The much-anticipated address by President Biden to a joint session of Congress, slimmed down by pandemic-induced caution, has come and gone. The president sounded optimistic. He asked for cooperation and unified effort. The president, though this has not been a secret, has solidified himself, and his administration's economic agenda as one driven by the demand side. Perhaps, the most decisively "demand side" economics president in this nation's history.
There were enough who referred to Biden's predecessor, Donald Trump, as a supply-side president. Though the Trump administration certainly shared some qualities (if you are a supply-sider yourself), or characteristics (if you are not) with that most famous supply-sider of at least modern times, Ronald Reagan, there were profound differences.
The differences in approach between these two most basic strategies for how to grow an economy are as stark as the division they cause among economists.
When I was in college (night school, because I was already working on Wall Street), I had an accomplished economics professor who told us to throw away the chapter on "Reaganomics" that the publisher had printed in a pamphlet form as an add-on because the original textbook had predated the change in national direction that came about in the 1980s. He told us that supply-side economics was garbage economics and would never work. (Note: This professor was the retiring head of the department, who I actually liked very much, not the one that I famously {or infamously} took on head to head, and literally took the class away from as a senior. That story is for another time.) I did not throw away my pamphlet.
Most basically, supply-side economics is the application of the theory that through smaller government participation, reduced taxes, reduced regulation, and globalist trade policies an economy can grow more rapidly. The idea is that through lower prices for goods and services, as well as lower taxes, employment grows and economic activity accelerates. The whole ball of wax also rests on the idea that due to this increase in economic activity that even though rates of taxation are lower, that federal tax revenues actually increase.
Keynesian economists, or demand-siders, might point out that federal tax revenues did not exactly work out that way through the Trump era. They would scoff at what you know as the Laffer Curve (named for Art Laffer). Supply-siders might retort that President Trump was not a true supply-sider. Yes, the Trump era indeed ushered in reduced taxes, and cut back greatly on regulation, but that's about it. The Trump administration was anything but globalist, and seemed to believe in large government despite reducing taxes.
So, basically, the past administration cherry-picked from among economic strategies. Plain as day, increasing government while reducing taxes is why those tax cuts did not pay for themselves. At least that's my opinion. Don't think I'll meet much argument there.
What the "new kid," who's not very new at all, is trying to do, is rapidly grow the size of the government, increasing taxes where he thinks he can pull it off, and increase regulation at least back to 2016 levels and maybe beyond. President Biden seems to have some of the same protectionist qualities/characteristics as his predecessor, sans the antagonistic method of implementation.
What all this does, especially during times of global plague such as these, is further constrict the supply side. The idea now is to force economic growth through government spending supported by both increased borrowing as well as increased taxes, all while consumers chase scarcity in goods and services, provoking a multiplier effect that is untried at debt levels like this. In other words, we are experimenting, but anything under such expansive policy conditions would be experimentation. Got it?
Will this work? Was supply-side economics a bad idea? Is its opposite, demand-side economics, what we are apparently attempting to do now, a bad idea?
I'll tell you, as the smartest person in the room (I am the only one in my office at zero-dark thirty), I believe that there is a point where taxation produces the most possible federal revenue without harming the economy. Laffer was not flat-out wrong.
Maximum taxation will of course destroy growth. Where this magic spot is, however, is like finding that one bean that will grow the beanstalk to the sky. The other beans are just beans.
The Fed
The official FOMC policy statement offered only mild surprise. For the most part, the statement has been taken as "green light go" by Wall Street and the financial media alike.
The target for the fed funds rate remains in between 0% and 0.25%, while the Fed plans to continue adding $120 billion worth of assets ($80 billion in Treasury securities + $40 billion in MBS) to the balance sheet... and to the monetary base every month.
The pledge? To keep on keeping on -- until the labor market (not the economy, that's something different) reaches the Fed's idea of full employment, and the broader economy averages consumer-level inflation of 2% or greater over time.
Define full employment? Janet Yellen's Fed never could. Ben Bernanke's Fed was even more lost. Sorry, I see the Bernanke Fed as the "Keystone Kops" of monetary policy. "Courage to Act"? Proud of yourself much? SMH.
Fun With Math
We do know that the U.S. economy employs 8.4 million fewer individuals than it did in March 2020. The official unemployment rate was 3.5% prior to all of those jobs being lost. We also know that Thursday morning, continuing jobless claims will likely print close enough to 3.6 million, while initial claims will likely add more than 500,000 to that roll.
So, we know where half of these folks are right off the bat. Right? Not exactly. Including the PUA (Pandemic Unemployment Assistance) program for sole proprietors, gig workers and freelancers as well as all other programs (veterans, extended, etc.) combined, as of April 4, more than 17.4 million individuals were receiving some kind of unemployment assistance.
