Is this the real life, is this just fantasy? Is this the real life, is this just fantasy? http://www.federatedinvestors.com/texPool/static/images/texpool/texpool-logo-amp.png http://www.federatedinvestors.com/texPool/daf\images\insights\article\crowd-cheering-concert-small.jpg March 19 2021 March 19 2021

Is this the real life, is this just fantasy?

It sure seems as if our world is moving toward MMT.

Published March 19 2021

Inflation and yields are all everyone is talking about … except for Fed Chair Powell. In this week’s post-meeting comments, he basically told global investors to, as Strategas Research puts it, “deal with it.’’ So, the bond market is dealing with it—with a tantrum. The 10-year yield hit 1.75% on Thursday, a 14-month high. It closed a little lower but at this writing was rising again. Strategas estimates the term premium—the yield investors demand to lend long—is at a level exceeded only once in the past 10 years, at the peak of the late-spring/early-summer taper tantrum in 2013. With Powell more or less saying it’s “not my problem,” the momentum trade is still for yields to nudge higher until the pain trade out of equities stabilizes this move. The bond sell-off may be raising eyebrows but it’s not unprecedented. Bank of America looked at each time 10-year yields rose more than 100 basis points on an 8-month basis over the past 15 years and found stocks and the economy quickly found their feet and moved to new highs. The move in yields clearly is causing pain for tech stocks, but the broader environment looks strong as earnings and economic growth forecasts keep rising. With the personal savings rate at its highest level since the mid-1940s, consumers are sitting on a pile of cash and they’re itching to spend it. Reservations are surging at the online restaurant reservation platform OpenTable; in Miami, where the economy has fully opened, the Wall Street Journal reports restaurant attendance is running 8% above where it was in 2019. The value trade has had a strong run, as have small caps, but it’s not game over by any stretch. If anything, as the market continues to price higher growth, JP Morgan thinks it may accelerate the value/cyclical rotation, aided by expectations that as much as 35% of the $410 billion in new stimulus checks finds its way into stocks.

UBI, ever heard of it? Despite the flood of new issuance to cover skyrocketing debt, service costs on U.S. debt amounted to just 1.6% of GDP in 2020 and are expected to come in lower than that this year. Treasury Secretary Yellen, speaking on Meet the Press last weekend, said interest payments relative to the size of the economy are no higher than they were in 2007 and that her views about fiscal sustainability “have changed somewhat” because of persistently low rates all over the world. This reflects structural trends “that aren’t going to disappear soon,” she said. (Is that MMT behind the curtain?) A recent paper by economists Lawrence Summers and Jason Furman concluded low interest rates “create numerous opportunities” by expanding the scope for expansionary fiscal policy and making debt more sustainable. If fiscal spending is done effectively, the denominator can be described as Infinite Horizon GDP, they said, meaning the current debt-to-GDP ratio would not be approximately 110% but closer to 50%. (A rationale for MMT?) Yellen and Powell appear most concerned about a return to full employment. Yet with ongoing stimulus programs and rising asset prices, some may prefer not to return to work. 55% of respondents to a YouGov poll in the U.K. said they will miss aspects of lockdown when it’s over, which could point to work-life balance as well as government payments. As TIS Group sees it, the beginnings of universal basic income (UBI) are here.

Caught in a landslide, Dems are talking filibuster reform. It’s likely the only way they can get all they want: a mammoth infrastructure bill with corporate and income tax increases, new antitrust regulations, a $15 minimum wage, more health-care reforms, worker rights, immigration reform, election reform, gun control, etc. That’s why there’s talk (pun not really intended but it’s apt) of changing the current “silent” filibuster to a “talking” filibuster. A filibuster requires 60 votes to move a bill forward in the Senate; if it falls short, the measure is put on hold. A talking filibuster could possibly lower the vote threshold and lower the burden on the majority party. At its essence, it would require filibustering senators to be on the floor of the Senate at all times. When no member of the minority party is speaking, the majority party can hold a vote to end the filibuster with a simple majority. This makes it difficult to sustain a filibuster indefinitely. In an interview this week with ABC, President Biden appeared to be all for it: “I don’t think that you have to eliminate the filibuster; you have to do it, what it used to be when I first got to the Senate back in the old days. You had to stand up and command the floor, and you had to keep talking.” Joe Manchin, the West Virginia Democrat considered his party’s most conservative member, sounded a similar note a few weeks ago: “The filibuster should be painful. We’ve made it more comfortable over the years, not intentionally; maybe it just evolved into that. Maybe it has to be more painful. Maybe you have to stand there.” If Dems move forward, Senate Minority Leader McConnell has promised a scorched earth response: “Everything that Democratic Senates did to Presidents Bush and Trump, everything the Republican Senate did to President Obama, would be child’s play compared to the disaster that Democrats would create for their own priorities if—if—they break the Senate.” (Get out your popcorn, them there’s fighting words!) Personally, I think I’d be great at the talking filibuster.

