MIKE TOWNSEND: One of the keys to being a good investor is being willing to ask a million questions. When considering any investment, you have to be willing to challenge assumptions, to dig deeper, to find answers for yourself, to ask questions like: Is this company’s growth sustainable? Does that company’s leadership have a long-term plan for expanding its market share? Does this mutual fund’s strategy match my goals, my tolerance for risk, my time horizon?
When it comes to Washington, even the most innocuous of issues spark their own set of questions. What’s the political motivation behind that proposal? Who wins and who loses if that bill passes? Who benefits politically? Can it pass at all in today’s divided Washington?
Answering the investing questions often requires just time, research, and a willingness to dig into the details. Answering the Washington questions, however, is usually much more an art than a science.
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation’s capital and help investors figure out what’s really worth paying attention to.
I’m going to do something a little different for this episode. Over the past six months, I’ve spoken to thousands of investors from across the country in virtual events, from groups as small as 20 to as many as nearly a thousand. And at the end of my presentations, I always leave time for a question-and-answer session. Q and A’s are my favorite part of any presentation—you get this unvarnished insight into what’s on the minds of the audience. I keep track of the questions, because it often helps me realize that I need to pay more attention to a particular issue if I start to get a lot of questions about it.
In today’s episode, I’m going to share with you my thoughts on seven of the most frequently asked questions I have received over the last few months. I think you will find them interesting—and, hopefully, there will be some overlap with some of the questions percolating in your mind.
Let’s begin with what is the most common question I hear from investors—and probably the most common question investors ask in general: What keeps you up at night—what’s your biggest worry?
For me, I often think about what some people refer to as the “unknown unknowns” and the “known unknowns.”
The unknown unknowns are the completely unexpected out-of-the-blue events that can have a market impact—the terrorist attacks of September 11, 2001, come to mind. There may have been intelligence warnings, but it just wasn’t something that most ordinary people could have imagined happening. I worry about the unknown unknowns abstractly—aware that they are out there, but also aware that worrying about them doesn’t make much sense.
On the other hand, the known unknowns are the risks one is generally aware of, but you don’t know the specifics. Investors often point to ominous signs around the world in this category. For me, the biggest uncertainty out there is the U.S. relationship with China.
President Joe Biden took office three months ago facing perhaps the most tense relationship with China in a generation. An initial high-level meeting last month in Alaska between Secretary of State Antony Blinken, National Security Advisor Jake Sullivan, and their Chinese counterparts did not go particularly well.
The list of issues between the two countries has grown long. It ranges from long-running disputes over the trade imbalance and battles over intellectual property and technology transfer issues to high-profile human rights issues, like China’s crackdown last year on Hong Kong and its treatment of the Uyghur people, the Muslim minority in the northwest part of China that is being persecuted by the Chinese government. But the issue that has the biggest potential to upend the relationship, not to mention power dynamics in the Asia-Pacific region, is the threat China poses to Taiwan.
There have been recent signs of saber-rattling by China towards its island neighbor, including the flights of Chinese military planes near Taiwan’s shores. American military experts believe that China is getting closer to being able to invade Taiwan, perhaps within the next five or so years.
U.S. policy toward Taiwan is known by the famously vague term of “strategic ambiguity,” so as not to aggravate China, which considers Taiwan a “rogue territory” that should be reunited with the mainland. Given China’s increased activity, pressure is growing on the Biden administration to be more explicit about how the United States would react if China were to use force against Taiwan
All of that complexity is what makes this the biggest “known unknown” out there. The potential for an even higher escalation of tensions between China and the United States has huge market implications, given the global interconnectedness of today’s markets and China’s critical role in so many areas of investing, including emerging markets, currencies, and commodities.
For the Biden administration, relations between the U.S. and China have been slow to evolve. President Biden spoke with President Xi Jinping in February, but there has been no official announcement of plans for a summit between the two leaders. At the same time, President Biden has been careful not to make any abrupt policy changes toward China, saying that he plans to take time to study the issues and communicate with key allies to present a unified perspective towards China.
