The $900 billion dollar pyramid. Stocks climbed yesterday on good economic news about employment and the services sector. Senators are talking again and again which has many investors hopeful that a stimulus package will be passed… soon.
N O T E W O R T H Y
Check please. I have been writing an awful lot about the need for stimulus, more stimulus… the more, the better. We all know by now that stimulus will be important to bridge the exhausted economy from where we are today to where we will hopefully be by this time next year. Many businesses are stretched thin as the virus devastated revenues and they have increased debt to keep the doors open. According to the Bureau of Labor Statistics, there were slightly more than 11 million people who were unemployed, able to work, and seeking work at the end of last month. That is a lot of people who are now without income to care for their families. From an economic perspective, that lost income means lost GDP (in macroeconomics total economic income equals GDP, I’ll explain that weirdness to you in some future note). So, if we want to get GDP back on track, we need to get those folks employed again, so they have money in their pockets. To do that, we need to keep companies healthy until the pandemic is in the rear view mirror. Healthy companies hire people who are seeking work. The newly employed spend their earnings on goods and services. All is good… total economic nirvana. Because we are not there yet, the Government is in a unique position to help the unemployed and ailing companies get to that point. Fiscal stimulus. Earlier this week, I wrote that I was well aware of the cost of providing stimulus. Here is a quick rundown of that. Earlier this year, the CARES Act provided a $3 trillion injection into the economy and the current follow-up stimulus package, as yet unnamed, looks like it is zeroing in on another $900 billion. Let’s call that $4 trillion dollars. Where does that money come from? It is clear that companies have been paying less taxes as a result of lower revenues and reduced tax rates which resulted from the 2017 Tax package. Income taxes are lower too as a result of lost income from the unemployed and the pandemic. We all know that even the wealthy have been paying less taxes. Taxes are the primary income source for the Government. What they don’t earn, they must borrow. That is known as deficit spending, which is an on-again off-again hot topic for lawmakers. There is no real solid proof that budget deficits are a bad thing, but by practical measures we can certainly imagine the effects. When the Government borrows a lot of money, its debt service, or payments, increase over time. That means that the Government will have less to spend in the future. Once a crisis passes, the Government is forced to get its finances back in shape. It can only do that by either cutting spending or… read my lips: more taxes. So, if we overspend today, our kids and grandkids will inherit the bill by paying higher taxes and receiving less services. There are other side effects, namely a weak dollar, which I am sure you have been noticing. Countries with large trade deficits, budget deficits, and sluggish economic growth typically experience a decline in currency value. A large fiscal spending jolt today will also likely lead to inflation at some point in the near future. Bond investors are beginning to factor that in as has been observed by rising treasury yields that theoretically factor in inflation. A high inflation rate also contributes to a weaker Dollar. But is it so bad to have a weak dollar? A weaker dollar means that US manufactured goods are cheaper to foreign buyers which could help with our perpetually wide trade deficit. On the other side of that equation, a weaker Dollar means that purchasing foreign goods will cost the US more… and the US loves to buy foreign-made stuff… we are a net importer. Remember those rising bond yields? They can actually help the currency. Higher relative sovereign bond yields draw foreign investors who need to buy dollars to purchase treasuries. The increase in demand will strengthen the currency. So, as you see, everything in the economy has a cause and effect, a benefit and a cost. That said, right now the country will very much benefit from a large fiscal stimulus… despite the costs that we may have to bear in the future.
Read the fine print. Yesterday, stocks were at all-time highs when a Wall Street Journal news item hit the tape just 15 minutes before the closing bell. The Journal reported that Pfizer was experiencing supply chain problems and that it would only deliver half of the vaccines it hoped to. The news caused stocks to sell off from highs and ultimately close mixed. The reaction was swift, and perhaps, unfounded. First, the news was referring to 2020 deliveries and 2021 deliveries are expected to remain on track. With just three or so weeks left in 2020, the overall effect of the lost deliveries may be minimal. Second, if you paid attention you might have known that Pfizer had already announced that it had supply issues LAST MONTH, so the news was not news, after all. That said, the market’s reaction did quite clearly display just how badly stocks want a vaccine.
THE MARKETS
Stocks closed mixed yesterday. Earlier in the session, indexes where at all-time highs, responding to good economic data, before a Wall Street Journal report that Pfizer would fall short of its 100 million dose projection caused a violent selloff into the close. The S&P500 slipped by -0.06%, the Dow Jones Industrial Average climbed by +0.29%, the Russell 2000 Index rose by +0.58%, and the Nasdaq Composite Index added +0.23%. Bonds gained ground and 10-year treasury yields slipped by -3 basis points to 0.90%.
NXT UP
- Change in Non-Farm Payrolls (Nov) is expected to show that 460k new jobs were created, compared to 638k last month.
- Unemployment Rate (Nov) may have ticked down slightly to 6.7% from 6.9%.
- Next week, we have JOLTS Job Openings, CPI, PPI, and University of Michigan Sentiment. Check back on Monday for calendars and details.