How to Profit From the 'Great Society 2.0'

Lyndon Johnson's call to action... The most lopsided plurality in American history... What we can learn from the 1960s... Joe Biden's plan to 'bake a bigger pie'... How to profit from the 'Great Society 2.0'...

The nation was still reeling when Lyndon Johnson settled in for his first presidential briefing...

If you were alive back then, I (Mike Barrett) am sure you remember the scene vividly...

It was the evening of November 22, 1963. Just hours before, President John Kennedy had been fatally shot in Dallas as his open-top limousine cruised past cheering crowds.

Johnson – who had been in the car behind Kennedy's – was sworn in as the 36th U.S. president aboard Air Force One as he hurried back to Washington, D.C. It's the only time our nation's most solemn oath has taken place on a plane...

A federal judge hurried to the airport to administer it. And when they couldn't find a Bible onboard, they conducted the ceremony using a Catholic missal found in Kennedy's bedside table.

This haste became routine for the new president... though it wasn't all entirely new.

When Johnson received his first presidential briefing, he was struck by the familiarity of the topics before him. As he told aides Bill Moyers and Jack Valenti the night he was sworn in...

You know, when I went into that office tonight and they came in and started briefing me on what I have to do, do you realize that every issue that is on my desk tonight was on my desk when I came to Congress in 1937?

In other words, 26 years after Johnson first won election to represent Texas in the U.S. House of Representatives, it was as if nothing had changed now that he was president.

Civil rights, poverty, and education were still America's most urgent domestic challenges. For the former teacher of impoverished Mexican-American kids in Cotulla, Texas, such lack of progress was a call for bold action.

Six months after his impromptu inauguration, Johnson gave students at Ohio University the first glimpse of his grand plan...

We will build a Great Society. It is a society where no child will go unfed, and no youngster will go unschooled.

Plenty of politicians are big dreamers...

But bringing those dreams to fruition – especially on the grand scale that Johnson envisioned – is usually only possible when one party controls the White House, Senate, and House.

When Johnson assumed what was left of Kennedy's presidential term, Democrats already controlled Congress. Then, the 1964 election gave them the most lopsided plurality in American history. Johnson beat Republican presidential nominee Barry Goldwater in a landslide, and the Democrats took control of two-thirds of the 89th Congress (both the Senate and House).

That meant Republicans would have little influence on legislation for at least the subsequent two years.

Joseph Califano Jr., Johnson's chief domestic policy assistant from 1965 to 1969, once recalled the president putting Congress on notice about what was coming. As Johnson told the lawmakers...

It never even occurred to me in my fondest dreams that I might have the chance to help the sons and daughters of those [Cotulla, Texas] students and to help people like them all over this country. But now I do have that chance – and I'll let you in on a secret – I mean to use it.

Did he ever.

With the clock ticking on two years of extraordinary power, Johnson wasted no time getting to work...

In a meeting just 10 days after his 1965 inauguration, Johnson urged his aides to make haste...

I want you to get all my legislative proposals during this session, now! Every day that I am in office, I lose part of my power. Every day I use power, I have less power left. You must get this legislation through immediately. I want you to talk to those congressmen. I want you to sleep with those congressmen if you have to. I want you to get this legislation through now – while I still have the power.

As far as we know, Johnson's team didn't need to take any congressmen to bed... But Johnson personally developed a reputation as a dealmaker with impressive, if unconventional, powers of persuasion. As online magazine Mental Floss recalled in 2008...

Johnson lived to dominate, and he used crass behavior to bend people to his will. At 6 [feet], 3 [inches] tall and 210 [pounds], he liked to lean over people, spitting, swearing, belching, or laughing in their faces... His favorite power ploy, however, seemed to be dragging people into the bathroom with him – forcing them to continue their conversations with the president as he used the toilet.

Whatever you think of Johnson and his team, their style yielded rapid, breathtaking results. Over the next two years, 200 measures were brought to a vote... And 181 of them passed, producing an incredible 91% win rate.

On October 15, 1966, with the 89th Congress in its last days, Johnson lauded its accomplishments with this incredible historical context...

In the 35 months since I entered the White House, Congress has passed not six, as it did in the [past] 174 years, but 18 basic education bills.

In the first 174 years, Congress invested [$5.8 billion] for education, or an average of $33 million per year in educating our children.

The 89th Congress invested not [$5.8 billion], but [$9.6 billion], almost twice as much as all those other Congresses put together...

