Watch the ten year and oil prices. Oil is $57. Both are now moving up. Look for food prices to move up as soy and corn remain at much higher prices and gas prices raise transport costs.. New home construction costs are up as lumber prices are up substantially. These are all core costs for households. And we still have not had the release of all of that pent up savings which will happen in June when the vaccines are widespread. While the Fed, and many others, still say there will be no inflation, I believe with these base commodities up so much, and the flood of spending about to come in June and onward, it is hard to see how there will not be some level of inflation that could go above 2% by late in the year. The yield curve will give us a warning. Railcar loadings are now above where they were in February 2020 before the shutdown. Energy prices are going to rise. In Germany they started to shift to renewables years ago and are now at around 65% renewables. Energy prices in Germany are now up to over 2 times what they had been, and they had to go back to using some coal plants to supplement power when the sun doesn’t shine and the wind does not blow. Welcome to the results of renewables for energy. Poor people will just not be able to pay for power I guess, so they will devise a new federal program to pay their power bills. And so the cycle goes around. We are not far from economically viable batteries to store power generated by sun and wind, but it will be possibly decades before this is widely installed and viable to make a real difference in how power is generated. Similar to electric cars, it will take 15-20 years to make the change over.
Reality is, more than 50% of the unemployed are receiving more in enhanced unemployment than they were earning, and that was at $300 not the $400 Biden wants to pay, plus they get food stamps, and no eviction for not paying rent. Plus they got $1200 per person, then $600, and now maybe another $1400=$3200 bonus. Plus if they are married with 2 kids they got an added $2200 under CARES, total $5400, and will now get another $4,000 (1400 per adult and I think $600 per kid) . Total for a married guy with 2 kids-$9,400, plus he is making more per week by not working. That is more money than most of these people ever had. And they wonder why some companies can’t find workers and unemployment is so high still. Plus their kid gets a free laptop, and their college grad kid gets his student debt paid off by the taxpayers. And now they plan to add another $3600 per child, $7200 per family of four, permanently. With $15 minimum wages that is $31,200 per year. The average income in places like Lumberton NC is $13.82 or $28,000. What a message to workers- why work- the rich guys will pay more taxes, and the government will pass it on to you for not working. Consumer balance sheets on average are the strongest they have been in decades. Savings are the highest in decades. There is no crisis of hunger or homelessness other than all the drug addicts in CA, OR and WA living in the street who get taken care of by their respective cities. Somehow those people seem to be eating real food. The whole basis for the $1.9 trillion is needed to alleviate all the “suffering” is bogus, and is just part of the new economic policy that if you throw trillions at the problem, and redistribute wealth, and pay $15 per hour, unemployment will go back down, and poverty and hunger will be eliminated. Keep that in your mind, as the underlying basis for all the spending and economic steps the White House and Dems take. They firmly believe that government spending and programs are what is needed, not deregulation and strong support for the private sector to create the jobs. Same policies as FDR after the 29 crash. They hate Trump so much that they ignore what the situation was in February 2020 when we had 3.5% unemployment by doing the opposite of what they are doing now. They also believe that the “worries about over spending are overstated”. They also believe “that concerns that the benefits of deficit financed fiscal support will be washed away by higher interest rates doesn’t apply.” These are quotes from policy documents I have read. That is the basis for all of the spending programs you see. Government transfer payments to individuals in 2020 were $1 trillion greater than all wages paid to individuals. Just for perspective.
If they would force the teachers to go back to work, and force NY, CA and IL to reopen, we would not need much of a stimulus. By the time any of this money actually gets into people’s pockets it will be late March or April, or later, and by then vaccines will be widespread, and the cases and hospitalizations will be far lower. They have not even spent the last $1 trillion from the last two packages. Almost none of the money for schools has been spent yet. By raising the excess unemployment to $400, and giving all that cash to low income workers, they will keep unemployment high. It is totally counterproductive to all the stimulus, as is $15 per hour. The whole thing makes no sense. I have the memo that explains the administration justifications for the stimulus program. It essentially says, “we are not sure what will happen so better to go too big than too small”. They also know inside the White House that the allocation to states and cities is way more than needed by maybe $400 billion. There is no need for the allocation to schools since there are tens of billions unspent from the last bill. Bottom line is the belief that throwing money at the problem is the answer to everything. Their answer is spend instead of force the teachers back to work and force CA, NY and IL to reopen, and lower the excess $300 unemployment. The White House believes the Fed is out of ammunition and that is why they think now it has to be fiscal stimulus. They believe inflation will remain low, as will rates for a long time. I think it is not so clear. 2022 is going to be a bad year in the stock market if all of this goes through.
