THE DESIRE FOR JOBS OVER THE FEAR OF INFLATION
There is a lot of argument as to whether the US needs another $1.9 trillion dollars added to the deficit in order to assist with the damages of COVID-19. The reason for skepticism towards such a large package is that consumer debt as depicted below is relatively low, and many households are actually in good financial shape, thanks to the combination of a high savings rate (those that are still working have not been able to spend as well as others that have received more in stimulus cheques than they used to make while working), rising home values and rising stock prices. This is in addition to a $900 billion stimulus package just passed by Congress in December.
The Biden administration’s perspective may be coloured by the experience of 2008-9 when not enough stimulus was passed and as a result the economy struggled out of recession and was weak for the better part of the next decade.
They remain concerned that the leisure and travel industry is months away from recovery given that herd immunity from vaccination still remains months away. Of further concern, the most recent employment report shows a stalled economy and certain coronavirus benefits programmes are scheduled to expire relatively soon in March. However in January, the Financial Times reported that a milestone was reached when total vaccine doses administered daily on a world wide basis actually surpassed the number of new cases being recorded daily. Nevertheless the fear remains that without a large fiscal package, the economy would be subjected to a gradual recovery that could take years to bring back to full employment. Furthermore, there is now fear that the new U.K. COVID strain that has much higher rates of transmission will pose a significant threat to any recovery over the next three to six months by causing a re-acceleration of new COVID cases.
Given the above charts, critics (mostly Republican) now claim that Biden’s $1.9 trillion stimulus program is unnecessary and may cause inflation to accelerate, which would then lead the Federal Reserve to raise interest rates. The only problem with this argument is that inflation is a function of velocity of money and this statistic as of the end of January did not show any increase, and in fact remains at multi year lows.
This does not mean that inflation will not make a comeback at some point when the pandemic is receding, unleashing consumers to spend their savings due to pent up demand on travel and other consumer services. Even then, however, inflation spikes are likely to be temporary in nature and focused on specific service sectors. With online shopping there are few goods that have not been available for purchase during the pandemic. Ultimately large amounts of debt combined with ageing populations and advancements in technology are likely to continue to represent strong deflationary elements that should keep inflation somewhat in check.
The last two decades has been a period of anemic growth in the US and most of the western world. This has largely been attributed to the preference for government austerity over the right amount of stimulus. Biden is determined to not make that same mistake again. His administration is determined to achieve full employment, as in their determination, the cost of inaction, or too little action, will far outweigh any cost of doing too much. Democrats, in response to new found Republican austerity critical of Democratic largesse in turn point out the hypocrisy of a Republican party that unnecessarily spent $1.3 trillion on tax cuts when the economy was at full employment, and then an additional estimated $5 trillion ($4 trillion approved in the spring and another $900 billion this December) spent to deal with the damage caused by the virus. The tax cuts alone according to the Joint Committee on Taxation will increase the deficit by $1 trillion over the next 10 years.
Time will tell whether the Biden administration will be correct, but the new President is determined to deliver what he promised to all of America.
From a stock market standpoint, our expectation is that a high percentage of this stimulus will also find its way into the stock market. Valuations will continue to climb well above what can be justified based on fundamentals. TINA (there is no alternative), FOMO (the fear of missing out) and YOLO (you only live once) are all driving investment returns at the expense of fundamentals. If the goal is to be greedy when others are fearful, and be fearful when they are greedy then it is definitely time to be fearful.
The Summerhill Team