A glance at the key economic personnel in President Joe Biden’s cabinet and administration reveals something not seen for decades under numerous presidents: Wall Street representation is conspicuously absent. Simply put, there are no prominent names from the banking and financial world in the new administration.
This means two things: Biden and his fellow Democrats are deadly serious about tackling America’s social and economic inequalities, or, in their preferred parlance, inequities. And, their priorities and policies are likely to disadvantage equity investors.
In the past 30 years, every administration has leaned on the expertise of senior Wall Street executives, including Secretaries of the Treasury Robert Rubin (a former co-chairman of Goldman Sachs ) under President Bill Clinton; Henry Paulson (a former chairman and CEO of Goldman) under President George W. Bush; Jacob Lew (a former Citigroup executive) under President Barack Obama; and Steven Mnuchin, who worked at Goldman and in the hedge fund industry prior to becoming secretary of the Treasury under President Donald Trump.
In addition to these secretaries, there have been many high-profile presidential advisers from Wall Street through the years, including Goldman alumni Stephen Friedman, who served in the George W. Bush administration, and Gary Cohn, former chief economic advisor to Trump.
To be sure, the new Biden administration includes two former BlackRock executives: Brian Deese, head of the National Economic Council, and Adewale Adeyemo, Biden’s pick for deputy Treasury secretary. But neither served in top decision-making management at BlackRock, and their tenure in financial services was comparatively brief.
If Wall Street has few friends in the administration, its adversaries hold powerful positions in Congress. Sen. Bernie Sanders (Ind., Vt.) chairs the Budget Committee, and Sen. Elizabeth Warren (D., Mass.) serves on the Committee on Finance and the Committee on Banking, Housing, and Urban Affairs. Four members of Warren’s presidential campaign staff hold positions in the Biden administration, and Gary Gensler, a Warren ally who left Goldman Sachs more than 20 years ago, is the president’s pick to chair the Securities and Exchange Commission. Warren introduced legislation last Monday to implement a so-called wealth tax, something that would hit Wall Street’s topmost echelon hard.
Few would dispute that the Covid-19 pandemic dramatically widened socioeconomic gaps in the U.S. Many service-sector jobs disappeared in the past year, and unemployment, especially among blue-collar workers, spiked. Dramatic and generally positive actions taken by the Federal Reserve and the federal government helped to shore up the economy, but policy moves ranging from near-zero interest rates to massive stimulus spending have had the unintended consequence of deepening the economic divide and further weakening the middle class.
Most of the benefits of these policies flowed to Wall Street, lifting the price of stocks and other financial assets. Main Street, meanwhile, continues to struggle. I believe that we have reached an inevitable turning point: Washington’s political and economic emphasis will now shift to Main Street and away from Wall Street.
That Janet Yellen now heads the U.S. Treasury Department only reinforces this view. She is the first career-long veteran of the Fed to do so. Yes, she earned lucrative speaking fees from some Wall Street firms in recent years, but her academic background and government service are paramount. While former Treasury Secretary Timothy Geithner arrived at the job (in the Obama administration) from the Federal Reserve Bank of New York, he had been at the Fed for only six years, after working at the Treasury under Rubin and Lawrence Summers, who were considered his mentors.
Yellen’s expertise as an economist is labor relations. As Fed chair, her prime objectives were fighting inflation and unemployment. Then again, even current Fed Chair Jerome Powell, a Trump appointee, was unequivocal at the Fed’s most recent Jackson Hole economic symposium in supporting increasing real incomes and improving the prospects for the economically disadvantaged.
To achieve these goals, the Biden administration will favor continued massive spending and regulation, while the Fed will eventually end its quantitative easing and stop monetizing the budget deficit. All of this means that the financial markets may be in for a dramatic surprise.
The administration’s tolerance of higher long-term interest rates is all but certain to arrest the stock market’s advance and send share prices lower. Long-term rates already have started climbing. It is also likely that short-term rates will rise in an effort to arrest possible inflationary trends resulting from fiscal expansion and a weakening dollar.
What does this mean for investors? The famous 1987 and 2001 Alan Greenspan puts, and the 2008 Ben Bernanke put—Fed policies that effectively set a floor under stock prices—have ceased to exist. Powell most likely will be replaced by a progressive Democrat when his term ends next year. But even if he remains Fed chair, the Fed put is now kaput.
Avi Tiomkin is an adviser to hedge funds. He previously managed money for several large hedge funds and specializes in global macroeconomic analysis.