The Jackson Hole Economic Policy Symposium is upon us, which started yesterday in Wyoming. This annual symposium has been one of the most anticipated Federal Reserve events each year since it started in 1978, as the Federal Reserve Bank of Kansas City hosts and plans a discussion of critical issues facing world economies. In 2020, it brought us a historic change to monetary policy when Bernanke noted a priority to get to full employment, along with letting inflation run moderately above a 2% threshold. Further, the Fed formally agreed to a policy of “average inflation” targeting instead of a flat annual number.
This year’s topic is “Macroeconomic Policy in an Uneven Economy”, pointing towards a debate on Fed policy effects on racial inequality and climate change. Chairman Powell has repeatedly referenced the later stages of recoveries and job gains among low-income Black and Hispanic households as an advantage to extending easy monetary policy. He noted, “developments underscore for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind.” That doesn’t sound like a person who will rush to aggressive tightening.
2 notes as it pertains to the conference:
• Chairman Powell will speak at 10AM today. Every word will be scrutinized. It will be the most important comment for markets. We wouldn’t expect too much though. Powell has improved his messaging over time and does not want to surprise investors. His speech will be on the broad subject of the economy. Further, numerous Fed officials have let it be known that discussing tapering Fed bond purchases is coming. It matters little if they start to slow bond purchases in November or January. By the second half of next year, assuming Covid shutdowns are over, purchases should be back to zero. That being said, markets will respond if any single sentence is not aligned with their positioning.
• As it pertains to keeping the punch bowl extended and letting conditions run hot in order to help low-income families, there is much to debate. Anything we can do to get everyone a job is recommended, but is 2% – 4% inflation going to help inequality? Inflation has run rampant over the past year while heavy stimulus was provided. Investors’ and home owners’ personal net worth are now at record highs. Inflation is pushing up prices of all asset classes. How does this help the low-income person who spends 100% of their income on everyday items, heat, electric, food, auto and mortgage bills? In fact, when inflation runs hot their wallets are stretched even more, while those higher up the economic food chain see outsized gains in their 401k’s and real estate. Something has to give, but higher inflation is not the answer, especially for low-income earners.
In other news on the inflation front, more spending is coming. Nancy Pelosi continues to prove her doubters wrong at every turn. A master politician, Pelosi was able to accomplish the improbable in getting a group of 10 moderates to adopt the far left’s aggressive budget resolution. According to reports, this was done in true “House of Cards” fashion, as are most idealistic packages. It does not guarantee $3.5T in new spending will get passed, not by any stretch, especially with Senators in a stronger position to defend their standards, but it does increase the probability of something getting done.
Further, the bipartisan infrastructure bill will get voted on September 27th and is expected to pass. More money printing expectations helped interest rates rise back to 7-week highs this week. September is going to be a busy, back and forth, headline provoking time frame to say the least. Senators Manchin and Sinema will be the loudest opponents to another massive spending bill.
Let’s assume some pushback from moderate Democrats pulls the two plans down to $3.5T in approved spending. That equates to ~$23,000 for every working American. As with any party’s Bill, the pay-fors are not likely to be met either, similar to Trump’s Tax Cuts and Jobs Act. Government receipts come from four sources of taxes. Let’s peg that number around $3.5T annually. Half of this comes from individual income taxes. Payroll taxes account for 35%. Corporate income taxes are high single digits, and alcohol, cigarette & other excise taxes make up the rest. In effect, American consumers account for 90%+ of Government income in one form or another. Any increase in deficit spending is eventually paid for by workers. That does not take into account whether the spending is necessary or not, these are just numbers. There is sure to be a lot of pork in this bill!
Now that we’re well out of our recession, inflation is rampant and jobs are plentiful, this is not what Keynesian economic theory would propose by any stretch. We really are entering a new economic theory that is pushing the limits on deficit spending and determining if we can maintain being the reserve currency of the world. It is a risky proposition to say the least.
On one hand, extra spending is forcing interest rates higher, as inflation could prove to stick around even longer than it already has. Higher rates help broaden out this market’s rally too. Financials and industrial stocks rose this week in response. A FANGMAN- dominated rally can only last for so long. This is good for the market.
On the other hand, another spending bill will push the limits on budgets. The pay-fors are mostly higher taxes, which is a big negative for stocks that trade for record valuations. Furthermore, earnings reports out from retailers this week are fraught with concerns over rising input costs and an ability to pass them along to an end consumer who is no longer getting extra unemployment checks or direct stimulus payments. Longer-term inflation is not good, especially for those who spend most of their income.
Combined, this keeps pointing us towards a transitionary environment where back-and-forth volatility should increase. A straight-line advance is great on the way up. Be sure to not give these hard fought gains back if your asset allocation is out of whack.
Breaking Bad co-star, Aaron Paul turns 42 today. Pee-wee Herman actor Paul Reubens is 69. Most may not recognize the name Akeila Collins, but she turns 21 today and has already earned more than 147 million views for playing Roblox. Video games and YouTube are powerful ways to get popular!
James Vogt, 610-260-2214