From 1798 until 1963, for 168 years, 17 major health measures were enacted – 17 in 168 years.

In that time, our federal investment for health totaled approximately $10 billion – $10 billion for that entire first 88 Congresses.

Since 1963, Congress has enacted not 17 measures, but 24 major health programs – more than were enacted in all the previous 168 years put together.

The 89th Congress will allocate [$8.2 billion] for health, including medical care – that is the granddaddy of all of them – nearly as much as federal health expenditures for all the other 168 years put together.

It's unlikely there will ever be another president and Congress capable of legislating a Great Society in just two years like Johnson and the 89th Congress did.

But the 46th president and the Democrat-controlled 117th Congress will give it their best shot...

Last October – while speaking at Franklin D. Roosevelt's summer retreat in Warm Springs, Georgia – Biden provided a preview of his intentions...

If you're giving me the honor of serving as your President, clear the decks for action.

History never repeats exactly. But I won't be surprised if the next two years end up looking a lot like 1965 to 1966. Think of it as "Great Society 2.0."

Keep in mind that Biden took the same path to the presidency as Johnson... Both men were the product of modest upbringings, had long careers in Congress, then served as vice presidents.

Johnson's extensive D.C. network and intimate knowledge of Congress were invaluable once he became president... They enabled him to quickly shape domestic policy initiatives and negotiate their passage.

Biden's familiarity with Congress' inner workings, plus his extensive political network, are likewise tremendous assets. Importantly, he has also demonstrated success at bringing Republicans and Democrats together on divisive issues – something that has become increasingly rare in Washington, D.C.

Shortly after becoming vice president in 2009, for instance, one immediate challenge was getting a handful of Republican senators to support President Barack Obama's economic rescue plan. In his memoir, Republican Sen. Arlen Specter of Pennsylvania remembered Biden's nonstop phone calls seeking his support as being the equivalent of playing "man-to-man coverage in a basketball game."

Biden and Johnson have similar policy ambitions...

Johnson's notion of a Great Society drew heavily from a book by political commentator Walter Lippmann titled The Good Society. For Lippmann, the key to reducing poverty and broadening the American Dream boiled down to something he said in 1964...

A generation ago it would have been taken for granted that a war on poverty meant taking money away from the haves and turning it over to the have nots... But in this generation a revolutionary idea has taken hold. The size of the pie can be increased by intention, by organized fiscal policy and then a whole society, not just one part of it, will grow richer.

Baking a "bigger pie" with organized fiscal policy was, in essence, the goal of Johnson's Great Society. It's also the essence of Biden's domestic ambitions more than 50 years later.

Former Senate Majority Leader Tom Daschle, a Democrat from South Dakota, believes Biden will be viewed "as the LBJ for low-income families" now that the COVID-19 emergency bill, officially known as the American Rescue Plan Act of 2021 ("ARP"), has been signed into law.

The New York Times reports that "nearly half [of the ARP's $1.9 trillion in spending] will be delivered to people who are unemployed, below the poverty line or barely making enough to feed and shelter their families." Children are a key focus, and Biden himself is promoting projections by the Center on Poverty and Social Policy at Columbia University that the spending will cut child poverty in half.

While the Democrats control both the House and Senate, Biden doesn't have the overwhelming majority that Johnson did... So he'll need all the political skill and goodwill he can muster – particularly after signing ARP into law without garnering a single Republican vote, using a process called "reconciliation."

Bills tied to the federal budget (like ARP) can secure passage through reconciliation, which bypasses Senate procedure and requires only a simple majority. But getting new legislation on administration priorities not tied to the budget, like a higher minimum wage, will almost surely require compromise with Republicans.

The recently expanded child tax credit represents a good opportunity for political consensus.

As part of ARP, the credit was raised to $3,000 per child, expanded to include those up to age 17, and half can be received up front in monthly installments starting in July. Here's how financial publisher Kiplinger explains the mechanics for a hypothetical family of five (emphasis added)...

For example, if monthly payments were made, this would result in payments of up to $250 per child ($300 per child under age 6) for six months and would be a nice windfall for many families. Take a family of five with three children ages 12, 7 and 5...

Assuming the family qualifies for the higher child credit and doesn't opt out of the advance payments, they could get $800 per month from the IRS from July through December, for a total of $4,800. They would then claim the additional $4,800 in child tax credits when they file their 2021 return next year.

Let that sink in...

Millions of families across the U.S. are just months away from a potentially massive increase in their monthly household income.