It’s definitely the relationship I’ll be watching as it evolves in the months ahead.
For question number two, let’s turn to domestic politics: The infrastructure bill is huge. Is there a chance for bipartisanship if they trim it or break it up?
You’re going to hear a lot of talk about this question over the next few months. Because infrastructure is something both parties can get behind—but it’s all in the packaging and the paying.
President Biden unveiled his $2.25 trillion infrastructure proposal at the end of March—but it’s just that: a proposal. The White House doesn’t write legislation—that’s the job of Congress. So now Congress is at the front end of a long process of turning the president’s proposal into an actual bill. And that’s where the sausage gets made.
The president’s plan, which he’s calling the American Jobs Plan, includes more than $600 billion for what most people consider “traditional” infrastructure—highways and bridges and tunnels and ports and railways. It includes more than $100 billion for water projects, like eliminating lead pipes from the water system; and it includes more than $100 billion to expand broadband, $100 billion for upgrades to the nation’s electrical grid, $200 billion for affordable housing, and $100 billion for public schools. There’s a lot of common ground on those types of initiatives—members of both parties understand that significant investment in the nation’s roads and bridges is long overdue.
But there is less common ground around some of the other elements of the president’s plan, for things like spending on electric vehicles and other climate change initiatives, as well as money for elder care and workforce development. Republicans have questioned whether those kinds of initiatives have any place in an infrastructure bill.
And, of course, there is almost no common ground at all between the two parties when it comes to how to pay for the bill. The president’s plan calls for increasing the corporate tax rate from its current level of 21% to 28%—something Republicans call a non-starter.
Each of the last two Mondays, the president has invited to the White House a bipartisan group of about a dozen members of Congress, from both the House and the Senate, to discuss his infrastructure plan. Democrats call it an honest attempt to find bipartisan agreement. Many Republicans have criticized it as a hollow gesture, certain that Democrats will use the special set of rules know as “budget reconciliation” to pass whatever they want by a simple majority, just as they did in March with the economic stimulus bill.
So, amidst that kind of atmosphere, is there any hope for a bipartisan outcome? Maybe. Last weekend, Senator Christopher Coons, a Democrat from Delaware who is a close ally of President Biden, and Senator John Cornyn, a Republican from Texas, both suggested that a bill that focused on roads and bridges only could bring the two parties together. Cornyn suggested that something in the neighborhood of $800 billion could win broad Republican support.
Coons laid out a scenario in which Congress passes an $800 billion to $1 trillion infrastructure bill with bipartisan support, then uses the budget reconciliation process to pass a second bill without Republican support. That second bill would contain the other elements in the American Jobs Plan, as well as the contents of a another package that the White House is expected to unveil in the next few weeks that focuses on social services, which the White House is calling the American Families Plan.
Could it happen? It sounds plausible. Remember that, at the end of the day, it’s Congress that is going to write this legislation. That process is going to take the next few months, involve a dozen or more committees on both sides of the Capitol, and will likely have numerous stops and starts. There’s still the huge issue of how to pay for even a slimmed-down infrastructure bill, since Republicans probably won’t ever go for the proposed corporate tax increase. And there is no sign yet that the White House would back this strategy.
I’m not saying it’s definitely going to happen, but it makes a lot of sense. Both parties would get a win that would build some goodwill with voters. Next week, President Biden will address a joint session of Congress for the first time since he became president. I expect the infrastructure package will be a central feature of his speech, and I’ll be watching for both what he says and how he says it for clues about whether the bipartisan compromise approach is something he’s open to.
The next couple of questions I want to address are about the implications of the debt and the federal budget deficit. All of the spending over the last 12 months has sent the budget deficit and the national debt soaring. At the end of March, the federal deficit was estimated at $1.7 trillion for the first six months of Fiscal Year 2021, which started on October 1. And the national debt, which is the accumulation of budget deficits, is now north of $28 trillion. For the first time since the end of World War II, the debt has exceeded the size of the entire annual economy.
