for this bill, all 50 Democratic senators have to vote "yes," with the tie breaking vote provided by Vice President Kamala Harris.

On Monday, we hosted a 15 minute seminar to discuss these bills and other topics related to the economy, interest rates, stock and bond markets.

Webinar Replay

https://youtu.be/UbbTYp8yEe4

Transcript is below:

Hard Infrastructure

On Friday night at 11:30 PM, Congress voted in the Infrastructure Investment and Jobs Act of 2021. This is a bill that received bipartisan Republican and Democratic support as early as August. But it took until November 5th for that bill to pass.

 Why? As usual, it has to do with politics. The first bill we’re talking about tonight is what I call the “hard infrastructure bill”: $1.2 trillion for traditional infrastructure. There’s $110 billion for roads and bridges, $39 billion for mass-transit railroads, $65 billion to upgrade internet access for the whole country. Going back to the 1940s, many parts of America still did not have electricity. Thanks to the Rural Electrification Act of 1936, every American eventually gained access to electricity. Now here we are, 70 years later, and every American needs access to the internet.

 The new bill also sends $17 billion to our ports. We all know that ports are clogged right now. We know that airports are terrible right now. A couple years ago, I flew out of La Guardia, a third-world airport, into Mexico, a first-world airport. So, we’re spending $25 billion on airports.

 Rebuilding the electrical grid. It’s not enough to put windmills and turbines and solar panels across the country to generate clean energy: you need a system for transferring that electricity. So, we’ve got $65 billion for electricity. Then lastly, $55 billion to upgrade water facilities. We all know a lot of communities in this country drink lead-tainted water, and that’s poisonous, so hopefully this bill will clean that up.

 It was pretty easy for Republicans and Democrats to agree to spend $1.2 trillion. It sounds like a lot, but it’s really not a lot to address 20 years of deferred maintenance in the United States.

 

Soft Infrastructure

There’s a second bill. I call it the “soft infrastructure bill,” officially known as the “Build Back Better Act.” This bill does not have bipartisan support, it only has Democratic support. The reason why is because soft infrastructure is not traditional infrastructure. But if you’re a small businessperson, the number one complaint you have is about getting qualified employees at a reasonable wage. This bill is about helping average Americans become better paid and better qualified.

 Right off the bat, the bill has $400 billion for universal pre-K and childcare subsidies. If I’m a mom or a dad and I’m stuck at home with a two-year-old, I can’t go out and work. But if I get good childcare, or if I can get my child into pre-K, now they’re in school six hours a day at an early age. Now, I can start working again.

 Then, there’s $200 billion in this Build Back Better Act to continue the child tax credit, which works out to about $300 per month per child for 35 million families in this country. This is not an issue that affects the people watching this webinar, but many families live hand to mouth, paycheck to paycheck. $300 a month is all it takes to lift most children out of poverty.

 As we know from the hurricanes, storms, forest fires, and droughts we witnessed this year, climate change is real. $555 billion in this bill is going to address climate change and create clean energy options. There are people who still believe in coal. But with each passing year, green energy gets cheaper, and more and more likely to replace fossil energy. That’s a good thing.

 Then, another $130 billion to enable average Americans to keep buying their health insurance through the Affordable Care Act.

 Lastly, $150 billion for affordable housing. These are all things that most Americans — 75%, according to polls — would really like to have. The problem is, there are two Democratic Senators — Joe Manchin of West Virginia and Kyrsten Sinema of Arizona — who object to this bill for a couple of reasons.

 Manchin is concerned about the cost. He’s concerned that sending an extra $1.75 trillion on top of $1.2 trillion is going to expand the deficit. My answer is, well, in the last administration, the deficit grew by $7 trillion, mostly due to the tax cuts of 2017. That money mostly went to corporations and wealthy individuals — I’m not talking about 1 percenters, I’m talking about 0.1 percenters. Average Americans got none of that $7 trillion.

 We just ended the war in Afghanistan after two miserable decades. The total cost of that war was $2 trillion. We got nothing out of that, nothing at all, and it added to the deficit as well. My response, as a taxpayer, a voter, and an American, is that I’d like to see some nation-building done here. I’d like to have infrastructure in the United States that looks as good as places like China, South Korea, or Singapore.

Right now, it’s uncertain whether the Build Back Better Act will go through. Congress is on recess this week, so nothing going on until next week. Then, once you get past December and into January, you’re into full congressional elections for 2022 and it’s very hard to get a significant bill through at that point. So, it’s kind of a now-or-never moment on a bill I think would significantly improve things for a lot of average Americans — not to mention pump a lot of money into the economy, which ultimately pumps up the stock market.

Why can’t D.C. politicians work for the average American instead of attacking each other? It’s been a long stretch. I’m not going to get into who’s at fault at this point in time. I think everyone is aware of the situation. But if you have a political party that wants to spend money and accomplish things on the one hand, and a political party that wants to not spend money and break things, well, we’re stuck.

