Rabobank: Is Joe Biden Turning Into Jimmy Carter?

By Philip Marey, US strategist at Rabobank

Stock markets continued their Omicron relief rally yesterday, despite the limited amount of hard data on the new COVID-19 variant. The S&P500 gained 2.1% and the Euro Stoxx 50 rose by 3.4%. This morning, most Asia-Pacific stock markets are up. The 10 year US treasury yield climbed further to 1.48% yesterday, but is trading sideways around 1.46% this morning.

In the US Senate, Schumer and McConnell reached a deal about a process to raise the debt ceiling. The decision to raise the debt limit would not require Republican votes, but the process would. Separately, the House approved the National Defense Authorization Act, boosting defense spending by about 5%. Schumer expects the bill to pass the Senate without amendments, which means that President Biden can soon sign it into law.

Meanwhile, geopolitical tensions are rising. Russia, China and Iran are posing an increasing challenge to the US. How will President Biden handle this?

Those of us old enough to remember President Carter in office will also remember what is was like watching the evening news and seeing the leader of the free world being humiliated day in day out. Jimmy Carter was the last one-term Democratic president of the United States, from 1977 until 1981. During his presidency, Iranian revolutionaries took over the US Embassy in Tehran and held 52 Americans hostage for more than a year (444 days to be precise). The Carter administration banned oil imports from Iran and froze Iranian assets in the US. Of course, this did not achieve anything. However, a rescue attempt by US special forces failed. Never did the US look so helpless. No wonder Carter was defeated in a landslide in the November 1980 elections. The hostages were released shortly after the next president, Ronald Reagan, was sworn in.

Of course, since then it has been a Republican sport to depict every Democratic president as the next Jimmy Carter. Unfortunately for them, they failed with Bill Clinton and Barack Obama. Both got re-elected. But they still have a chance with Joe Biden. After a flying start with the American Rescue Plan, his ratings got a major beating after the Afghanistan debacle. Of course, the keys to the castle had already been given away by former President Trump, but President Biden had never hesitated to reverse Trump policy decisions before.

Why am I reminiscing about President Carter? Because Biden is facing several important foreign policy decisions in the near future. And Afghanistan was not a good rehearsal. The first conflict on the horizon is Ukraine. Yesterday, Biden held a video call with Putin. The US has promised economic sanctions in case of a Russian invasion of Ukraine, additional efforts to boost Ukrainian defenses, and additional deployment of military supplies and capabilities to Eastern European NATO members. In other words, no direct military reprisal. Biden may have well invited Putin to invade Ukraine. After all, the US wants to avoid putting troops on the ground. What part of this does not say “Welcome to Ukraine?” The flaring up of tensions between Russia and Ukraine were closely related to Ukraine’s increasing ties with the European Union. The Europeans are guilty of encouraging the Ukrainians to move away from Russia. Remember those EU politicians standing side by side with Ukrainian protesters at Euromaidan in 2014? Unfortunately, Europe does not have the armed forces to back up this encouragement. Certainly now that the British have left the EU, only the French have a force de frappe. But with the US on the sidelines, it seems the Ukrainians are on their own. Just another young democracy abandoned by the Western world in order to appease the Russians.

And it is not only the Russians that Biden has to deal with. The second foreign policy dilemma for Biden is Taiwan. Some reports suggest the Taiwanese military are as battle-hardened as the Afghan military, so not. With China’s military capabilities increasing each year, it seems only a matter of time before Taiwan falls into the China’s lap. Perhaps not as urgent as Ukraine, but any sign of American weakness could bring us closer to Chinese action on Taiwan. What’s more, relations with China are already fragile. Yesterday, the US announced that it would not send diplomats to the 2022 Winter Olympics in Beijing. The White House says it is a clear message against China’s human rights abuses. China says the US will pay the price for this boycott and that it is a political farce.

The third problem on the horizon brings us back to Jimmy Carter’s nightmare: Iran. The Iranians seem determined to become a nuclear power against the wishes of the US. However, if Biden fails to dissuade them, Israel may decide to take the matter into their own hands.

What does this story about Joe Biden and Jimmy Carter mean for markets? While markets are focused on the newest variant of COVID-19 and the Fed’s very slow retreat from extremely loose monetary policy, the geopolitical landscape is getting uglier by the day. This at a time with a president in the White House who has yet to prove that he is no Jimmy Carter. If Biden’s fiasco in Afghanistan is only the first of many, COVID may soon become one of our lesser worries.