Updated: Aug 20, 2021
Let's start this week's update with some significantly good news regarding COVID-19. Cases are declining, likely due to a change in the World Health Organization's PCR testing on January 13th. The slope is a very noticeable change.
The cycle threshold was set very high, and it was more sensitive to testing for viruses. Therefore, there were a lot more false positives. However, some people believe this was politically motivated, and the data is no longer in a statistical language known as the covariance stationary. Ultimately, how do we know what the impact is?
We hope to see a drop in the death rate; however, I believe there will be a more natural decline. The lower rates are alreay already to lighten lockdown measures. California, New York, Illinois, Michigan, and Massachusetts are easing coronavirus restrictions . There are accusations that the timing of lockdowns are based on politics; however, they are not as straightforward as people make them.
Tax Season is Here
Tax season has arrived! LPL has already started issuing 1099 for accounts that have simple securities. If you have more complex securities that delay their filing, many areas can delay this process. If you don't have your paperwork yet, starting in February, there will be a batch that gets each week to GWS clients each Friday until February 19th.
Remember, these dates are regulations, not set by LPL or the mutual fund companies.
President Biden's Proposal
We think that the stimulus bill will be lower than the $1.9 trillion price tag initially put out there. What are the potential holdups with this?
The Biden administration knows they will have to negotiate, so they started at a higher amount; therefore, they can negotiate down to the amount they want to get for stimulus. The big holdup is the $15 minimum wage the Republicans and many Democrats do not want to implement nationally. Many small businesses, which are already facing headwinds, would not be able to absorb that cost.
Janet Yellen Elected as Treasury Secretary
Janet Yellen, the former Chair of the Federal Reserve, is now the Treasury Secretary. Yellen is competent and qualified to do the job that she's going to do. She strongly believes the stimulus bill needs to be big, and she's not so much worried about the current debt burden.
This is a problem for a few reasons. Yellen doesn't think that corporate taxes and tax changes need to happen at the moment. Instead, she maintains we need to have big spending. We will likely see a smaller stimulus bill, but remember, a $3 trillion infrastructure bill is in the works as well. And that will have a lot of bipartisan support, as well.
Our viewers had some commentary regarding cryptocurrency as well as Janet Yellen. She wants to "look closely to encourage their (crypto-currency) use for legitimate activities while curtailing their use for malign and illegal activities." You could say the same thing about cash. You want to curtail illegal activity because a lot of notorious stuff can be done with the money. You can't just say that the money is terrible.
Three Main Tenets of the Modern Monetary Theory (MMT)
Let's go back to basics and look at three key concepts of MMT as they apply to current economic happenings.
1. Treat the Treasury and the Fed as a single entity with a single balance sheet for spending, borrowing, and printing money.
The modern monetary theory is the merging of the treasury. Yellen can print money up while the federal government will no longer go through the treasury but instead can go out to the market and borrow money from savers to fund the Government.
2. Citizens must accept dollars whether they like it or not.
The second idea goes back to that cryptocurrency. The way this works is everyone has to use a type of currency as a medium of exchange. There's no alternative; however, I think cryptocurrency is acting as an alternative currency right now. Many people are going to that with the dollar's fear and money created in the system.
3. There is no practical limit to how much debt the United States can issue.
The last idea is the statement that there's no practical limit to the amount of debt that can be issued. It's not to say that you would not need to pull back or slow down if there's inflation, but you can print as much money over the long-term. Ultimately it doesn't matter because you can always pay your debt back.
According to the graphic below, we were at $27.8 trillion in federal debt earlier this week. We will be over $30 trillion by the end of the year. If those two stimulus bills pass, looking at the end of President Biden's current term, the debt could be at $49.4 trillion.
What's causing the acceleration of the debt over the next four years? There will likely be an additional stimulus and unfunded liabilities on the social security payroll in the next four years. The Government is continuing to spend money because interest rates are low.
Typically, once the Government spends a certain amount of money, they tend not to go back. They always spend for the same projection on the debt clock. We can also ask what a global debt is?
Here in our country, we were at $277 trillion of debt at the end of last year, globally. So let's put this into simpler terms. The net worth of Jeff Bezos, the president of Amazon, increases by $321 million a day. At that rate, it would take 863,000 days or 2,634 years to pay off the $277 trillion. That's a lot of debt.
Now, how do all the countries compare in terms of their total debt? The U.S. is about 130% of the Federal debt vs. GDP. If you add in all the other assets, they were undoubtedly very high relative to RJ; for example, China has about 53% of the debt ratio. But that isn't true because of the way China keeps things off its balance sheet. They're somewhere around 335%. So debt is across the globe.
Target Inflation Rate
You can see that the red line is the 2% target inflation rate on the chart below. There are many other items that you can buy above the line, such as food, housing, alcohol, etc., and below that is gasoline, airline fares, etc. As states start to reopen from lockdown, the items under the red line will begin to get more attention.
Returns in Different Inflation Environments
In an area where we have high and rising inflation, what are some of the spots that do well? We can see equities do well, but you don't want to be in bonds or cash if we're in a high and rising inflation environment.
What about a low inflation environment with rising inflation? Commodities and gold are vital assets to be in, which is the green bars. Once again, equities are doing well, commodities are struggling, and gold is flattering. But you'd rather be in bonds than gold in that environment.
We know we're not in high inflation at the moment. If we're in a low inflation environment where they're falling or rising, the small-cap does well, growth does well, and emerging markets do well in the rising inflation and commodities and gold. However, falling inflation does not.
If we were to look at real estate in an inflationary environment, they do well at 9%, but we think there are fundamental headwinds. With real estate, work from anywhere, and policies to move away from urban to rural, we would not be surprised based on the current trajectory if Miami becomes the financial capital of the U.S. Also, there's a fundamental reason why small-cap does well. Small-cap companies tend to have the ability to continue to grow market share if they have a new product that’s sought out after.
For real-time updates, be sure to tune in on Tuesday – Thursday on YouTube LIVE for our "Daily 3x3" live streams and Wednesday for "Market Insights." Follow us on our Facebook, LinkedIn, and YouTube, so you never miss updates!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly. The economic forecasts outlined in this material may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
All investing involves risk, including the possible loss of principal. No strategy assures success or protects against loss.