Neither Party Will Sing The Immigration Song Anymore But New Policy Could Reduce The Rancor In Time For The Eventual Bull Market: The Geopolitical — Stock Market Connection

The Fed finds little in the recent data to change their hawkish stance on inflation but one hopeful sign of future disinflation is coming from of all places the Biden Administration. Whether Biden can stick it through in the face of a surging Ron DeSantis could have profound effects on Fed policy down the road, but in the current febrile environment the markets are taking little notice of politics or cultural trends. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. There is one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly over the next few days.

Last week’s jobs report showed manufacturers are hiring more people after dipping in February, a fact passed over by the markets. This underscores the Fed’s public stance of raising rates in the face of a bank credit crunch and keeping them higher for longer, despite the bond market’s diametrically opposing view. Key to the debate is the course of wages and its link to inflation, and on this score the cultural divide over immigration policy impacts the Fed’s policy stance directly if tacitly. With quiet quitting becoming mainstream and other tactics like “ghosting” and “rage applying” growing the Fed is concerned that tight labor markets mean wage growth will stick in the 4-5% range and keep inflation at those levels too, which history shows becomes untenable. The only alternative to destroying labor confidence is to increase the supply of labor, and here the Biden administration’s new policy will be crucial.

The Daily Beast notes “Biden announced that immigrants with U.S. sponsors from four major origin countries could apply to come legally to the United States on a status called humanitarian parole. And according to the January immigration figures Biden’s plan is already working. This was similar to the decline in Ukrainians fleeing the Russian invasion showing up at the Southwest border in Spring 2022 after a similar program was announced. The Ukrainian program was the model for Biden’s Latin American humanitarian parole and it’s having similarly dramatic effects on improving border security... The migrants must have a U.S. sponsor and meet health and security standards. Once here, they receive a two-year residency permit—which could be extended—and they can apply for a work permit. They have almost no access to public benefits.”

While this policy is hardly humane it does fit with Americans’ increasing unease with immigration levels. Axios reports “The share of Americans wanting less immigration has spiked across the board since President Biden took office in 2021, according to a new Gallup survey. Why it matters: Just 28% of Americans say they're satisfied with immigration levels in the U.S. — the lowest in a decade. The rise in Americans' concern about immigration levels is likely tied to the record numbers of crossings at the U.S.-Mexico border the past two years, according to Gallup.“

Immigration of both low and high-skilled workers is crucial not only because of the cultural decline of the work ethic since COVID but in light of the long-term demographic aging of America. Biden’s plan tries to reset the incentives so that immigration can persist without laying all the costs on border states while distributing the benefits to the rich Northeast and West Coast. As Foriegn Policy notes “The United States has faced recurrent migrant crises at its border with Mexico for a simple reason: The incentives are upside down. If would-be migrants show up at the legal points of entry, they are all but certain to be turned back. If they cross the border illegally, they stand a strong chance of staying in the United States. The predictable results have been recurrent surges of illegal crossings—sometimes in enormous numbers—that fuel the public perception of chaos at the border.”

Unfortunately the policy is coming too late to change the current dynamic, and the election may determine whether immigration policy takes a turn for the worse. Wage and inflation dynamics are a key reason I remain bearish and increasingly concerned that the eventual bottom may take longer than normal, setting up for a rocky road back to the old highs.

My current positions include a very large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a modestly long position in large-cap equities.