Economy: Full Steam Ahead
- Unemployment remains high, but continuing claims remain in a downtrend.
- GDP is not back to pre-pandemic trendline, but early indicators say we are getting close.
- After the massive GDP decline last year, we should expect well above trendline growth this year as long as the vaccines work their magic.
Investors remain focused on the future and appear less concerned about the past and the evidence is in the Weekly Economic Index from the New York Fed below. While the lagging statistics show we are not back at full strength, the current stats (blue line) suggest we are rapidly getting there as the economy re-opens.
The larger question as far as we are concerned is where all this levels out in 2022 and 2023. Our crystal ball is no better than others, but once the recovery surge is complete, we are hopeful for sustained growth above trendline which might give the FED its first opportunity to reverse some of the extreme measures taken during the pandemic and before. For now, the stock market remains focused on re-opening and the projected growth in earnings that typically brings to cyclical stocks.
Build Back Better (But How Do We Pay For It?)
- The Biden Administration released its infrastructure plan, a $2.25 trillion package.
- Everyone agrees our infrastructure is old and tired, but no one agrees on how to pay for the repairs and that remains the primary stumbling block to action.
- The far left says it isn’t enough and the far right says it costs too much, which we see as a realistic basis for compromise, but it isn’t going to come easy or quick.
- Despite the size of the package, if passed, it will be spent over roughly 8 years, so the affect on the economy will be longer term.
The Biden Administration laid out a wide-ranging infrastructure plan that has expanded the concept of infrastructure, linking projects to rebuild roads, bridges and mass transit with plans for R&D spending as well as care for the elderly and affordable housing. The basic game plan is laid out in the table at right.
While there is no question we are, and have been, in great need of upgraded infrastructure, a plan this ambitious will likely have problems working its way through Congress. To be sure, the expanded scope is a way to appease the left and limiting tax increases is a hopefully way to appease the right. This is not going to be easy.
The plan is mostly funded via an increase in the corporate tax rate from 21% to 28% and the Administration has stated that anything is on the table, as long as there is no tax increase for couples earning less than $400,000 per year.
The proposal is receiving criticism from both extremes, which suggests to us that this is a good starting point, but it will test the President’s power to reach across the aisle while keeping his support on the left.
We also believe that fiscal concerns here are not as dramatic as it may seem. This should not be perceived as more pandemic largesse. It is a far cry from simply writing checks to average Americans. Make no mistake, $2.25 trillion is a lot of money, but this would be spent over 8 to 10 years and if a bill can be crafted well, there are plenty of growth benefits that can be achieved from the plan.
Archegos Capital – Yet Another Sign of Excessive Risk Taking
- Archegos Capital, a multi-billion-dollar, unregulated family office used exotic derivatives to take very large, leveraged stock positions. It collapsed under the weight of that debt when those stocks declined.
- Ironically, past financial disasters have forced central banks to reduce interest rates to extremely low levels and that has encouraged such risk taking. The lax attitude toward risk is also evident in the popularity of Bitcoin, SPACs and unprofitable technology stocks over the past year.
The failure of Archegos thankfully didn’t create a domino effect in markets, but it is another notch in the belt for the idea that markets are frothy or bubbly. There have been numerous articles of late debating the bubble/no bubble issue, which we think is a waste of time. The label is not one we particularly like because it is very rare that the entire market is frothy. More likely, it is some segment of the market that is in a bubble and it usually isn’t very hard to tell where that is. Over the last year, it is technology, particularly the tech companies with no earnings, that have been the key source of froth, particularly the companies coming public via SPACs. Recognizing the bubbles is important because they can impact markets when they burst, which is what we care about. We’re not investing in SPACs, or exotic derivatives, but we must stay diligent and stay diversified to address the broader market implications created when these products blow up.
What We’re Reading
Goldman economist: We’re in an acceleration phase (4 min. video)
SEC opens investigation into Bill Hwang after Archegos meltdown
El-Erian: Archegos ‘is the third near accident this year so far’
Can Joe Biden recreate the U.S. economy he grew up with?
What Biden’s infrastructure plan could mean for the US economy (2 min. video)
Global equities surge on factory data, stimulus hopes
The Dumbest Financial Story of 2021
Can the stock market crash during an economic boom?
Build America Bonds to be in Biden infrastructure plan
S&P 500 hits 4,000 on tech power, recovery optimism
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The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.Archegos Capital, Biden Administration, Build Back Better, Cyclical Stocks, Economic Growth, GDP, Infrastructure, SPACs, Unemployment
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