Eric Cantor: The level of indebtedness in the US is beginning to impact more people as we see an increase in interest rates. In the federal budget, interest expenses have gone up 35% this year.
If nothing is done, then in 10 years the taxpayer will be paying more to cover the interest costs than they will be to cover the expense of the Department of Defense.
Policymakers are slowly beginning to come to the realisation that something needs to be done about that, although, as we know, in Washington that's easier said than done.
We'll see how the experience in Washington plays out as some strategic mile-marks have to be met in terms of the debt ceiling over the next several weeks, if not months – which will be impactful for investment teams at insurers looking to allocate capital.
Eric: In a divided Washington, there is very little expectation that much will be done on the legislative front. The best we can hope for is to avoid trouble. This means that, in the context of a potential debt ceiling increase, there’s no default on the federal debt and not another government shutdown.
I don't think that there will be a lot of accomplishments that the administration will be able to point to given the partisan divide – and not just in Washington but across the country.
From an investor standpoint, there are three areas to watch: first, is the regulatory arena. This administration, not unlike others that have faced a divided Congress, is turning to the regulatory powers because it's so difficult to see any legislative progress in changing the law.
"When you're an investor looking for the trend, we can assume there will be increasing costs incurred by businesses across the economy."
We have seen a hyper-regulatory state under the Biden. You look to regulatory bodies such as the Securities Exchange Commission (SEC), the Federal Trade Commission (FTC) at the Department Of Justice (DOJ), and the others, and see that they are very ambitious with their programmes. We saw the SEC announce new rules on stock buybacks, which are open for comments now.
We've seen increasing requirements for disclosures in the area of human capital as well as climate. All of these bear on the cost of doing business, and so when you're an investor looking for the trend, we can assume that, under this administration, there will be increasing costs incurred by businesses across the economy.
Second, from the Mergers and Acquisitions (M&A) view, we are focused on what's happening at the FTC and the DOJ, because we've seen a new and unconventional approach to antitrust law. The courts will increasingly be faced with the question of whether executive branch agencies have exceeded their statutory authority in this area.
The third area to watch over the next few years will be a significant shift in the tax environment. The so-called “Trump tax cuts” of 2017 will face expiration in 2025. That means, in federal budget terms, about a $2.7 trillion fiscal cliff that will impact all taxpayers; rates are going to go up, and exemptions are going to be taken away unless Congress acts.
We're already beginning to see, on the business front, the reduction in the ability to immediately expense Capital Expenditures. This will negatively impact the rate of growth in our economy.
As an institutional investor, one would see this as a less beneficial environment for particular companies they might be looking at. There could be heightened scrutiny on investment decisions and allocation of capital in the new environment, come 18 months from now.
Eric: The most serious geopolitical risk that we face, both at the US federal level and with private sector actors and investors, is the tension around China. Even when compared to the Russia/Ukraine situation, the thematic of China and its hegemonic aspirations is beneath the surface.
Increasingly, we’re seeing these tensions play out in the domestic political agenda in the US. The ’administration doesn’t have a lot of room to engage in diplomacy – and, increasingly, we're seeing a more strident anti-China political agenda by both Republicans and Democrats.
"The policies undertaken in Washington are trying to ensure we're not over-reliant on powers and countries that aren't looking out for our best interests."
The National Security Adviser, Jake Sullivan, gave a speech earlier this year in which he laid out a robust policy vis-à-vis Beijing, which was very focused on making sure that the national security of the US is paramount. This will play out from an investing standpoint, in that if there are any industries that bear on national security concerns by America then we're going to see a decoupling between the US and China.
An offshoot of that is the situation we're seeing now with onshoring or friend-shoring trends. This comes in a post-pandemic world where people have seen the overreliance we have on China for some strategic supply lines. Increasingly, the policies undertaken in Washington and allied countries are trying to ensure we're not over-reliant on powers and countries that aren't looking out for our best interests.
Eric: The most immediate public policy impact in terms of the investment environment has to be this tremendous amount of cash and liquidity injected into the economy due to the legislative agenda of the Biden administration.
Remember, this was a unilateral legislative agenda in the last Congress, which was primarily focused on the Inflation Reduction Act (IRA) bill that provided subsidies in the area of electric vehicles and trying to push the US forward on energy transition.
We also saw the CHIPS and Science Act, which was another bill with a large amount of subsidy that goes toward the semiconductor industry and to enhance the incentives for manufacturing in the US.
"If there is a change in administration, we can expect a wholesale 180-degree
turnaround in terms of the regulatory posture."
Then thirdly, we had the passage of the Infrastructure Bill, which means half a trillion dollars of new money is coming out of Washington and providing subsidy to industry.
So, in the short term, we’re seeing a lot of clients and industry players looking toward those subsidies to promote private sector investment.
If there is a change in administration, we can expect a wholesale 180-degree turnaround in terms of the regulatory posture. We have seen this happen since the Bush administration, into the Obama administration, into the Trump administration, and into the Biden administration. Every time there's a change of party in the White House, things are turned around 180 degrees on the regulatory front.
What will be interesting to watch is whether a Republican-controlled Congress – if allied with a Republican-controlled White House – will begin to undo via statutory change some of the subsidies and legislative policies that have been enacted under a Biden presidency.
We'll have to see how the election plays out, but that could have an extreme impact, given all of the trillions of dollars that will be flowing into the economy. The Republican Congress just demonstrated in the passage of the latest debt ceiling bill that it is willing to undo a lot of the incentives towards energy transition.
Eric: Insurance regulation takes place at the state level, and anytime we try and introduce federal meddling into a regime that has proven the test of time, there are warning flags.
There is a lot of uncertainty in the capital markets today, given the monetary policy that's being pursued by Jay Powell and the Federal Reserve. There’s uncertainty regarding the regulatory structure of regional banks and banking as a whole, so state regulators are probably watching with an eye toward a priority of stability.