Pandemic

Let’s talk about the pandemic a little bit. Already, almost 800,000 Americans have died. That’s 1 in every 500 Americans. There is some good news — at least here in New York City, it’s not something most people worry about. They take precautions, they wear their masks, they’ve had their vaccinations, and case and mortality rates are way down. In New York state, most of the mortality took place during the first six months of the pandemic when we were completely caught off-guard. Texas and Florida now have more deaths in their populations than New York state.

 On one hand, New York, Texas, and Florida all have about the same population, so it’s not surprising that their overall mortality would be about the same. But what is surprising is that in Texas and Florida, most of the mortality has been within the last six months — after we knew about the disease, after we had protective measures, after we had vaccines. That is just a mind-boggling fact.

 

It’s almost like Gov. Greg Abbott of Texas and Gov. Ron DeSantis of Florida deliberately murdered their own voters just to make a political point. I do not know what can be done to fix that. I’ve never, ever in my life seen anything as stupid as the argument over vaccinations. People don’t have a right to drive drunk, and they shouldn’t have a right to go around unvaccinated. But they do. It’s a “personal freedom.”

 

At the end of 2022, we’ll have a million American dead and shrug. We’ll be getting booster shots for the rest of our lives, because this thing will be around and mutate. It’ll be like the flu.

 

The Economy

 About 18 months ago — March, April, May 2020 — things looked pretty bleak.  In three months, the stock market plummeted 35%. But by summer, investors realized that COVID kills people but leaves companies alone. Not every company survived. But the ones that did actually thrived. It only took until this most recent quarter for the US economy to regain all of the economic GDP that it lost during the summer of 2020. It only took 10 months for the unemployment rate to get down to 4.6%, roughly where it was before the pandemic started.

 But what we’re missing right now are 7 million people that were working previously.

 

We’ve got a 4.6% unemployment rate, but 7 million people have stopped looking for work. Where did they go? Well, nearly 1 million people died. They weren’t all working people, but maybe half of them were. A lot of people have gone on permanent disability, they’re not coming back to the workforce. A lot of people retired early, and maybe they’ll come back to the workforce later. Lastly, there are millions of parents that are stuck at home, dealing with children or elderly parents, and they’re afraid to go back to work.

 The job situation is a puzzle right now. On one hand, there is the potential to regain 5 million jobs, and we added another 500,000 last Friday. That’s good. But on the other hand, there’s an enormous deficit of qualified talent. I’m not talking about talent for working at investment banks, I’m asking about talent for running restaurants, auto repair shops, and for working at Walmart this Christmas. Truck drivers, you can’t get truck drivers right now. You can’t get people to unload all the boxcars that are piled up in the port of Los Angeles. In the old days, when you worked in a port, you carried a sack of grain on your back. These days, you operate a crane that picks up a 20-ton container and drops it onto a truck. That’s a skilled job.

 The easiest way to address that issue is for employers to raise wages above the minimum wage, which in most of the country is $10-$15/hr. You can’t do much with $10-$15/hr. The other thing you can do is spend some money on vocational training, which is part of the Build Back Better Act. The best way to resolve the problem that employers have is to get people childcare, healthcare, and training, and boost their wages a little bit.

 Some people have said, “David, if you do that, certain businesses will fail because they won’t be able to afford their workforce.” My answer is, “If your business only survives on minimum wage people, then you don’t really have a business.” I don’t think we need to obsess too much over whether those businesses survive or not.

 Inflation

 The other topic that has people more worried than COVID right now is inflation. Over the last 20 years, inflation has averaged about 1.9% per year. In the last 10 years, it averaged about 2.1% per year. Last year, it was pretty much unchanged; this year, it’s jumped up 5.9%. People are very frantic and upset that prices have gone up.

 

I tell my clients, you have to imagine the US economy like a FedEx 18-wheeler barreling down the highway at midnight, 85 miles per hour. All of a sudden, a deer jumps out and the driver slams on the brakes and the packages pile up in the front. Then the deer goes on and the driver nails the accelerator, and all the packages go slamming back the other way. When the driver gets to his or her destination and opens the back of the truck, all the packages are in a giant jumble.

 That’s the situation across the planet right now. If you want to buy a new car, you have to wait a long time. If you want to buy a new computer, you have to wait because the chips that power the computers are in short supply. The reason they’re in short supply is because the factories that produce the chips had to close down sporadically over the last 12 months when the factory workers got COVID. When the chips finally got produced, they get to a port in China or Singapore, but there’s no boat to put the chips on. The boat finally starts to move, but then the Suez Canal was blocked for two weeks.

 There are products being shipped from overseas right now designed for the Christmas market that won’t get here until March.

