Bait and switch
As predicted, while the country was bombarded with imagery, commentary and analysis from former President Donald Trump’s second impeachment trial, the Senate has been drafting its $1.9 trillion stimulus package. There was much talk last week of inflation, but the CPI number wasn’t alarming, and the market chugged on to new record levels.
Federal Reserve Chairman Jerome Powell provided support for more stimulus with comments in a speech Wednesday about the economy’s fragility and the need to do more, but what “more” means is open to debate. Americans have socked away a lot of moneysince the start of the pandemic, so does doing “more” mean keeping interest rates low for longer? If Americans are saving more, I am sure that means “more” people are unhappy with the interest they are receiving on their savings. Does doing “more” mean pumping additional cash into an economy that isn’t fully reopened and at full capacity? Does it mean we will have “more” money to buy less available things?
This debate, if there will even be one, on the stimulus’s scope and size needs to happen. Sadly, that discussion is being conducted outside the public light. The concern here is that we get a massive stimulus just for the sake of being massive, but it may not need to be as massive to spark the economy back to normal. This concern is that if the stimulus is not targeted, the scope of the stimulus will do little to improve our economy while adding debt, which will hamper future growth and usher in higher inflation. People will have “more” money to chase fewer goods in the short run. In the long run, the economy will grow at a slower pace because more money, in the form of higher taxes, will be required to service our debt and decrease spending in other areas.
Nero and the market are fiddling a duet
Remember the old story about Emperor Nero playing his fiddle as Rome burned around him? He was just doing his thing while ignoring reality. The markets seem to be doing the same these days, as we continue to rally to new highs. There appears to be a less cautionary air even though jobless claims remain stubbornly high, economic growth seems to be dramatically decelerating and people are socking away more money since the financial crisis in 2008.
I recall reminding people in December 2019 that we were in a good place with markets and that this period of placidity should be enjoyed because it would be brief. Then we had 2020; although the markets rewarded us for the pain, it was still an unpleasant year for investors in the end. The markets seem to be fixated on the forthcoming stimulus, with not much beyond that.
Many things can upset this delicate cart as we move forward through the late winter and early spring. I won’t say I’m smelling smoke yet; still, I remain extremely cautious as markets continue to grind higher because I don’t see improvement in the underlying economy to support this level of euphoria. Earnings guidance has been positive and so have expectations for rates to remain low for longer. (For the markets, that basically means forever, given its short-term outlook.) I will say this: Guidance and expectations are just that and can change as quickly to something different. That’s why I remain cautious.
Go ask Alice, when she’s 10 feet tall!
In a slow week for markets, there is time to ponder some of the less immediate marketthemes. Take marijuana stocks: They have been in the news because of the Biden administration’s willingness to decriminalize the hallucinogen nationally. This has attracted the same crew that made news with the GameStop short squeeze mania a few weeks ago. Is this a new frontier in investing? I doubt it, because once this well has been drained, the group will move on to the next idea. Maybe this attention will move marijuana growers into the mainstream with other investors. I say, go ask Alice.
Another item I’m currently fascinated with is Starlink, part of Tesla’s Space X program. In simple terms, Starlink is an array of low-level satellites launched around the Earth intended to provide internet coverage anywhere on the planet. Others have tried it before, but we’re talking about Elon Musk, the world’s richest man. If anyone can do this, it will be Musk.
People throw around the phrase “game-changer” a lot, so we’ll just say this will be a “world-changer.” Imagine what global internet access could mean for commerce, employment, real estate, etc. It’s kind of scary to think about, but it is also extremely stimulating. (See how I did that? We ended where we started!)
Coming this Week
  • Markets are closed today in observance of Presidents Day. The fallout from former President Trump’s acquittal will continue as we celebrate the holiday. With the shorter trading week and a compressed economic calendar, there will be an increased focus on the Federal Open Market Committee minutes released Wednesday.
  • The usual smattering of economic data could provide some market movement if the data is too out of whack. Retail sales, PPI and the Housing Market Index will come out on Wednesday, while housing starts and unemployment claims will be released Thursday and home sales on Friday. These are all data points that could cause some volatility.
  • With the impeachment trial done, markets will focus on the stimulus bill’s progress, which has been flying under the radar for most folks.
Have a great week!
Tom Siomades
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