The kudos keep rolling in for Cowen Washington Research Group (WRG), recognized for their cutting-edge analysis of government policy and regulatory affairs at the intersection of investment strategy. Institutional Investor ranked WRG second in the Washington Research category in its 2021 All-America Research Team poll for a third year in a row. The survey is based on input from nearly 1,500 buy-side firms and more than 3,500 individual buy-side investors.
In addition, both Barron’s and the Economist recently sought out WRG’s Paul Gallant for his thoughts on where regulation of Big Tech is headed. When the infrastructure bill passed the House last month, the Washington Post ended its analysis with a kicker from Chris Krueger, describing the bill as “historic fiscal policy.”
With all eyes on Washington going into a year likely to be consumed with jockeying ahead of the 2022 midterms, our WRG team has consistently broken down complex issues to illuminate and demystify the burning questions of the day. We asked our seven analysts to share what they are most focused on as we close out 2021 and look ahead to a watershed 2022. They address the key policy issues of the day ranging from financial regulation, fiscal policy, China, cannabis, ESG, healthcare, defense, and Big Tech.
If you put the process to the side and focus on the policy from a cumulative view, the Democrats are on the verge of historic fiscal policy with over $3T between the first reconciliation bill in March and the $1.2T hard infrastructure bill. Our base case is another ~$1.75T by early February before President Biden’s State of the Union Address with the Build Back Better reconciliation bill.
Technology, Media, and Telecom Landscape
For TMT, 2021 was about Congress dealing with top-line issues (infrastructure, social safety net) and Biden getting his tech team in place (FTC/DOJ/FCC). 2022 is when we expect Congress to make a serious run at tech/antitrust legislation and Biden’s agency chiefs to implement activist policies aimed at shifting power away from the largest tech platforms and ISPs toward smaller firms and consumers.
Financial Regulation / Cannabis
For financials, the next big step is the President’s pick of vice chair for supervision at the Federal Reserve. Regardless of the selection, oversight will get tougher. It is also about these sectors transitioning from a stimulus that has depressed credit losses and boosted economic activity to a new environment where prices are rising and government spending is declining even if Congress enacts Build Back Better. On top of that, we expect regulators to be more skeptical of regional bank M&A while the CFPB already is ramping up consumer enforcement. In short, the environment will get tougher. Housing policy continues to focus on boosting demand rather than increasing supply. That should mean continued home price appreciation.
For cannabis, this is all about the race to get to 2022. Senate Majority Leader Chuck Schumer next year will unveil his revised cannabis legalization package. We don’t expect that to pick up the 10 Senate GOP votes needed to pass, but it’s failure should open the door for a more modest compromise bill later next year that includes the SAFE Act on cannabis banking, capital markets access, an end to 280E tax treatment, and an excise tax to provide grants for states to expunge minor criminal cannabis conviction.
Foreign Policy and Defense Spending
U.S.-China relations remain frozen, and any major positive breakthroughs seem unlikely before November 2022 elections in both countries (as each deals with internal political/economic tumult). Biden’s China policy remains essentially unchanged from Trump’s and upcoming policy announcements will likely reflect tougher, not weaker, policy toward China on geopolitics, defense, trade, technology, and climate. Congress is considering numerous bills on tech, Xinjiang, Taiwan, Olympic ban, and capital markets that have bipartisan support and will further anger the Chinese Communist Party.
The outlook for defense spending is much improved from a year ago, switching from fear of a -10% cut to the prospect of +5% growth. The mid-term picture could be even better if GOP momentum carries into the November 2022 midterms and one or both chambers in Congress flip. The most recent quarter was a washout for defense-heavy names, and we think the focus should be on the FY23 DoD budget (February release) to determine which companies/sectors will be net gainers in the current budget environment. We continue to believe spending will grow in areas such as nuclear, space, missile defense, long-range strike, and naval.
Rick Weissenstein and Eric Assaraf
Meaningful changes to drug pricing provisions in congressional Democrats’ social spending bill seem unlikely before final passage. The bill would allow the government to negotiate drug prices in both Part B and Part D for drugs that have no competition and are nine years from launch (small molecule) or 13 years from launch (large molecule). The program would begin in 2025 with 10 drugs, increasing to 20 drugs in 2028. The plan also includes both Part B and Part D inflation caps based on 2021 prices and Part D would have a $2K out-of-pocket cap. Drug makers will likely seek changes during implementation or in the courts.
Looking ahead to 2022, we anticipate the second iteration of the 21st Century Cures Act (Cures 2.0), in conjunction with the reauthorization of FDA user fees, will be a major vehicle for healthcare policy initiatives. The list of items we expect to be on the table are permanent telehealth expansions, a modified accelerated coverage pathway in Medicare (MCIT), regulation of lab-developed tests (LDTs), and the Biden Administration’s new health research agency (ARPA-H).
Sustainability and ESG
All eyes remain on the Build Back Better (BBB) Act moving through the reconciliation process. If Democrats can find consensus on this bill as proposed, production, investment, and manufacturing tax credits for wind, solar, electricity transmission, energy storage, carbon capture, and hydrogen will either be extended – or newly created – through 2031. New and extended tax credits, over a ~10-year investment horizon, are likely to provide certainty to an industry that has been operating on the edge of credit phaseouts and cliffs, accelerating the development of clean energy capacity.
With regards to sustainable transportation, again we look to the BBB Act. If Democrats can find consensus on this bill as proposed, the tax credit for the purchase of new (and used) electric vehicles (EV) will change dramatically, with the new vehicle credit value ramping to $12.500 max, and the removal of an existing prohibition which had capped credits by manufacturer to just 200K units. The transportation sector is now the largest producer of greenhouse gas emissions in the U.S. Boosting the EV tax credit and removing the prior manufacturers cap would extend the EV credit to more vehicles, which is likely to accelerate the adoption of EVs.
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