The tax credit changes currently expire at the end of 2021, but Democrats are expected to push to make them permanent. And the changes certainly will be popular among working families...

What parent of three wouldn't want an extra $800 per month?

There's already some bipartisan interest... Republican Sen. Mitt Romney of Utah has proposed a similar plan to subsidize the costs of raising kids. Also keep in mind... as the New York Times recently noted, at least 17 other wealthy countries – including Canada – already do something similar.

In short, bipartisan support for subsidized child-related care already exists, giving Biden a much-needed opening to build the kind of consensus that he'll need to pass Great Society-like legislation.

The key question, of course, is how he'll cover the cost of baking a bigger pie...

Kennedy's idea was to spur economic activity by cutting taxes, but he was assassinated before Congress could take up his proposal. Johnson made it a priority, believing that putting more money in people's pockets would increase spending so much that the additional tax revenue could pay for his programs.

Three months after taking office, Johnson signed a comprehensive tax plan reducing all 22 marginal tax rates. Just as he had hoped, the tax cuts spurred a combination of business investment and consumer spending, leading to higher corporate profits and tax revenues. The federal budget deficit even declined 50% between 1964 and 1966.

Johnson biographer Randall Woods, in his book titled Prisoners of Hope, says the tax cuts were a "stroke of genius"...

Month after month, quarter after quarter, the major indexes of growth moved upward. Gross national product and disposable personal income both rose sharply, while the number of families in poverty and people out of work fell.

Moreover, by the first half of 1965, government revenues had actually increased $7.5 billion over the last pre-tax-cut year.

In a 2017 opinion piece, the Wall Street Journal couldn't help pointing out the irony... "The Kennedy tax cuts for 'the rich' that liberals loathe helped finance the subsequent Great Society programs that liberals love."

The Biden administration doesn't seem interested in this part of the original Great Society story...

Last month, Biden proposed raising the corporate tax rate from 21% to 28%. If enacted, this would be the first tax increase in almost three decades.

The president has also made it clear he wants a more progressive tax code with higher income taxes on individuals making more than $400,000, plus higher capital-gains taxes for individuals making $1 million or more.

Higher taxes would clearly be a headwind for corporate earnings and valuations...

Accounting analyst Dave Zion of the Zion Research Group estimates Biden's proposed tax increase would reduce the earnings of S&P 500 constituent members by at least 10%. My own research indicates valuations could decline about 8%. But keep in mind... Biden's proposed 28% corporate tax rate is comparable to the effective tax rates that existed back in 1965 and 1966 (29% and 30%, respectively), according to the Economic Policy Institute.

In isolation, higher taxes aren't good news for stocks. However, raising taxes on the highest earners won't necessarily derail the economic rebound that's currently underway... since that's going to continue benefiting from the post-pandemic reopening.

According to tax-policy expert Therese McGuire...

You can cherry-pick studies to show that raising taxes on high earners has a detrimental effect. But the preponderance of studies – and the best ones – find that this will not harm local economies.

Surprisingly, the Great Society's legislative blitz to bake a bigger pie didn't do much for stocks overall...

The Dow Jones Industrial Average opened the 89th Congress at about 870 in January 1965. Two years later, it was down 10% to 786.

Even two years farther out, in December 1968 – which would've been plenty of time for the massive spending to work its way through the economy – the Dow's gains were only modest.

There were other factors in play at the time, none more evident than the expanding war in Vietnam. But the important takeaway is that a robust economy – driven largely by massive government spending – did not translate into robust, across-the-board stock returns.

Keep this in mind as Biden's Great Society 2.0 unfolds...

The massive government spending that has already been approved (plus what's in the works) could indeed produce a robust economy, including rising GDP and falling unemployment. It could even go on for a year or two.

But as investors learned 55 years ago, there's no guarantee it'll translate into broadly rising stock prices.

However, there will be winners. And to find them, you must follow the money...

Starting in July, I estimate 36 million households with children will start receiving, on average, about $500 per month in upfront child tax credits. That works out to about $18 billion of new money being deposited into millions of bank accounts – each month.

Most of this money is likely to be spent rather than saved.

That's generally what we do when our disposable incomes rise – we "trade up" our spending. We eat steak instead of burgers... drink Heineken rather than Budweiser... and vacation in Hawaii instead of driving a couple of hours to visit family in the next state over.

In Extreme Value, editor Dan Ferris and I have been hunting for companies that are poised to be big "trade up" winners as Biden's plan unfolds in the coming years. When ordinary Americans have more money, they'll be spending it with these companies.