 Again, you look back to the infrastructure bills, and a good chunk of it is being spent in ports to make them more automated, to raise their capacity, increase their volume, operate 24 hours a day. These are all problems, but they’re solvable with time and money, time and money. You can’t get past physics. You can only build things so fast. But with time and money, you can do it.

 

Stocks

 If you’d been a betting person last March, you would’ve said, “Yeah, stocks are going to plummet 50% and then plummet another 50% before this COVID thing is all over.” But as we’ve constantly reminded our viewers, the stock market only cares about three things:

1. Revenues

2. Earnings to profits

3. Interest rates

 Inflation is something to be concerned about now, but let’s see what inflation is doing next year after all these bottlenecks and supply shortages are resolved, and after we get chip factories back up to full capacity. What we’re seeing is that, when you juice the economy with another $1.2 trillion or $2 trillion, that’s a lot of new demand, and that’s going to create a lot of revenues, earnings, and profits for the stock market — which as a result is at an all-time high.

 You might say, “How much longer can it stay at an all-time high?” It can go for a while because we’re not talking about expenditures of the next year. We’re talking about the expenditures of the next 10 years. Whereas after the 2008/2009 recession it took a full decade before the US economy got back to full capacity, we could be at full capacity within a year or two. That’s good news for families, good news for companies, and good news for the stock market.

 

Q&A

 Do you think the Fed will continue to stimulate the bond market, as it has throughout the pandemic?

 

The Fed has two purposes:

1. Promote economic growth with moderate inflation

2. Promote full employment

 The employment situation looks good right now, so that would push the Fed to be less accommodative. The inflation situation doesn’t look so good, so that would push the Fed to raise interest rates faster. That’s the bad news. The good news is that the Fed is aware of all the same factors that I’m aware of, and they’re taking a wait-and-see approach. They’ve shifted to neutral on fiscal policy for the time being and I don’t think they’re going to make any decisions about raising rates in a significant way until Q2 of next year. Then they’ll see. If inflation dies down, if job growth remains reasonable, they might accommodate neutral for longer.

 

How do you think the infrastructure bill will impact the municipal bond market?

 If I were a state or municipality with capacity to borrow — because you need to have tax revenues to support borrowing — I’d borrow as much money as I could right now. Borrowing is not going to be any cheaper for the rest of our lives. As an investor, the last thing I would buy right now is municipal bonds. The returns are so minuscule, even adjusted for taxes. I think corporate bonds and junk bonds offer a lot more return for the same amount of risk.

 

Do you see any significant changes coming with regard to the Tax Code?

 

Earlier this fall, I spent a lot of time wondering about the US Tax Code. I wondered if the capital gains rate would go up. I wondered if the marginal income tax rate would go up for high-earning Americans. I wondered if the estate exemption, which is currently $11.3 million per person, $22.6 million per couple, would be cut back to 2017 levels — about $6.6 million per person, $13.2 million per couple.

None of that seems likely to get into the Build Back Better Act. The reason is because tax policy is incredibly complicated. There are many vested interests. There are so many people, so many lobbyists opposing changes to the Tax Code, and they’re just running out of time.

There was the proposal to tax billionaires — billionaires only — on the annual appreciation in their investments. If you’re somebody like Elon Musk, you don’t pay taxes at all. How is that possible? Well, when you have $225 billion in Tesla stock, you don’t need to sell it, you just borrow money against your Tesla stock, so you never need to pay taxes at all.

 

When I saw Richard Branson and Jeff Bezos spending $100 million each to fly into space for eight minutes, I said to myself, “We definitely need a billionaires tax.”  $100 million is the cost of two high schools.  If billonaires can be that frivolous as to spend $100 million for a joy ride, well then they can afford to build a couple of high schools as well.

 

One more on taxes. For our New Jersey and New York residents, do you think SALT cap gets raised, state or local?

In the most recent draft of the soft Build Back Better Act, they were going to increase the cap from $10,000 a year to about $75,000 a year.  The problem is that you have to make a bill like this revenue neutral. If you’re cutting taxes here, then you have to raise taxes somewhere else.  Overall I expect minimal changes to the Tax Code.

 

Will much money be spent updating roads and bridges?

Yes. 20% of the roads in the US are in poor condition. If you remember history, there weren’t any significant roads in the US until after World War II. The most significat was Route 1 from Boston to Miami.  General Dwight D. Eisenhower was very impressed by the state of the German Autobahn, which allowed the Germans to move troops very rapidly back and forth. So, when he became President in 1952, he passed the Interstate Highway Act. Enacted in 1956. Over the next 50 years, we spread interstates north and south, east and west, creating an amazing grid. Those highways enabled an incredible postwar expansion of the US economy.

But now parts of the Interstate system are 65 years old, and a lot of those highways are wearing out. That slows down commerce, puts incredible wear and tear on trucks, and it’s dangerous. You need a plan at the Federal level to fix it. Hopefully we’ll have fewer bridges that fall down and better roads.