Positives

  • Only product shortages may slow manufacturing Versus expectations for a slight increase, the Philly PMI more than doubled to its highest level since 1973. New orders, shipments and employment rose strongly—as did prices paid, the only fly in the ointment as Covid-related supply-chain stresses work their way through the system. March’s companion Empire PMI also surprised to the upside.
  • Stronger growth is on its way … Conference Board leading indicators rose a 10th straight month in February, before passage of the $1.9 trillion American Rescue Plan. The 6-month rate of change is running at more than double its average pace of the previous expansion.
  • … more capex, too The Equipment Leasing and Finance Foundation’s monthly confidence gauge rose for the fourth time in five months in March to a 3-year high. More than 60% of respondents expected economic conditions to improve over the next six months.

Negatives

  • Dependence on stimulus checks?  After a stimulus-fed jump in January, retail sales plunged in February, with almost every sector down save gas stations and grocery stores (up slightly). Year-over-year (y/y) sales remained higher, however, and retail sales are expected to get a big kick this month and next as stimulus checks and tax refunds flood mailboxes and automatic deposit accounts.
  • Housing stumbles on winter storms February starts fell sharply as harsh weather over much of the country brought activity to a standstill. Permits also declined but remained up 17% y/y as housing continues to trend strong, with only supply shortages and higher rates as headwinds.
  • Storms hit factories, too Industrial production plunged more than 2% in February, nearly quadruple forecasts, as the storms hit factories hard in the South, Midwest and Northeast. Only utilities gained as the cold drove up usage. Another issue: auto parts shortages that forced Toyota and Honda to halt some U.S. production.

What else

If it walks like MMT  Adding in the $1.9 trillion American Rescue Plan, Axios Capital put total fiscal stimulus passed by the U.S. government over the past year at $5.3 trillion—a number so enormous it’s almost impossible to comprehend, so here’s one way to look at it: more than $43,000 per U.S. household.

Another Ron rising? 50 years ago, it was Reagan, who knocked out a progressive Democrat to become governor of California and then went on to become a two-term president whose politics heralded a GOP rebirth. Today, Florida Gov. Ron DeSantis has emerged as arguably the most powerful Republican voice other than Trump. His star is rising because he kept Florida schools and many of its businesses open during the crisis, helping the state’s economy recover faster, with a per-capita Covid mortality death rate below the national average and well under lockdown states New York, New Jersey and California.

Value’s got Mo The ongoing rotation into value stocks—flows into value-style ETFs over the last 65 trading days were a record—has the trade taking on characteristics of momentum stocks, with significant overlap between the two in auto, banks, materials and energy names. Bernstein notes this has not happened since 2016—the last period of short but meaningful value outperformance.

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DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Modern Monetary Theory (MMT): A macroeconomic theory postulating that sovereign currency-issuing governments (such as the U.S.) can finance any budget deficit by simply printing more money. Advocates suggest through higher interest rates and taxes, the government can effectively remove excess liquidity to cool the economy and prevent inflation.

Monthly Confidence Index for the Equipment Finance Industry: A gauge of current business conditions and expectations based on a survey of key equipment finance executives.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

Stocks are subject to risks and fluctuate in value.

The Conference Board's Composite Index of Leading Economic Indicators is used to predict the direction of the economy's movements in the months to come.

The Empire State Manufacturing Index gauges the level of activity and expectations for the future among manufacturers in New York.

The Federal Reserve Bank of Philadelphia gauges the level of activity and expectations for the future among manufacturers in the Greater Philadelphia region every month.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

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