Patrick Welton

Dr. Patrick Welton Founder and Chief Investment Officer

For macroeconomic investors the passage of this bill is a watershed event, but its implications for what comes next are likely even more consequential.

The new $1.9T economic relief package that was passed by Congress this week and signed into law yesterday, is without question the most ambitious anti-poverty agenda in a generation. Economists estimate that low- and moderate-income Americans will benefit the most from this aid, especially individuals earning $75,000 or less and couples earning $150,000 or less. The number of Americans living in poverty is predicted to drop in 2021 by as much as a third because of this legislation. Consumer spending implications are direct and strong.

The legislation also has plenty of features for the middle class ranging from direct stimulus, to tax benefits, to reductions in healthcare costs that will likely boost spending from this critical demographic over time. When one combines this direct stimulus package with the pent-up consumer demand from middle class families looking to travel, dine out and shop, brighter days should be ahead.

For investors, choreography is always important to notice. At the same time the relief package was taking shape over the past few months, the Federal Reserve was telegraphing quite consistently that they would continue to maintain their easing conditions for some time to come.

Stimulus at extraordinary scale

It is hard to overstate the unprecedented scale of this combination of fiscal and central bank monetary support. As I have stated recently elsewhere, these two actions will trigger flows of capital on such a vast scale that there really is no comparison in the modern era. In WW II, there were very different conditions most notably demand destruction from the depression and direct capital stock destruction from the war itself.

We expect the knock-on effects of these joint stimuli to unfold amid the backdrop of an improving global economy for the remainder of 2021 and well into 2022.

Clear signaling guided the markets

In terms of market effects from the $1.9T stimulus, the markets had already priced in not just the anticipated passage of the legislation but its component pieces as well. The Biden Administration telegraphed what was in the bill as it took shape, and the legislative outcome was fully in line with those expectations.

The more interesting question is, therefore, what can we extrapolate as investors from the passage of this bill in terms of other aspects of the Biden legislative agenda? Specifically, what will this mean for the capital markets?

What’s ahead? Build Back Better will produce foreseeable macro impacts of their own

For starters, markets now know that the President and Congress can successfully navigate a divided Senate, and investors will likely forecast a similar credibility onto the passage of future legislation. We would expect there to be less uncertainty discounting by the market when it comes to other aspects of the Administration’s agenda, at least in the near-term.

More specifically, the biggest new driver of expectation is a large Build Back Better infrastructure bill. This has at least three major long-term implications for investors.

a) Traditional and Partially Factored

We and others anticipate a number of traditionally related macroeconomic adjustments in the capital markets. These include pressure on long-term interest rates; the stimulation of risk-on behavior in equity markets; shifting market forces towards infrastructure sensitive sectors; and further support of the nascent rise in commodity prices, particularly industrial metals. Because these can be logically anticipated, they are to some degree already reflected in investor positioning.

We further anticipate the opening gambit of a novel central bank policy role. This may be declared or undeclared but a powerful new factor nonetheless. If the Build Back Better legislation lands anywhere in the ranges under discussion or whisper levels of between 10-25% of US GDP, then its funding will require fully supported integration with the Fed. There is simply no reasonable tax policy coverage of these levels of national investments.

b) Novel and Powerful – The Fed moves from Rates to QE to QP

With US short term rates at zero, the current Fed intervention of QE, buying open market treasury securities, will effectively transform. Based on federal budget composition, these bond purchases will move from principally funding current consumption and services to funding productivity altering investments in the national capital stock. As investors, we believe this will be accepted far differently by the capital markets. This recognition would effectively add a synthetic third mandate to the Fed of financing improvement of the national productivity base. We might term this funding policy QP for Quantitative Productivity. While overlapping to the declared Fed mandates, the levels of QP versus QE will inspire investor study and separation as to their multiplier effects, velocity impact, and factor productivity rates.

If a $4-5T bill is passed, then a new branch of macroeconomic investment analysis will be passed simultaneously. The differential effects on global capital markets, relative national productivity, and sector performance will come under close scrutiny and drive capital allocation.

c) Sustainable investing gets a legislative tailwind in the U.S.

As part of this bill, the Administration is wasting no time in setting expectations for a strong climate focus. Total investment may be measured in trillions. Given the ambitious climate-focused agenda, we also expect the final legislation to accelerate a number of industries.

Among them is the federal subsidization of renewal energy production to achieve greater scale, and therefore, price parity/superiority over fossil fuels. Germany, for example, has a vibrant renewable energy sector thanks to the government’s two decades-long commitment to reducing the country’s carbon footprint. This investment subsidized certain aspects of renewable energy production transformation to scale, ultimately benefitting global consumers.

If the U.S. proceeds with legislation as extensive as telegraphed it will be far more transformative because we consume 80% more energy than Germany. Beyond energy production, US proposed investment size on downstream clean energy infrastructure, distribution, alteration, and consumer transformations will drive innumerable investment opportunities in the wake of brute force policy impacts.

For investors, this extends beyond merely picking benefitting companies. At this enormous scale, entire sector and national competitive dynamics will be altered. Sophisticated early capital deployments will target these shifting opportunities. Successful follow-on investing will redeploy from fail fast attempts and benefit from long tail macro demand shifts and innovation to meet them.


  • Dr. Patrick Welton

    An active investor for more than three decades and an investment manager since 1989, Patrick co-founded Welton in 1988. As CIO, he oversees the investment team, develops and executes on investment strategies, and monitors compliance and risk associated with those activities. He also continues to support the firm’s research efforts.

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