The Future White Hot Coals Economy
Why Elon Musk is Like a Greek God
Let’s state this right at the start: the goal of the Biden administration, Congress and the Fed is to make the economy white hot.
Not trend growth, not strong growth, but 8-10% GDP growth.
Let that sink in for a minute.
The US economy will recoup the lost economic growth from 2020 in 2021. Remember in June of last year, the Congressional Budget Office estimated it would take 10 years to recoup this lost economic output or output gap. They are everything we’ve come to expect from a government economic research group.
The truly shocking development has been the rapid wall of money created by the White House, Congress and the Federal Reserve. This is unusual and extraordinary. Due to the massive amount of stimulus from CARES 1.0, 2.0 and 3.0, we now have over $10 trillion dollars working its way through our economy. The graphic below underscores how much has been allocated and how much has yet to hit the economy.
This is on top of the monetary stimulus the Federal Reserve continues to pump through the veins of the US economy. The Fed’s stimulus included $3+ trillion of new assets (see graph) and cutting short-term rates to zero with a pledge to not raise the rates in our lifetimes. Ok, that last of that is not true. But the comments recently feel that way as Fed officials go out of their way to reassure markets they will not react to a short-term increase in inflation.
The US economy has roared back and as stated above, the markets/analysts/economists are expecting a complete GDP recovery by the end of this year. This is not the complete story. There are still 10 million workers who have lost their jobs due to the pandemic. This is the focus of our government right now and the driving reason for the push to enact a $1.9 trillion stimulus package. While ex-President Trump is being tried in the Senate this week, it’s fair to say that Democrats are emulating him on the economy. It was under Trump and a unified Republican Congress that the TCJA (Tax Cuts and Jobs Act) was enacted, leading to above trend economic growth and drawing in workers to drive down the unemployment rate to historical lows for blacks and minorities. Paraphrasing the Raiders’ Al Davis deficits be damned, just stimulate, baby.
This gets us to where we are today. It’s likely the $1.9 trillion stimulus package passes.
This is raising economists 2021 Q2 GDP forecasts from 4% to as high at 10%. The Fed is onboard and will continue to buy as much debt as necessary to not only stimulate the economy, but also to ensure the bond market doesn’t become overly volatile. The Fed is not concerned about inflation. The Jay Powell Fed believes it has learned it can run the unemployment rate down to 3.5% without creating wage inflation. All the major government economic decision makers are aligned to create policy to drive down unemployment.
For the markets, it translates into the biggest risk-on party in our lifetimes. Go ahead, try to think of another time where monetary and fiscal stimulus were in completely and utterly aligned for generating rapid, over-the-top growth?
Tesla and BTC percentage returns over 5 years.
Can you think of another time where a car company (Tesla), who’s stock price is running at 100x EPS, decides to use almost a full year’s revenue to make a bet on 1 financial product? Or when retail investors have dramatically dominated trading volumes as these rose from 10% of trading in 2019 to 25% today?
Keep in mind, the party won’t stop after CARES 4.0 gets passed. President Biden and fellow Democrats have another budget for 2022 they can utilise under reconciliation (50 votes only needed in the Senate) to bring about more stimulus. Infrastructure, housing and expansion of Obamacare are on the spending to-do list.
What does this hold for the future economy? Rapidly rising risky asset prices, rapidly rising housing prices, and rapidly rising deficits. A more volatile bond market despite efforts from the Fed to contain the price movements. Guess what happens if the Biden administration is successful with the vaccine program? Economy, steroids, on.
Musk is simply the Hermes for the Stimulus Gods.