Subject: Ross Rant – 11/26/2020
As we get toward the end of the year it is good to look at what occurred in the economy. We had a massive recession unlike any in history where the entire world economy shut down. That never happened before. Other recessions were based on high rates, banking failures, bad mistakes by the Fed or Congress, or some other financial market collapse, like the housing market and RMBS markets in 08. This time was unique, but was handled better than any in past history. The Fed this time, and Treasury, acted immediately and decisively, and Mnuchin got Congress to implement several programs that were crucial in saving the markets and general economy from complete collapse. Those actions provided liquidity for capital markets and banks, and support for the unemployed and businesses. That allowed the economy to bounce back in a V in a way few expected. Trump was one of the few who got it right. The US Markit monthly aggregate survey hit a new high this week for November. The EU continued to go lower by contrast. Clearly the US has been doing things right, which is why I have continually said stay away from the EU stocks. While there are sectors like hotels and travel that have gotten creamed, most of the rest of the economy is bouncing back well, and will continue to do so provided governors do not shut things down again. The combination of immediate market liquidity, and the payments to individuals and PPP, saved the day and set the stage for the recovery. The capital markets are functioning very smoothly, and IPOs are having one of the best years ever. Liquidity in capital markets and historic low rates are key to keeping the economy headed upward. A lot of the consumer savings strength is due to the lockdowns and lack of travel and eating out. Savings worldwide are at historic high levels. In fact, the world is awash in savings and cash even now. One big difference this time is due to lockdowns, service industries are what got wrecked, and hard goods and high tech thrived. No matter how much there are low rates and fiscal stimulus, these cannot get people to travel and eat out until the vaccine is widely used. It is likely that now that the virus is surging again, job growth will slow, but not die this time. Most governors realize a total lockdown was a disaster, and are only doing limited restrictions in most states, plus the death rate is far lower now. In red states with limited lockdowns the unemployment is 6.9% or lower, while blue states with much tighter lockdowns the unemployment rate is around 9%. The red states will help keep the economy growing, even if more slowly. Unfortunately the Dem view is that it is more important to stop the world, and try to stop the virus, than it is to save people and businesses from the effects of lockdowns. Thus we briefly had one of Biden’s “experts’ come out and say we need a six week total lockdown. So much for Biden’s experts. You may have noticed that guy disappeared. I guess Fauci stopped that stupidity. A brand new study in the EU shows that countries with minimal lockdown did no worse than those with major lockdowns. This is consistent with the Great Barrington Study signed by 43,000 experts. Lockdowns are a negative, not a positive. One tiny example. I tried to get a simple teeth cleaning appointment with my dentist here in FL. The first opening is in April due to the virus backup in delayed care. Just imagine if I needed some real medical diagnosis. I now have a new dentist.
You may be enjoying the record high on the Dow, and have some belief the stock market will continue to go up. Don’t count on it. If the Dems win both seats in GA, the market will tank. Yellin at least is a good non-political choice, but it is unclear how much power she really will have. We need to see the rest of the economic team. Pelosi will exert huge pressure on Biden to pass a $2.2 trillion Covid deal, just as the vaccine starts to be administered. However, now more sane Dems are pushing to pass a smaller more rational deal. That is very possible now that the Republicans won so many House seats sending a loud message about Pelosi’s actions. If the Dems control the Senate it might pass a massive give away and then we are in real trouble. We can’t pay for it, nor do we need it. Will Yellen push back? We will see. Be prepared to get out of the market if the Republicans lose control.
There is still $450 Billion unspent from the stimulus programs passed by Congress that was committed to backup Fed loans. Mnuchin insisted that money be refunded to Treasury from the Fed as required under the CARES Act. The Fed has now agreed, and that cash can now be reallocated by Congress for stimulus with no more giant Congressional Pelosi goody bags. Mnuchin is exactly correct. Of course Pelosi and Schumer wanted to leave the funds at Fed and pass a new $2.2 Trillion wasteful programs. This is one reason GA is so critical. We need some more fiscal stimulus which is targeted, but not another massive give away to all of Pelosi’s favorite agencies and non-profits and unions. It is clear Pelosi never was going to allow any fiscal stimulus until after the election. It is unclear what Congress will do before January 20, but likely not anything. GA matters a lot. Fed actions are economy wide, while fiscal legislation can be very targeted. Reality is capital markets are working well for even IL which raised $1.5 billion recently in the bond market, so there is no need for us to be paying for the waste and corruption of states and cities, and especially no reason for us to bailout the outrageous pensions to teachers that have been locked in by Dem states and cities. Were it not for the huge pensions, these governments would have the money for cops, and other uses that are far more deserving. As I have said numerous times, it is the pensions that are the problem, and Biden will do nothing to fix that problem. By the end of four years it will be a real crisis.
