Market Recap

Posted on January 15, 2021 by Gemmer Asset

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Weekly Recap

 

Another month another stimulus plan. This is getting to become something of a routine. After a $900bn plan was signed into law in December, President-elect Biden outlined his plan for another $1.9tn Thursday night. His plan calls for:

 

– Direct payments of $1,400 to most Americans, bringing the total relief to $2,000, including December’s $600 payments.

 

– Increasing the federal, per-week unemployment benefit to $400 and extending it through the end of September,

 

– Increasing the federal minimum wage to $15 per hour,

 

– Extending the eviction and foreclosure moratoriums until the end of September.

 

– $350 billion in state and local government aid.

 

– $170 billion for K-12 schools and institutions of higher education.

 

– $50 billion toward Covid-19 testing.

 

– $20 billion toward a national vaccine program in partnership with states, localities and tribes.

 

– Making the Child Tax Credit fully refundable for the year and increasing the credit to $3,000 per child ($3,600 for a child under age 6)

 

But that’s not all!! As CNBC notes:

 

‘The plan is the first of two major spending initiatives Biden will seek in the first few months of his presidency, according to senior Biden officials. The second bill, expected in February, will tackle the president-elect’s longer-term goals of creating jobs, reforming infrastructure, combating climate change and advancing racial equity.’

 

Of course, this plan will change. It is already getting pushback from various policy makers. As Goldman notes:

 

‘The proposal faces hurdles in Congress. Biden transition officials and congressional Democrats have indicated they hope to pass this proposal via regular order, not the budget reconciliation process. This means that it would need 60 votes in the Senate, and therefore the support of at least 10 Republicans. We do not expect ten Republicans to support a $1.9 trillion relief package. While Democratic leaders might use the budget reconciliation process to circumvent potential Republican opposition, there are two arguments against doing this. First, recent political events put a greater premium on finding areas of bipartisan support, if possible. Second, the reconciliation process has never been used before to pass discretionary spending, and it appears that around half of the proposal—state fiscal aid, education grants, public health spending, to name a few areas—falls into this category. While it is possible that congressional Democrats might find a way to do this, it looks more likely that the need to find bipartisan support might constrain the size of the package.’

 

They think the bill is ultimately reduced to roughly $1.1tn. I can’t find anyone who thinks the proposal will fail entirely.

 

If you haven’t been keeping score at home, Biden’s new proposal would push the total fiscal stimulus since the COVID crisis started to roughly 25% of GDP. That works out to a little over $5tn in total.

 

 

And counting…

 

Maybe the Most Important Variable in 2021?

 

Well, maybe not the most important outside the very narrow world of the markets, but within this little bubble, future inflation is going to be key. If prices start to rip higher current fiscal and monetary policy is untenable. And a lot of assets are priced for a world of low-flation. Conversely, continued modest inflation means current trends can continue.

 

Certainly, the COVID crisis has been a major deflationary shock, and the recent inflation stats do not indicate any overheating. For example, the CPI increased 1.4% year-over-year in December while the core rate increased 1.6% for the third consecutive month. Not much to get excited about.

 

 

If you want the story on continued disinflation you can do worse than reading Lacy Hunt’s most recent letter (https://hoisington.com/pdf/HIM2020Q4NP.pdf). In a nutshell, pilling more and more debt on top of an already large pile doesn’t do much for long-term growth (actually, it leads to lower growth).

 

 

And there is no sign that the velocity of money is likely to increase any time soon, a necessary prerequisite for higher inflation.

 

 

But then you look at the growth in the money supply and you start to wonder if the paradigm could change in 2022??

 

 

Charts We Found Interesting

 

1. Here’s a tentative sign of hope – COVID hospitalization rates declined over the past week for the first time since September.

 

 

2. It appears people are getting more comfortable with the idea of getting vaccinated.

 

 

3. 11.9 million Americans have now been vaccinated (3.6% of population). States w/ highest % of population vaccinated… 1) West Virginia: 7.1% 2) North Dakota: 6.4% 3) South Dakota: 6.1% 4) Alaska: 5.9% 5) Vermont: 5.2%.

 

 

4. Turning to the markets, traders are betting heavily the dollar will go down. This shows the total speculative positioning of currency futures. There is a massive $30bn short against the dollar.

 

 

5. At $110 billion, Airbnb now has a higher market-cap than the 6 largest hotel chains (Marriott, Hilton, InterContentintal, Hyatt, Wyndham, & Choice) … combined. Oh, yea, they lost $697m during the first three quarters of 2020.

 

 

6. One last chart on inflation and interest rates. Getting the inflation call right isn’t the only decision. How do policy makers respond? Does the Fed hike rates to address it, or do they go the yield curve control route like they did in the ‘40’s? Back then they sat on interest rates by buying all the T-bills in sight.

 

 

 

Have a good weekend.

 

 

 

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