Stimulus: Can There Be Too Much Of A Good Thing?

What are the unintended consequences of having too much of a good thing? Will too much free money trigger such a spike in inflation and borrowing costs that the parabolic rise in stocks triggers another crash?

As we have often discussed, the biggest lesson learned from the Great Financial Crisis (GFC) of 2008 was that we could print money out of thin air without causing a panic or collapse of the financial system. Irresponsible and dangerous perhaps for global banks to print trillions to hand out as if it were real, but for now, being the only game in town allows our fiat currency system to be sustained. Since Central Banks saved the day buying up debt and equities during the last crisis, this time they have already tripled their pace of fiscal and monetary stimulus, with much more to come regardless of the recovery. Politicians know you can’t let a good crisis go to waste, so they are handing out more money than can be utilized during the pandemic, causing a sustained stimulus throughout their term in office.

The new Biden stimulus of $1.9 trillion could boost GDP several percentage points this year and even add 1% growth to the global economy. Almost $12 trillion in US fiscal and monetary stimulus is in the system or on its way with another $2 to $4 trillion of infrastructure proposals due to pass during the 3rd quarter. The potential Government spending of $6 to 10 trillion would be 28 to 45% of the entire annual US economic output (GDP).  Add to this the multi trillion infrastructure package to the growth equation and it’s likely another round of hikes in GDP economic estimates in the 8 to 10% range for 2021 are coming. Forecasts are unanimous that interest rates and inflation will rise as the economy overheats later in 2021 and 2022.

The biggest obstacle to such an overheated growth rate, assuming no Covid, is the supply chain. Is there enough material and labor resources to meet demand? How many less cars will be sold due to an expected one year shortage of semiconductor chips? Will there be enough planes to handle increased travel? Will there be enough truck drivers to deliver goods? Exacerbating this will be Government inspired wage pressure through the 3rd quarter with enhanced unemployment benefits pushing jobless incomes into the $20 an hour range for those choosing to turn down their old jobs at lower pay than Uncle Sam. Job openings are already very high and headed for record levels this year, yet we suspect the pace of hiring will not keep pace. Rising prices for raw materials has been a major complaint by employers recently, but the shortage of people with the skills or desire to work will become extreme by year end.

 With lumber and industrial metals soaring and an expected spike in working wages, many fret about a major inflation scare. Our esteemed Fed Chair Powell wants inflation to reach 20 year highs and has assured us it will only be transitory if it rises too far. We are not worried about long term inflation, though we also expect a sharp spike in the 2nd quarter that will stay elevated this year and keep interest rates trending higher. The supply chains are likely to be worse in 2021 and much of 2022 than they were in 2017 and 2018, but by 2023, higher credit costs and Fed asset sales should bring the inflation rate back to moderate trend rates.

Record US and Global fiscal and monetary stimulus piled on top of an economy that is recovering naturally due to vaccine control over Covid is about to accelerate earnings and sales growth above consensus forecasts. Tech led this Bull market in stocks in 2020 while the economy was partially shut down due to Covid restrictions. As the economy begins to open with the introduction of vaccines, equity leadership has shifted. Energy, financials, small cap and cyclicals have now taken over the lead while interest rate sensitive tech is lagging behind. We expect this infrequent outperformance to continue over the next year as the economy opens with travel and social mobility normalizing significantly.


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