There is nil inflation in the world, and that will remain for several years as the world economy is slow to recover. Oil prices are going up again, but they are not going back to $100. Ever. If Biden dopes shut down a portion of fracking and regulates the rest out of business, then much higher oil prices will happen. So now the Fed has adopted what is called Flexible Average Rate Targeting. Meaning, they no longer will raise rates before inflation hits 2%, but instead will let it rise a little over 2% before acting. That means low rates for several more years. Good for real estate, and other interest sensitive industries like housing. It also means for a few years, commercial real estate will be valued higher than it should be, and buyers who purchase an asset in 3 or 4 years will find rates go up after that, and values will be stalled after they hold the asset for a while. The Fed is trying hard to keep inflation expectations low to under 2% to justify lower rates for several more years. The “neutral rate” target for Fed funds is set at 2.5% which we will not hit for a couple of years. Right now the equivalent of 25% of the value of GDP is held in bonds by the Fed. Roughly $5 Trillion. The good news is that the Fed earns around $900 billion a year in interest on these bonds which it pays to the Treasury, thereby reducing the national debt by that much. However, one could argue that it is all just a game of moving cash from one hand to the other, and back, and the reality is the private markets cannot handle the flood of US Treasury debt were it not for the Fed. Once real rates do rise, the Fed will stop buying Treasuries and corporates, and then it will get interesting, and maybe unpleasant.
The economy will likely not fully recover in all sectors until sometime in early 22, but until we know who controls the Senate, we will not be able to project anything. For large conference hotels, recovery could be much later. Biden is going to make recovery much harder with massive new regulations, and a partial shut off of fossil fuels. Energy costs will rise, operating costs will rise, labor costs will go up materially as Biden issues executive orders and union friendly regulation, and banks will likely become more reluctant to lend freely since they will face new regulations, and thus fear of big fines again. The appointment of Yellen will prevent much of the worst regulation and attacks on banks that would have happened if the radicals had their way . Trade policy will go back to much more liberal globalization policies that failed so badly under Obama, and China will emerge even stronger to the detriment of US manufacturers, and to the detriment of US workers. Many hotels and restaurants will fail, as will more big retailers and malls. But that is a cleaning out of the marginal players, and those remaining will be able to recoup. The strong will be stronger. Just look at Amazon, Wal Mart, Target and Home Depot. They are thriving. Housing will remain very strong for several more years due to low rates and a massive supply shortage. All that savings is making house purchases possible. We went from 70% owners, to 64%, and now we are headed back upward as there is a massive move out of many cities. Housing is a great driver of the economy. However, 25-35 year olds, the prime time for home purchases, suffered financial setbacks with the crash 12 years ago just as they were graduating, then a very slow recovery for 8 years, a lot of student debt, and now the pandemic. Housing would be even stronger had these things not occurred. What is needed is a real infrastructure program. Not the make believe waste of the Obama stimulus shovel ready. Unfortunately, Biden will reregulate, and cause major delays and higher costs, and that will inhibit projects from happening, and all of Trump’s deregulation of infrastructure projects will be undone. It is likely that any infrastructure program will go nowhere again due to over regulation and the probable demand that they use union labor and a diverse labor force if there are federal funds.
As with most recessions, there is pent up demand. However after this one there is huge savings and the lockdowns, so when the vaccine is fully implemented by Q3 next year, the spending and travel will increase materially. That is when travel and hotels will see a major recovery.
