As a new administration took power in Washington this week, investors weighed new opportunities as well as new risks.
The Biden administration promises to undo much of the policy agenda President Donald Trump had implemented. However, those expecting a new era in American politics are likely to be disappointed – or relieved, depending on their perspective.
Joe Biden is anything but new or transformational. He seems to view his mandate as that of reassembling the Obama-Biden administration for a third term.
Obama’s Federal Reserve Chair Janet Yellen is among the familiar faces Biden has picked to populate his cabinet. Yellen will take the helm as Treasury Secretary.
She testified before the U.S. Senate remotely ahead of the inauguration and urged lawmakers to commit to more fiscal stimulus.
Janet Yellen: Without further action, we risk a longer and more painful recession now and longer-term scarring of the economy later. Neither the President-Elect nor I proposed this relief package without an appreciation for the country's debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run I believe the benefits will far outweigh the costs.
The government’s ability to borrow at low interest rates may seem limitless given the Fed’s unlimited capacity to buy Treasuries. But that doesn’t mean there aren’t costs and dangers involved. Chief among them is a decline in the value and global credibility of the U.S. dollar.
Inflation risks appear to be rising at the same time as the threat of higher taxes looms.
If Janet Yellen and Joe Biden get their way with Congress, then trillions of dollars in new taxes on businesses and investors could be coming down the pike. Yellen wants the Trump tax cuts repealed, which would revert the U.S. corporate tax rate to one of the highest in the developed world.
When pressed by GOP Senator Mike Crapo, Yellen said she would push for a globally coordinated tax hike through the Organization for Economic Cooperation and Development. She decried the “global race to the bottom on corporate taxation” that makes other countries more attractive for capital investment.
Apparently, she thinks higher taxes wouldn’t deter economic activity if only everyone else adopted them too.
Also in Yellen’s crosshairs is cryptocurrency. The former central banker urged Congress to "curtail" the use of Bitcoin. She falsely claimed that its primary use is for “illicit financing.”
In fact, Bitcoin is held mainly as an alternative store of value by investors and speculators. Their purpose in acquiring it is for expected price appreciation – an entirely legal objective.
Unfortunately for Bitcoin holders, Yellen’s remarks contributed to a sharp selloff in cryptocurrency markets this week. Over $100 billion in total market value was erased.
Meanwhile, another alternative asset class – precious metals – fared much better although they are taking a bit of a hit here at the end of the week.
Metals markets appear to be well positioned to benefit from the policies of the Democrat administration and the nonpartisan Fed.
For now, precious metals, unlike cryptocurrencies, aren’t being singled out for more regulations and restrictions. In an environment where the monetary authorities not only DON’T view inflation as a problem – but actively seek to generate higher rates of price increases in the economy – rising gold and silver prices are completely compatible with their objectives.
At some point that may change if gold and silver price spikes begin to reflect too negatively on the standing of the U.S. dollar on the global stage. For now, though, a weak dollar policy is in force as Washington favors stimulus over all other concerns.
Stimulus measures which President Donald Trump himself supported will have a much better chance of passing an evenly divided Senate than a Biden tax hike package. Current political realities all point to more borrowing, more money printing, and more inflationary fuel for precious metals markets.