I listened to Biden push for his $1.9 trillion package. I had trouble listening to the BS. He essentially said what I told you in my last letter. The whole push is to get unemployment down as fast as possible no matter the long term consequences, and having the government instead of private enterprise create these millions of new “green jobs”. He said under Obama they tried $800 billion, and it did not do the job, so now we have to double down. The definition of an idiot is doing the same thing over again after it was a disaster the first time. They did not yet spend most of the funds from the last $900 billion, nor billions from the first CARES program, so what are they going to do with $1.9 trillion of new wasteful money. This is a potential fiscal disaster, and we need to hope Manchin stops the worst of it. The only real answer is more people getting vaccinated, lift the shutdowns, and teachers going back to work, and problem solved. Biden made it sound like we are in a major recession, but that is just not true. I can see the political appeal of the story that we are going to just hand you another $1400 per family member, more food stamps, rent money, higher minimum wages, dismissal of your student loan, and other goodies. Who will say no to that package of free money other than those of us who are paying the bill, and who understand what an economic disaster is being created. It is a huge political winner for the Dems for 2022. That is all this is. It is all up to Manchin now. Even Larry Sommers, former Treasury Secy, said it is too big, and going to create big problems in the future.
In addition to all of that waste of money here are the added programs yet to come to spend your money. $2 Trillion for infrastructure with 40% to be spent in black areas whether or not there are $800 billion of projects that make sense, or would be ready to build in less than ten years. The rest is the same old “shovel ready” program from Obama that totally failed. A tax credit of $15,000 to minority families to buy a home. What about poor whites or Asians. Build 1.5 million affordable homes. Who is going to be the developers and where is this land for what cost. They once had Section 8, and that did not work out too well. Grants to 1 million minority businesses. What about struggling white owned hotels and restaurants? A $10 billion VC fund for minority businesses? Who are they going to hire with the ability to underwrite these ideas and monitor them? Seems like a massive corruption scheme. Forgive student loans for $10,000 or maybe more. Just a few hundred Billion here. What about all those who already paid off their loans like responsible borrowers? Tuition free college. A few tens of billions more forever. Build high tech labs in minority communities. Who is going to build these, and who with any real ability is going to run them when they could earn many times as much in real high tech private firms. $50 billion for investing in apprenticeships. I guess we will pay companies to hire people which they already do with their own money. Here is the real killer,. Force all lenders, even non-banks to make loans they otherwise do not want to make to minority borrowers-this is a repeat of subprime programs all over again. It will also require banks to open branches in low income communities and make more loans they cannot justify. $100 billion new loans by the government in black communities. Who underwrites these and how do they prevent mass corruption. Now if you lost count of how much of your tax money just went down the drain, so did I. It is trillions. But not to worry, they will just raise your taxes to redistribute your money to others who did not earn it. It can be your new charity. Some in the White House team have said expect there to be a 10%-20% drop in the stock market in the next 12-18 months, but they feel it makes no difference to the economy. They are just focused on jobs, so they are dismissing that as not a problem. Let that sink in.
Wisconsin now is collecting its tax collections at a level that is back to pre-March, 2020 levels. So there is no need for any federal funds for them. Moody’s has just lowered its estimate of the states’ shortfall of funds collected, and the need to $224 billion. I don’t have the numbers, but I will bet if CA, NY and IL would reopen and reopen schools so people could get back to work, the gap would decline dramatically, meaning no need for the $1.9 trillion package to have any money for states and cities. According to the WSJ there is still $1 trillion of unspent funds from the first two $4 trillion Covid programs. Can we first spend what we have in the bank before we take on more debt? What they need is massive pension reform, not more subsidies.. The real issue is places like NY that has 2 million less population than FL, but twice the budget. Waste is enormous. If it were not for the grossly excessive government worker and teacher pensions, there would be surpluses in most cities and states. Back to the teachers again as the real problem. In the end they will lower the threshold for the extra $100 and maybe lower the $1400, and they may lower the money to states and cities. However, expect them to come back later this year for more money if they do that.