Last month, we recommended a classic trade-up idea using innovation to differentiate itself from the competition. For instance, in 2020, this retailer launched thousands of new, uniquely branded, and private-label products you're unlikely to find in any other stores.

And big changes coming to the supply chain ensure it'll remain a leader in new product launches. (Current subscribers can learn about them in the issue right here.) Best of all, shares could double from here and still not hit our estimate of the company's intrinsic value.

Plus, back in March, we added a company to our "Crown Jewel" portfolio that we've been watching for years. Thanks to the pandemic, shares were temporarily cheap. It offers one of the most unique shopping experiences on the planet and enjoys tremendous brand loyalty.

It's another classic trade-up idea. Its management team is highly skilled at finding products and services customers want – and offering them at compelling prices.

Finally, the company that we recommended in February is already experiencing solid growth in its most important segment. One of the drivers is success in selling higher-priced products with superior features. And households with children are a key focus.

In tomorrow's Digest, Dan will reveal all the details about one of these 'Great Society 2.0' winners...

In the past few months, investors have bid up shares of this company – once they recognized what our Extreme Value model helped us see before them... that this company would bounce back now that the darkest days of the COVID-19 era seem to be behind us.

In fact, this company will probably be an even bigger winner than we expected... for many of the reasons I've explained today. In lieu of his regular Friday Digest musings tomorrow, I'm excited to say that Dan will give you an inside look into how he and I operate within our Extreme Value newsletter. In short, we're "unlocking" our March issue for all of you to see...

You will be able to read for yourselves what we wrote earlier this year. And even better, you can still get in on this recommendation under our maximum "buy" price... for now at least.

Stay tuned to tomorrow's Digest for all the details about this free research.

In the meantime, if you're interested in claiming instant access to this issue – as well as all of the research we produce in Extreme Value – check out our special offer for Digest readers... Right now, you can subscribe at 33% off the normal price. Get started right here.

New 52-week highs (as of 5/12/21): CBOE Global Markets (CBOE), Freehold Royalties (FRU.TO), and Novo Nordisk (NVO).

In today's mailbag, feedback on yesterday's Digest about the pipeline attack, inflation fears, and job openings. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"If Colonial pumps 100,000,000 gallons/day and the ransom is $2,000,000, they could raise the price $.02 for 24 hours and it would all be over (if you want to give in to blackmailers)." – Paid-up subscriber Robert M.

Corey McLaughlin comment: Nice point, Robert... That might actually be what the hackers are banking on, asking for an amount "small" enough for Colonial to part with... which would also be a huge chunk of change for the hackers (and most people) to make.

"As stated in today's issue (May 12), some outlets are paying workers more, all well and good, but those higher wages will be passed onto the consumer, at some point, people are not going to pay 6 dollars for a cup of tea or coffee, oh Bill Gates will, but the average worker who is barely squeaking buy will forgo it, and start making his own at home.

"We recently went to Costco, and stopped at a Five Guys Hamburger Place for lunch. One small fry, two regular burgers with cheese, and most of the included stuff. The bill came to 25.00 for that, no drinks, just food. We can go to Longhorn steak house and the two sirloin steaks with one side and pay 3 dollars more for the side salad for two for that money, Five guys is off our list of affordable restaurants.

"Gas here has gone up 2 dollars more a gallon than April 2020. We won't drive as much, to curb that use/price. The pipeline has made some difference, but hundreds of tanks are full of gas and diesel all up and down the pipeline. The problem is twofold, irresponsible news reporting about the issue and not enough truck drivers to deliver all that fuel. Why would truck drivers work if the government is going to pay them to sit on their [butts]...

"For us, we are not spending money we do not have to spend. We won't eat out much, won't buy coffee if price is too high, and won't participate in any restaurant where the costs are too high for the quality and quantity of the food justifies the costs. We stocked up on all the necessities over the last year, so are somewhat immune to higher prices except for food. We wait till it's on sale, then get as much as they allow for that item...

"We look for sales on all the things we need, coffee for instance, and when it gets too expensive, I will give it up for good then. FWIW – It was at 96.00 and change on the commodities exchange in December 2020. Today it's at 150.00...

"I don't have to have any luxuries, I just need the basics to survive, most people are not as disciplined as me and better half." – Paid-up subscriber Monty B.

Regards,

Mike Barrett
Orlando, Florida
May 13, 2021