If the US wants to return to full employment, it’s going to take “a society-wide commitment, with contributions from across government and the private sector,” Jerome Powell said Wednesday, in a set of generally innocuous remarks delivered during a speech to the Economic Club of New York.
Powell’s not the best communicator. The market learned that in 2018. Early cheers tied to his “plain English” approach turned to jeers and then, shortly thereafter, to tears, when an egregious communications misstep in October of that year prompted a steep selloff in equities, forever enshrining “long way from neutral” in the annals of market history.
But one thing you can depend on Powell to do is repeat himself verbatim when he finds a series of talking points that seem to work. That’s essentially what he did on Wednesday. He also unequivocally dismissed any notion that Fed tightening is in the cards anytime soon. Risks are tilted to the downside primarily from slower vaccine rollout, he said, noting that the Fed isn’t even thinking about withdrawing policy support. The committee isn’t thinking about shrinking the balance sheet either.
Amusingly, he insisted the Fed doesn’t venture into fiscal policy. That, on a day when Treasury said the deficit quintupled from a year earlier (figure below). January’s shortfall was nearly $163 billion, versus around $33 billion last year. The latest monthly figure includes some of the costs associated with the virus relief package passed in December.
I said “amusingly” above. I didn’t mean to indicate you should be concerned about the federal deficit. That’s not the red ink you need to be worried about. Rather, what’s “amusing” is that the Fed’s ongoing purchases of Treasurys quite obviously represent a foray into fiscal policy. They always have. Those Fed purchases are arm’s length deficit financing. And, as Powell made clear Wednesday, those purchases won’t be abating anytime soon.
Wednesday’s closely-watched 10-year sale went fine, even as Treasurys rallied over the US morning following cooler-than-expected CPI data.
As ever, BMO’s Ian Lyngen and Ben Jeffery offered an incisive assessment that managed to capture multiple dynamics in just a few words. “For those anticipating today’s session would be definitive, the takeaways can certainly be skewed toward the range-confirming camp,” they wrote, in a Wednesday afternoon note, adding that “the combination of disappointing core-CPI (lowest annual pace since June) and the solid takedown of the 10-year refunding have brought into question the inevitability of higher yields from here.” They’re not ruling out 1.25% in the near-term, but after the last three days, it certainly does feel like we’re “closer” to 1%, even as 1.13% is basically equidistant.
In equities, it was another listless drift sideways near record highs on Wall Street. As mentioned Wednesday morning, the MSCI World in its longest winning streak since the election.
There’s really not much anyone can add in terms of meaningful color at this point. It’s just all some derivation of the same boilerplate soundbites. Stocks are higher. Sometimes, that’s all you need to know.
Speaking of higher, it appears the Reddit crowd has decided to pile into weed. Tilray jumped nearly 70% at one point, for example, while the Alternative Harvest ETF is enjoying what looks to be its most spectacular three-day surge ever (pink in the figure below).
This space is a bit more challenging when it comes to deciding whether something is or isn’t a “bubble.” There’s little question that most of the world is headed towards a full-on embrace of legalized cannabis. So, while it’s entirely likely that money can be made on the short side when things run too far, too fast, betting against this over the longer-term feels a bit like swimming against the tide.
I’m fine with watching that play out from the sidelines, no matter what happens.
The Fed’s policies actually tend to suppress inflation by keeping alive excess capacity. Funneling money into the hands of those likely to spend (but not enough to eventually keep them from better paying jobs) should be a focus. Giving $1500-2500 a month to the lowest 50-75% of the population would definitely move the needle. I am not a big believer in universal income but if you want prices to move up isn’t a demand shock a good way to go and one that could be sustained? And if demand is sustained investment could follow and the markets would provide capital (whether debt or equity as we have an excess savings pool). Also, why don’t we actually pay people to achieve education. Pass a grade get a check, get a degree get a bigger check, get a certification get another big check. Focus on science, engineering, math, etc. The more productive the workforce is the less universal basic income we will need to provide. Productivity is the key to a better quality of life and investment and education lead to productivity.
After a decade of doing the same thing and expecting different results is it not time to consider a different path?
some of the ex-communist countries used to give high achieving students a stipend comparable to an average salary. some still do. sounds like a good idea to me. reward performance early on and performance may follow.
The great thing about the stock market is that if you don’t like or are too late to a given “opportunity” – there will always be more.
You just have to be interested in sourcing opportunities.
Passed on over-shorted stocks, cryptos and pot- but I am seriously interested in banks who might have “over-reserved” in 2020 and will be releasing reserves in 2021.
Maybe the banks will actually start making loans, as well.
I really like the next item on your prospect list. When the CEO of my first bank (actually a mutual S&L) consulting client took over the job he went over the loan portfolio and through write-offs and reserves was able to essentially reserve the bank into negative net worth, creating a potentially huge tax-loss carry forward. He converted the bank to a stock company, negotiated a forbearance agreement with regulators, and sold enough equity to eight angel investors to bring the bank’s capital to Federal minimums and the rest was history. Through the next couple of years he set up a trust company and a very profitable student loan subsidiary, and started making recoveries on the bad loans and unwinding the reserves. For four years profits were tax-free, equity piled up, deposits and loans doubled and we sold the place to another bank for a huge gain that allowed the angels to get out with five times their investment in four years. Those reserves are such a handy tool for earnings management.