I am having a very hard time deciding what to project. Putting aside the GA election, on one hand there will be a major recovery due to the vaccine and all of that pent up demand backed by huge savings and less credit card debt. Biden will have the wind at his back for which he will take totally undeserved credit. The press will spin it that it was all Biden and the fact is it is all Trump setting it up with warp speed and refusing to close the economy again. On the other hand it is clear we will have massive new regulation, a far more accommodative policy with China which will cost jobs in the US, and much higher energy costs and labor costs. It is too hard to see how all these things balance out. I think the stock market is overly euphoric about the vaccines, and ignoring all these other factors. My problem is I look past this one moment and try to see all the other factors which will inhibit profits, and I don’t like what I see. The regulatory and geopolitical changes that will be implemented are going to be very detrimental over time.
Someone needs to explain to me why the average family with no college education should pay off the loan for those who took student loans they cannot repay. The loan program was irresponsible where anyone with no credit and a useless major could borrow big amounts with no viable way to ever repay. It was all a way to let universities raise tuition by passing the cost on to taxpayers. Thus we had tuition inflation far beyond anything that could be justified, and expenditures on campuses that made them like resorts. Many with loans just dropped out of school and still have a loan, but less ability to pay And now the rest of us will be made to pay it off. The whole student loan program needs to be redone to have requirements for credit, or a course of study that will result in an ability to repay, and limits on loan amounts with pressure on schools to lower tuition. That will never happen under Biden so plan on an even worse student loan problem and a massive hit to taxpayers.
Based on the cabinet appointments just announced, it is clear Biden will follow the same failed foreign policies of Obama. Their policy of multilateralism is back. Trump and Pompeo have engineered one the greatest peace programs in history in the Mideast. To have Netanyahu actually fly into Saudi and meet the prince is spectacular. My guess, with no knowledge, is Pompeo convinced them both to do a deal now before Biden and his team try to give away the store to Iran again, and set up the region for major conflicts again. The meeting sent a massive message to Biden, Blinken and Kerry, they better not try to end sanctions, or loosen pressure on Iran unless the Arabs and Israel agree to the deal. They have partially boxed in Biden now. If the Republicans do control the Senate, they will never get any deal agreed to in the Senate unless Israel and the Saudis agree. We are going to go back to globalization and multilateral policies which were detrimental to the US. It means the US will cede control to organizations, and give up the America first policy. The establishment and the press think Trump destroyed US leadership, and ruined all of our alliances, but just ask the Arabs and Israel, and ask the Secretary General of NATO, and you get a very different response. Ask Ukraine, who gave them the ability to stop the Russian invasion with anti-tank missiles after Obama gave them blankets. Or ask Iraq and the Kurds who destroyed ISIS after Obama Biden did nothing but allow them to rise up and to grow much stronger. If we had no alliances what were NATO forces doing in Afghanistan. Germany hates Trump because he called a stop to Germany not paying for its own defense, which Biden will now relent on. Merkel and the EU refused to do much of anything after Russia invaded Ukraine, but then she did the gas pipeline deal with Putin which was a major reward to Russia until Trump stopped it. No wonder Germany hates Trump. China took over Hong Kong and runs concentration camps, and then the Asians do a major trade deal with them which is a huge reward. And these are the allies who we are supposed to align with and do as they say? When Trump took office even Obama said N Korea was a pending war, and setting off nukes. Trump threatened Kim credibly, and the result was nothing happened for the past four years and no nuke blasts. Under Obama, NATO was nearly non-functional and unable to defend itself. It now has a more formidable force. The US military was unable to win a major war by the end of 2016 due to 20%+ cutbacks in military budgets. Now it is back to being a major deterrent to China, and improving fast, but with a long way to go to make up for all that lost time, while China rushed ahead. Biden may set that back again if he tries to cut defense spending. Jake Sullivan is well known for pushing a let’s be friends with China policy. The exact opposite of what needs to be done. Sullivan is also the advisor to Hilary who pushed the Libya war which has now lasted 10 years and is a mess. He is also the person who was reported to have shredded state department documents about Benghazi on behalf of Hilary. Again, GA matters to world peace. Israel will be left again to fend for itself, but now it has the Arabs as allies, and that will make a huge difference. The US will now be told it has to spend tens of billions on climate, and what laws it has to follow. The costs to US companies and real estate development will be hundreds of billions, and not accomplish much of anything more than what was already being