THE WEEK IN REVIEW: March 28 – April 3
Another multitrillion dollar deal?
President Joe Biden announced his new infrastructure plan last week, which is expected to clock in at $2.25 trillion. The proposal is on the heels of last month’s $1.9 trillion stimulus package. In his first 2+ months of presidency, Joe Biden is proposing spending nearly $4 trillion. Think about that for a second: $4 trillion!
My very earnest hope is that this money ends up making our roads, bridges, airports, seaports and rail depots safer, better and more competitive. But my realistic self tells me that this bill – just like the stimulus plan – will likely be a misguided hodgepodge of extraneous funding for pet projects and political favorites.
I’m not saying the country doesn’t need infrastructure spending; one short road trip confirms our roads and bridges are a mess. My question: I already see construction everywhere on our highways, so what additional projects do they need? Airports are dated, sloppy and shabby, but I always see construction when I’m in an airport, so what else? I keep going back to our debt level and the potential for that debt to slow down future economic growth. If the money is spent wisely, it would be an investment for the future of our country. But if it isn’t, we are simply rearranging the deck chairs on the Titanic.
About 65% of our country’s infrastructure is privately owned, with 30% owned by states. That leaves just 5% owned by the federal government. Where, exactly, is all this money going to go? Private firms? No, they use the capital markets. States? No again, they use their own tax-gathering options, like sales and real estate taxes. Will we build the Hoover Dam higher, or will this be just another way to spread money to pet projects?
The other shoe to drop pretty soon (and this is one ugly pair of shoes, in my opinion) is the discussion of taxes to pay for all the debt. Capital gains, higher corporate tax rates and higher taxes on individuals will negatively impact the market and economy. We need to see how this all plays out; sometimes, the best option is to leave things be, see how they go and inject aid judiciously. Hyper liquidity, limited supplies, high levels of debt, increased taxes and an economy that is set to reopen fully may be too severe a shock and potentially lead to much higher inflation. This could be a toxic brew unlike anything I have seen in my entire time in the investment business. Forewarned is forearmed.
Nothing like clear Sinai to get the global economy to breathe easier
OK, it was a bad pun, but the unblocking of the Suez Canal was important and needed to be done quickly. The obstruction of the canal – a major artery for goods and raw materials (especially oil) from the Middle East and Asia to Europe – for a prolonged period would have been devastating to a region already struggling and falling behind as a result of the coronavirus. The good news is the Ever Given was dislodged and commerce has reopened. However, the incident highlighted the fragility of global supply chains and the need for better infrastructure. (It all comes back to the same things, doesn’t it?)
More hedge fund drama falls on deaf ears while the 10-year tells us time might be running out
Last week we found out there was a huge margin call on positions held by Archegos Capital, creating a scramble on the part of large banks worldwide to cover them as Archegos was forced to sell.
Archegos held large and leveraged bets in U.S. media stocks ViacomCBS and Discovery and a few Chinese internet ADRs such as Baidu, Tencent and Vipshop. Some of the positions were held via total return swaps, a type of derivative that allows investors to take big, leveraged stakes without disclosing those positions publicly. In other words, they were a secret.
These bets started to go south after ViacomCBS’ $3 billion stock offering through Morgan Stanley and JPMorgan fell apart. It triggered a domino effect where prime brokers rushed to exit the positions on Archegos’ behalf and resulted in a massive margin call, where brokerages demand that an investor deposit additional money or securities into the account when a position falls sharply in value. Brokerages usually sell the securities in block trades, often at a discount to the current share price, in an attempt to recover losses.
Billions were lost as shares were shed. However, the markets didn’t seem to notice as the S&P 500 rose over 4,000 for the first time. That’s alarming! Nomura and Credit Swiss lost nearly $9 billion.  This may be an anomaly, but it could also be a wake-up call. After the GameStop nonsense, we may be seeing a disregard for risk – and that seldom ends well.
Coming this week
  • The market is back to work after the long Easter weekend. Data will be sparse this week. The biggest scheduled news is the release of the minutes from the last meeting of the Federal Reserve’s Federal Open Market Committee (FOMC). Any insights into the mindset of Federal Reserve members will be of interest, and the minutes will be examined closely to see just how united they may be on the Fed’s current stance on rates.
  • Last Friday, the March employment situation blew past expectations; consensus called for an increase of 625,000 jobs, and the actual number was 916,000. Expectations are that initial weekly claims will continue to fall. We’ll see if that encouraging trend continues on Thursday.
Have a great week!
Tom Siomades, CFA®
Chief Investment Officer
AE Wealth Management
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