Sign, Sign, Everywhere A Sign. But Investors Disregard

Pulling It Forward

Over the past week, headlines of more stimulus have bolstered the bulls. The current proposal, which will likely get whittled down in negotiations, is $900 billion. Such a bill is far short of the original $2.2 trillion package markets had “bid up” for previously. 

There are a couple of problems with a bill of this size and structure. Given the rather sharp economic recovery seen in the third quarter, the stimulus input will have a more muted impact on future activity. Also, given this bill does not have “direct checks to households, the boost to consumption will be far less. 

The idea of “stimulus” also leads to a second premise of “pent up demand.”  Since consumers have been “locked down” due to the pandemic, there is a vast amount of pent up demand in the system. As soon as consumers are unleashed, they will rush into the economy and spend with reckless abandon.

In a normal economic recession, such would likely be the case. However, in this cycle, the excess unemployment payments and direct checks to households led to a spending spree in houses, automobiles, and various services. 

In other words, there is likely not as much pent up demand as market participants currently expect. If holiday retail sales are any indicator (retail makes up ~40% of PCE, which is ~70% of GDP), then consumers may be more “spent up” rather than “pent up.” 

“Black Friday in-store sales down 54.5% YOY, but all Bubblevision wants to talk about is how online was up 21.5%. Total consumer spend last holiday season was $730.7B. Online was only a little over $100B. The 21.5% increase in online is insignificant.” – TheMarketEar

 

The Instability Of Stability

I previously wrote an article on why the Federal Reserve is so dependent on stability in the financial markets.

“The ‘stability/instability paradox’ assumes that all players are rational and such rationality implies avoidance of complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’

The Fed is highly dependent on this assumption as it provides the ‘room’ needed, after more than 11-years of the most unprecedented monetary policy program in U.S. history, to try and navigate the risks that have built up in the system.

Simply, the Fed is dependent on ‘everyone acting rationally.’”

Unfortunately, the record shows that such has never been the case. 

Doug Kass made a great point on this issue last week.

“While it is clear to most how far beyond the past norms zero and negative interest rates have taken us, I think that exposition needs to go one step further to be complete. The missing element is the absence of the concept of instability of the current equilibrium created and supported by zero/negative interest rates.

It is important to emphasize that, as well, how enormous the ‘distance’ financially to the next equilibrium point will be once this bizarre instability is finally disrupted – as it must be someday. 

The point to be hammered home is how ‘far,’ in financial terms, it is to the more stable and natural equilibrium supported by interest rates that reflect real growth rates. 

Here the operative descriptive phrase is a long way down!” 

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