So question three is: Given the nation’s debt situation, how worried should we be about inflation?
There’s a broad range of views among economists about whether the rising federal deficit accelerates the risk of inflation.
And there’s no denying that concerns about inflation are on the rise. We see it in various sentiment measures, as well as in the demand for TIPS, or Treasury inflation-protected securities, which always attract more interest when inflation fears are increasing.
But the Federal Reserve has been consistent in its messaging that while a modest amount of inflation may be coming, it’s not a big concern.
Testifying last month before the House Financial Services Committee, Fed Chair Jerome Powell said, “We do expect that inflation will move up over the course of this year,” pointing to pent-up demand, supply-chain pressure brought on by the pandemic, and the odd price comparisons to a year ago, when much of the country was in shutdown mode. But he added that “our best view is that the effect on inflation will be neither particularly large nor persistent.”
Last week, the Fed’s newest governor, Christopher Waller, gave his first major interview since his confirmation in December. He stuck to the message as well, saying, “Whatever temporary surge in inflation we see right now is not going to last.” He, too, pointed out that prices fell last March and April as the pandemic-fueled lockdowns settled in, arguing that that has resulted in an artificial bump in inflation.
My Schwab colleague Kathy Jones spoke about inflation last month on this podcast, noting that it’s been well over a decade since we saw inflation over 3%. She has said that she expects inflation to remain tame over the next couple of years because of all the ample excess capacity in the economy, particularly the ongoing relatively high rate of unemployment, which should keep wages from rising much and keep consumption somewhat soft.
But in the two-five year range, the risk of inflation appears to be rising, with a combination of the very easy monetary policy from the Fed and the huge amount of fiscal stimulus put into the economy by Congress over the last year potentially combining to fuel inflation. Even then, we’re not talking about anything approaching 1970s-style inflation
The other question I always get about the deficit is whether anyone in Washington actually cares about the deficit anymore, and if they do, how will they ever get it under control?
This is an interesting question that always takes me back to the beginning of my Washington career in the 1990s. I was working on Capitol Hill, and the national debt was less than $5 trillion. At the time, that was considered a preposterous sum and there was genuine concern about whether the path of increasing debt was sustainable. As the figure continued to increase, I often heard people say, “Well, Congress will never let it get to $10 trillion—they’ll have to do something about it before then.” And then it was $12 trillion, and then $15 trillion, and then you started to hear less about it. There were always so-called “deficit hawks,” who railed in speeches on the House and Senate floor about the out-of-control debt. But in recent years, those voices have been far quieter.
Today, there doesn’t seem to be much pressure on our elected officials to keep spending under control. Just in the last year, Congress has spent about $5 trillion on economic stimulus and coronavirus response packages, very little of which was offset by any revenue-raising provisions.
Part of the reason there isn’t much pressure, I believe, is that the average American doesn’t understand why the size of the debt should matter to them. $28 trillion is an unfathomable number that sounds almost made up. As a result, there just isn’t that much outrage among voters about it. Members of Congress don’t find their phones ringing off the hook with people complaining about the debt. Protestors are not marching on the Capitol about the debt. It’s hard for people to point to some specific impact the debt is having on their individual lives.
The other issue is a political one. It’s easy for an elected official to say they are against budget deficits but addressing them is politically tricky. There aren’t a lot of choices for balancing a budget and, politically speaking, the choices are all bad: You have to either bring in more money or tighten the purse strings, or both. For a politician, of course, that means raising taxes or cutting government spending—and those are really difficult votes to cast. Voters don’t generally reward politicians who vote to raise their taxes, and voters don’t generally reward politicians who vote to cut their favorite government program. That’s why it’s easy to be generally for the concept of balancing the budget, but much harder to actually take the steps to do so.