Remember, we are down 8.4 million positions. Yet, 17.4 million are still receiving state and/or federal benefits. As of February, according to U.S. government data, there were 7.37 million job openings across the nation. These folks are all on somebody's payroll. Yours. Demand-side economics.
Of course, there are mismatches in skill-sets that cause unfilled positions to remain unfilled. That said, demand for labor stands but a rough 1 million positions short of if not returning to trend, at least returning labor markets nominally to pre-pandemic heights.
I don't know everyone's situation, but I do know that at least some folks are financially incentivized toward choosing to remain on the sidelines. Yes, there is probably some fraud, but you cannot blame the individual with mouths to feed if taking a low-paying job would expose them to public risk at a discount to current income levels. This is a problem.
This is why you read stories about fast-food restaurants offering $50 checks to anyone accepting employment there. This is why there was a diner near my home that recently had a sign in the window offering "an undisclosed" signing bonus. Signing bonus? To wash dishes? There will be wage inflation that will not catch up to, but will chase possibly forever, asset appreciation.
This wage inflation will form the base of real-time increases in consumer-level inflation that will determine whether or not inflation is in fact "transitory."
What we do know for sure is that those who benefit the most as inflation rises are those most heavily indebted. The U.S. government, the state governments, and the municipalities are all heavily indebted. At least some of you now have savings. Savings in the bank (cash) is not a store of value, my friends. That is the value that governments, treasury departments, and central banks know how to take. It is in their best interests to do so. Their best interests and yours are not necessarily financially aligned.
Sure, they smile... hoping all the while that you smile back. Demand-side economics.
Back to the Fed
"Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors."
This is the sentence, taken directly from the FOMC statement, that permits the Fed a level of flexibility as we proceed into a still unknowable future. I see this as a potential turning point. Not that the Fed needs or wants to taper asset purchases or increase short-term interest rates. That decision still lies in the future. This sentence sets up increased flexibility to pursue a more hawkish policy stance.
But... they want inflation. They need inflation. That said, they do not want rampant uncontrolled inflation, nor a loss of confidence in fiat. Hence, a fine line must be walked.
Looking out years and not months, this Fed needs to be agile enough to tighten policy in order to shore up the currency while slowing inflation, while also -- if the inflation game plays out poorly in the long run -- being able to go all-out full dove "Modern Monetary Theory" on our tails.
This means borrowing without natural limits, outlawing cash, and outlawing crypto, with the exception of a centrally controlled fiat crypto, Why? This eliminates any and all underground financial ecosystems, while negative interest rates are then imposed on all forms of savings as a wealth tax, on everyone.
Oh, look at the time. Man in the blackened window is long gone. He sure was on a roll today. God bless. Carry on.
By the Way...
Headline-level equity indices may have closed in the red on Wednesday, but just barely, and overall breadth at both of New York's primary exchanges were decisively positive. Don't buy the selloff, or rather, you probably could have bought the selloff, literally.
Market Notes
1) Apple (AAPL) crushed it, increased the dividend, as well as the buy-back program. Rock and Roll.
2) Amazon (AMZN) reports tonight. I have been adding going back to last week on stock-split rumors, though more likely I think that this type of activity waits until CEO Jeff Bezos moves on. Now that I bought the rumor, do I sell the news? Earnings will, in my opinion, probably impress. Yes, I will sell something regardless of the news. Stock is just up too much since these rumors started circulating.
3) I have also been buying the ServiceNow (NOW) dip overnight, even though these levels still villate my net-basis. The numbers were excellent. CEO Bill McDermott is excellent. We had to wait for the call for guidance, which, in my opinion, was close enough to in-line with pandemic-era trends to keep this name on track.
4) I also sold my holdings in Verizon (VZ) in order to increase my long position in AT&T (T) , as I have decided that AT&T is the better positioned place to be. This was prior to news breaking that Verizon is exploring the sale of the firm's media unit. I would consider that sale a likely positive for Verizon, of course dependent upon price.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 547K.
08:30 - Continuing Claims (Weekly): Last 3.674M.
08:30 - GDP Economic Growth (Q1-adv): Expecting 6.5% q/q, Last 4.3% q/q (SAAR).
10:00 - Pending Home Sales (Mar): Expecting 4.8% m/m, Last -10.6% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +38B cf.
The Fed (All Times Eastern)
11:00 - Speaker: Reserve Board Gov. Randal Quarles.
14:00 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (MO) (1.04), (AMT) (2.28), (BMY) (1.82), (CAT) (1.88), (DPZ) (2.93), (KHC) (0.60), (MCD) (1.80), (MRK) (1.63), (NOC) (5.45), (SO) (0.82)
After the Close: (AMZN) (9.55), (GILD) (2.08), (SWKS) (2.35), (TWTR) (0.14)
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