Pro Perspectives 1/5/21

January 5, 2021

As we discussed yesterday, a democrat sweep in today’s Georgia Senate race would likely lead to a multi-trillion dollar government spend on a clean energy plan, under a Biden presidency and aligned Congress.

That’s the bet being placed today across financial markets. A big government spend would add even more fuel to the asset price fire, putting “inflation risk” (and maybe hot inflation) in the crosshairs.

With that “hot inflation” scenario in play, commodities are up big today. The dollar is down. And rates are on the move, up.

The 10-year yield will be the spot to watch in the first half of the year as the market begins to project this scenario where the Fed, for the first time in a long time, will be caught behind the curve on inflation.

But despite the big move in gold yesterday, and the despite the follow through today of this 2021 inflation theme, I suspect we can take very little information from the first two trading days of the year, at this point. That is, unless tomorrow’s joint session of Congress produces no drama. Every indication points to the opposite.

Yet, with a VIX today at 25, the markets continue to underprice the risk of chaos surrounding the Electoral College count tomorrow.

The likely scenario is for the session to play out beyond tomorrow (to follow objection procedures), with the potential that the six states that sent competing slates of delegates be asked to clarify which should be counted (which could open the door to a special session in those states and an investigation). Bottom line, it’s unlikely to be a quick and tidy stamp for Biden. Markets won’t like that, and we should see “risk off.” Perhaps the market that has been giving us that signal the clearest, since election day: Bitcoin.