We’re going to see this issue play out in a very public way in Washington soon. Congress is required to set a limit on the amount of debt the country can accumulate—it’s known as the debt ceiling, or the debt limit. In 2019, Congress temporarily suspended the debt ceiling, meaning that there is currently no cap on the amount of debt the country can have. But that temporary suspension ends on August 1.
When the debt ceiling comes back on August 1, we’ll be automatically at that cap—and that means the clock will start ticking for Congress to either raise the debt ceiling to a new number, say, $30 trillion, or agree to another temporary suspension. If Congress doesn’t do so, the country could default on its debts, something that has never happened in U.S. history—and that could produce a major market reaction.
Starting August 1, the Treasury Department can make some temporary moves to delay the default date for a little while, perhaps a few months. But eventually, sometime this fall, Congress is going to have to either raise or suspend the debt ceiling. And while that debate will undoubtedly involve a lot of hand-wringing over why no one believes in fiscal responsibility anymore, in the end there is just no alternative for Congress but to increase the debt limit. There is no instant fix to lower the amount of debt, and the choices for doing so are just too politically difficult right now, especially when the economy is still fragile.
As broad a concern as the debt and deficit issue is, this next topic is much more specific, but it generates a lot of questions—and that’s the cryptocurrency craze. So let’s start with question five: Do I think cryptocurrency ever becomes a mainstream investment?
Well, the answer to that question may lie with Gary Gensler, who was sworn in last weekend as the new chairman of the SEC. As we’ve discussed on this podcast recently, Gensler started his career with Goldman Sachs, then worked in Washington, serving in the Treasury Department during the Clinton administration and as chair of the Commodity Futures Trading Commission, or CFTC, during the Obama administration.
Since leaving the CFTC, Gensler has been a professor at MIT’s Sloan School of Management, where his academic focus has been on cryptocurrency, blockchain, and digital finance issues. For that reason, his arrival at the SEC has been eagerly anticipated by cryptocurrency enthusiasts, who hope that he will bring his knowledge of the crypto space to sensible regulation. Interestingly, Gensler was confirmed by the Senate on the same day last week as Coinbase, the cryptocurrency exchange, became a publicly traded company. For those hoping to move cryptocurrency forward, that may look like a sign that the stars have aligned this time.
The SEC in recent years has, at times, been openly hostile to cryptocurrency, issuing strongly worded investor alerts that warn investors about the risks of fraudulent cryptocurrency-related scams.
But it is widely expected that the SEC under Gensler’s leadership will take steps toward more regulation of cryptocurrency. The first opportunity to do that may come in the next few months as the SEC considers whether to approve the country’s first Bitcoin exchange-traded fund. There are at least eight different asset managers who have submitted an application to launch a Bitcoin ETF. Approval by the SEC would give a kind of stamp of legitimacy to the industry and likely open up a path to investing in Bitcoin for a much broader pool of investors.
Even so, cryptocurrency remains an extremely volatile investment, with high risk of financial loss, a significant risk of fraud, and an uncertain future from a regulatory standpoint.
There’s a related question about cryptocurrency that’s also an interesting one—will cryptocurrency every become a truly global currency? Right now, it’s hard to imagine using Bitcoin, or some other cryptocurrency, to buy a cup of coffee or a few groceries. Apparently, you can buy a Tesla with Bitcoin, but it’s just not very commonly used as an actual currency.
My colleagues Rob Williams and Randy Frederick recently wrote that “for a currency to be viable, it usually requires three characteristics:
first, that it can be used as an inexpensive and reliable medium of exchange; second, that it can be a unit of account; and
three, that it can be a store of value and legal tender honored as a means of payment.”
They point out that right now, cryptocurrencies are so volatile that they have limited use as a means of exchange or a store of value. Indeed, while cryptocurrencies have a market price, they have no inherent value other than scarcity and the value that comes from the trading itself.