There is now a growing consensus including the economists who advise the White House, to major investors, that the stock market will drop 10%-20% in 2021 as a result of the bubble created by zero rates and massive fiscal spending. I agree this could happen so keep your eye on the ten year and any shift in Fedspeak. If the ten year gets close to 2%, that will be the trigger, or if Powell shifts his words about rates. That will be the time to be a seller of much of your stock portfolio. Bonds will also be dropping at that time as rates rise. Stay out of bonds. They can only lose from here. In the meantime the SPX is likely to go above 4000, and possibly could reach 4400, although that is a real reach.
So now the games with Game Stop and the others are over, and it is very likely some hedge funds made a fortune on the way down as well as on the way up. Don’t whine for the hedgies. Next week the political circus begins in Congress when they rake Robinhood over the coals, and whine all about the poor individual investors who they will claim “got screwed”. Well the individual investor took his shot and some made a lot of profit, and some lost a lot. That is what happens in the stock market when you gamble. We need to hope there is no new regulation coming out of this. There is none required. Now they are playing with Bitcoin, and they tried silver. It has become just a game for many of these kids. The good news is none of the market makers or funds went out of business, and the market is back to itself now. That should show that the current regulatory structure worked. Robinhood never could have anticipated the massive volume, and even Schwab had delays in executing trades. Everyone needs to move on after the politicians and press get done with their misinformation circus. These things happen periodically in the market, and at least this time there was no disaster as we have seen in the past. The focus now will be on pay for order flow which is how you get zero commissions. Big trading houses pay Schwab and Robinhood to place their orders through them, and they take a tiny spread to make their profit. The customer pays that spread, but the execution price is supposedly better than if they paid a commission and the originating broker executed. The claim is, in the end the customer is slightly better off. I do not know the numbers on this to know, but if they stop pay for orders commissions will come back. One way or the other the customer has to pay for the system to function to execute orders.
Biden’s foreign policy continues to send the signals that he is weak, and will eventually roll over for Iran despite saying the sanctions will remain for now. These are the same sanctions Biden said were so bad when Trump imposed them. He now stopped helping the Saudis battle Iranian proxies in Yemen so Iran can try to finally set up another proxy army to attack Saudis. Stop arms sales to Saudis and UAE violating the Abraham Agreements, further sending the message to Iran that he will not resist their move to dominate the Mideast. A new report says that Iran could now be in a position to have a bomb in months. Biden has not talked to Netanyahu, and pointedly did not even mention Israel when he spoke about the Middle East last week. What do you think Iran read into that. Obama II. Ignore Israel. Signing the renewal of the START treaty for 5 years was a terrible strategic mistake as now Russia has no reason to agree to anything on short and medium range missiles and no reason to push for China to sign on. When Blinken asked China to negotiate a similar nuke treaty last week they told him to get lost. Trump was using the renewal of START to get Russia to try to get China to the table. That is now gone. A major strategic blunder. In two weeks the foreign policy team is off to a great start. And now the head of our nuclear forces says we need to plan that we really could be in a nuclear war with Russia or China. And we have Biden and his previously failed Obama foreign policy team in charge.
I have shifted from thinking Haley will be the Republican nominee. I now think it is more likely to be Pompeo with Haley or Tim Scott as VP. When asked last week if he was running, Pompeo just smiled and said he was deciding what to do next. If he runs he will have Trump’s full backing. Trump will not run. He has too many legal and financial problems to deal with. And he will be 78. Pompeo is the perfect, very smart and well educated person with the perfect resume to be president.
Biden DOJ dropped the case against Yale for discrimination in admissions against Asians. They wasted no time in confirming that diversity admissions are here to stay until the Harvard Asian case is decided by SCOTUS. If you are a white heterosexual male you now go to the bottom of the list for school admission and jobs.