The Over-heating Economy
Author: Greg Valliere
February 18, 2021
YESTERDAY’S BLOWOUT RETAIL SALES REPORT, combined with steamy PPI inflation data, confirm our view that the economy does not need $1.9 trillion in fresh stimulus.
ECONOMISTS EVERYWHERE REVISED THEIR GDP FORECASTS upward yesterday, with the Atlanta Fed now predicting 9.5% growth in the first quarter, which traditionally is soft (bitter winter weather makes 9.5% unlikely).
BUT THE SECOND QUARTER COULD ROAR, as new stimulus looks increasingly likely to win enactment in March — at least $1.5 trillion, maybe something closer to President Biden’s $1.9 trillion request.
WITH UNEMPLOYMENT STILL ELEVATED and a need to speed up vaccine shipments, there’s still a case for more economic medicine, but as we continue to caution — medicine yes, overdose no.
HOUSING IS RED HOT, EARNINGS ARE A HUGE SURPRISE and now retail sales are clearly on the upswing, which means inventories will have to be rebuilt — but pipelines are clogged, especially at U.S. ports. This has led to higher prices, which may persist.
WASHINGTON IS FAMOUSLY OBLIVIOUS TO MARKETS, so there’s little attention in this city to what’s happened to the Treasury 10-year bond yield, which has rocketed higher in recent weeks. Even with a relatively soft labor market, the bond market vigilantes see inflation on the horizon.
THE MARKETS HAVE IT CORRECT: The economy doesn’t need a $1.9 trillion stimulus; maybe something like $1 trillion would be plenty. But as Rahm Emanuel famously declared, “never let a crisis go to waste.”
JANET YELLEN AND JEROME POWELL seem determined to let the economy over-heat, and they consider higher inflation an acceptable risk. So they’ll get what they wish for, with one important drawback: rates are headed much higher — which may prompt Fed officials to re-assess their massive asset purchases, perhaps by fall.
* * * * *
INVESTIGATIONS AND MORE INVESTIGATIONS: When things go wrong, investigations follow — and there are three big investigations to come, starting today:
GameStop: There’s an excellent article on the Reuters web site this morning about today’s GameStop hearing on Capitol Hill. This may be a classic example of a frothy hearing after the crisis has passed, but populists will call for much tougher regulation — perhaps even curbs on “shorting.” It won’t happen.
Texas: The blame game is in over-drive as Texans shiver. The Wall Street Journal editorial board wants to blame wind power, but a closer look at this complicated narrative will focus on natural gas. In any event, the bloom may be off the rose for Texas; seemingly everyone in California wanted to move there just a few months ago. Incumbent Texas politicians suddenly look vulnerable.
Andrew Cuomo: The media darling last spring and summer is now in free-fall. He faces widespread investigations, alleging the New York governor concealed nursing home data on Covid fatalities. The issue isn’t whether Cuomo’s political career is over (it is), but whether he can simply hang on as governor.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2021 AGF Management Limited. All rights reserved.