There are other concerns as well. Proponents argue that the fact that cryptocurrencies have no central oversight is one of the core elements of its appeal, that it is free from governmental control. But that has also made cryptocurrencies susceptible for being used for illicit activities, which could hurt their appeal as a mainstream currency. There are also concerns about the environmental impact, since it takes enormous amounts of energy to produce or “mine” a cryptocurrency.
We are entering a fascinating period in the short history of cryptocurrencies, with more scrutiny likely by global regulatory agencies in the months ahead. How cryptocurrency emerges from that scrutiny will go a long way to answering both questions. But right now, it looks more likely that cryptocurrency will gain more legitimacy as an investment than it will as a currency.
Well, let’s wrap up with one final frequently asked question: Will Democrats get rid of the filibuster in the Senate?
Perhaps the better question is can the Democrats get rid of the filibuster? But let’s back up a minute and provide a little context for what has become one of the most polarizing issues in Washington today.
The filibuster has its roots in ancient Rome, but it’s not part of the U.S. Constitution. Rather, it’s part of the rules of the Senate itself, with generations of senators arguing that the right to unlimited debate was a core feature of the institution. From the beginning of the Senate in 1789 through the 1800s, there were no rules in place by which the Senate could end debate and move forward on a piece of legislation.
It was not until 1917, at the urging of President Woodrow Wilson, that the Senate finally changed its rules to allow a vote to end debate, known as “cloture.” It required a vote of two-thirds of the Senate to end debate—a bar so high that it was only invoked five times over the next four decades. In the 1960s, southern senators filibustered several civil rights bills, until the Senate was finally able to get enough votes in 1964 to pass the Civil Rights Act. In 1975, the bar was lowered to three-fifths of the Senate, or 60 votes.
In the decades since, the notion of a filibuster as a senator or a group of senators talking non-stop for hours and refusing to give up the floor has all but disappeared. It still happens occasionally, but for the most part, all legislation that moves through the Senate is subject to a counting of heads—and if there are 41 senators threatening to oppose it, then the legislation is basically dead. Those senators don’t even have to actually filibuster—just the threat is usually enough to kill the bill.
No further changes were made to the rules until 2013, when Democrats invoked the so-called “nuclear option” by changing the Senate rules to prohibit filibusters of Cabinet nominees and federal court nominees, with the exception of Supreme Court nominees, meaning that those nominees could be confirmed with only a simple majority vote. In 2017, the Republicans countered by expanding the prohibition to include Supreme Court nominees.
Today, with the Senate bitterly divided and often hopelessly deadlocked, it’s said in Washington that the Senate is where all bills go to die. That situation has given momentum to those who advocate for Democrats to use their majority to change Senate rules to end the filibuster on all legislation. Doing so, advocates say, would allow the Senate to improve its functionality. And, of course, it would allow the party in the majority—the Democrats, at the moment—to have relatively free rein to pass its priorities. In today’s conversation, that’s where you hear discussion not only of sweeping health care legislation and other progressive priorities, but also structural changes, like adding the District of Columbia or Puerto Rico as the 51st state or expanding the size of the Supreme Court.
But with the Senate tied at 50-50, the only way for any of that to happen is for every single Democratic senator to vote for eliminating the filibuster and for Vice President Kamala Harris to break the tie.
Which brings us to the real question: Can the Democrats change the rules? Well, they can … but only in theory. At the moment, at least two Democratic senators, Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, are publicly opposed to eliminating the filibuster. Manchin, in fact, wrote an op-ed piece in The Washington Post earlier this month with the title “I Will Not vote to Eliminate or Weaken the Filibuster,” which makes his view pretty clear. Unless Manchin and Sinema change their view, just based on the numbers, eliminating the filibuster is off the table for now.
Well, that’s all for this week’s episode of WashingtonWise Investor. I’ll be back in two weeks, so please take a moment now to follow the show in your listening app so you don’t miss an episode. And if you like what you’ve heard, leave us a rating or a review—that really helps new listeners discover the show.
For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.