One of the themes I've been writing about all year is the need for fiscal stimulus to be used to support monetary stimulus. This is not just a U.S. issue, it's global, and the recognition of the situation is beginning to resonate with investors and governments.
What's troubling, though, is that so far monetary authorities have been exceedingly reluctant to publicly voice support for such stimulus. I think that will change soon, however.
During her prepared remarks in the Semiannual Monetary Policy Report to the Congress, a week ago, Federal Reserve Chair Janet Yellen mentioned fiscal policy only once, saying "fiscal policy is now a small positive for growth."
With many members of Congress facing a tough economic environment as we move toward the November elections, they are clearly looking for support from the Fed for pursuing fiscal stimulus.
In that vein, during the Q&A with members of Congress, Rhode Island Senator Jack Reed (D), noted that fiscal policy hasn't been helping the Fed at its job. This was clearly an invitation for Yellen to breach the traditional protocol of the central bank not commenting publicly on fiscal-policy issues, and to encourage the use of fiscal stimulus to support monetary policy.
However, Yellen's lackluster response was:
"Central banks have been carrying the load in many parts of the world. Fiscal policy, due to concerns about debt or deficits, "has not played a supportive role."
"If there were to be a negative shock to the economy... starting with very low levels of interest rates, we don't have a lot of room using our traditional tried-and-true methods to respond."
When asked an even more pointed question about the Fed coordinating with the Treasury to finance fiscal stimulus through the use of "helicopter money," Yellen again refused to address the real economy and provided a pat academic response on the separation between monetary and fiscal policy.
This is a pattern by Yellen and a reversal of the increasingly vocal comments made by her predecessor Ben Bernanke, on the need for fiscal policy to support monetary policy. For whatever reason, Yellen is deciding not to follow Bernanke's lead, even as it is becoming increasingly evident that monetary policy is not achieving its goals unilaterally.
But Investors globally are increasingly voicing the opinion that fiscal stimulus is imminent everywhere.
In the U.S., six of the seven largest government contractors are positive today. And with the exception of China, eight of the nine largest global and country-specific infrastructure ETFs are also positive today by an average of about 2%. Meanwhile, 20 of 21 global and country-specific water infrastructure and development companies are positive by a similar amount, and 11 of the 14 largest U.S. infrastructure companies are positive today, also by an average of about 2%.
Across the board that's an average increase of about twice the Dow Jones Industrial Average and S&P 500 Index, and about 25% higher than even the Nasdaq Composite Index, as I write.
The positive performance of the two most geographically diverse infrastructure ETFs, SPDR S&P Global Infrastructure ETF (GII), and iShares Global Infrastructure (IGF), at about 2%, is roughly twice the average increase of the individual stocks they are invested in.
Regardless of the fact that Yellen and the FOMC are of the opinion that the U.S. domestic economic situation is fine, investors and politicians are increasingly voicing the opposite.
In my view, this trend will continue to increase and fiscal stimulus will eventually be employed everywhere -- likely focused on infrastructure as governments face having to create jobs directly. The only immediate cautionary point is that the vast majority of the companies and ETFs referenced above provide dividend yields well in excess of sovereign bonds, including the U.S.
So, these stocks and ETFs may be the recipient of institutional asset parking on a flight to safety and yield no longer available in the sovereign bond market.
This is evident in the performance of REITs today. The mortgage REITs and the physical collateral REITs for hotels, office buildings, and health care facilities are also up by an average of about 2% today.