accomplished by the private sector due to fracking and Tesla. China has zero requirements until 2030, but the US will have stringent requirements, and Kerry will fold on everything just as he did to Iran. This climate accord will do real damage to the US economy, and especially to the oil, auto, and real estate industries. We will be constrained by the UN and WHO, and other world institutions as to our ability to act in our best interests. The EU has no foreign policy of its own because it cannot agree on what that should be, but Biden will not take independent action when needed, so we become as weak as the EU, instead of an independent super power taking on Iran, China, Russia and ISIS. What the establishment and the press thinks is going back to “normal foreign relations” will mean back to weakness and failures like Libya, Syria, N Korea, Iraq, China and ISIS. Where was this wonderful set of allies when ISIS was running rampant. They were nowhere until Trump changed the rules. Where were all the other allies when China was building its massive military and fortified islands in the S China Sea and creating a monetary influence that now is used to blackmail nations like Australia. Biden would never have killed Soleimani, the worst terrorist in the world. That setback Iran in major ways, and sent a loud message which is now going to be reversed. He was even against killing Bin Laden. As Robert Gates said “Biden has been wrong on every major foreign policy issue for over 40 years”. And now the press thinks it is great to have him as president and to reinstall the Obama team and failed policies. The next four years could get very ugly as Iran, China, Russia, and N Korea, and terrorists test Biden and find him very weak and anxious to appease again.
In case you missed it in all the other news, the clamp down on freedom of speech on campus is now worse than ever. Just look at Harvard students demanding that no Trump administration person can ever set foot on campus, and the university has said nothing in response. We will see much more of this, and this is why these kids are pushing socialism and cancel culture when they graduate. Blacks are empowered on campus and told they are victims who are owed a job and a good income, instead of what we were told. Here is an education in skills, and now it is up to you to succeed or fail on your own. The professors and universities are why we are all called racists. That is what they are taught in university today, and then big corporations pander to this false claim, as do Democratic politicians, and we get a race to the bottom where merit is no longer the test for employment or promotion. Diversity is coming to your healthcare, legal representation and STEM subjects. Some major companies are now requiring their law firms to include blacks in their roster on a case. It used to be, give me the smartest lawyer who will do the best job regardless of skin color. No longer. Now it is you must have a black and a female on the team, or we will use another lawyer. This is utter stupidity.
One of the really bad things coming if you have a son in college, is a return to Title IX which lets girls make false claims of rape or harassment, with no real due process for the boy. There are now dozens of cases of boys in Federal courts where the boy was falsely accused and had his life wrecked, and he was kicked out of school. This is just one small example of what is coming. School choice will be under enormous pressure by the teachers union to have it ended. Right to work laws will be under attack. Minimum wages will be set to rise and destroy many small businesses in non-urban areas. The press will say this all wonderful stuff. A lot of bad things are coming. It will be a return to Obama on steroids with the radicals pushing for much more. In my mind Obama was one of the worst presidents in history, and he did severe damage to the world. The cabinet choices are the people who implemented those policies.
Obama just came out and defended Jeramiah Wright as being taken out of context. That just confirmed my belief that Obama was basically anti-Semitic, and pushed things like Ferguson and Travon, and set the stage for the BLM and anti-white rhetoric now rampant on campus and in the streets. Obama and Holder did massive damage to America by igniting the mantra of systemic racism.
I don’t know what Trump and Giuliani were doing, but they now look like fools. If they really had all the evidence Rudy claimed, where was it when in court. I have no doubt there was ballot fraud in Detroit, Philly, Atlanta and elsewhere, but if they can’t prove it was major in court, and now they need to stop chasing it. While we are at it- Where is Durham. He was supposed to indict by late summer. If he does not show up with indictments in the next week or so he will have done massive damage to the idea of equal justice.
If you wondered how Longboat Key managed in the hurricane two weeks ago. The north end of the island had major flooding. 5 houses on my street were wrecked. Thirty homes on the island were ruined by flooding. I am up 10 feet on concrete and steel walls so had no damage, but some neighbors who are at grade are having to completely rebuild their interiors. The good news is FEMA pays for all of it so several of them say this was a good event because now they get all new interiors and kitchens at no cost. This was the worst flood event on Longboat in many decades.
We have much to be thankful for being Americans. Have a wonderful holiday
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