Am I wrong?
To be honest, I could care less about Meghan and Harry and wonder why that interview was supposed to be bigger than the Super Bowl. Are we that desperate for something different to watch on TV? Do we really need to hear another two whiney people complain about how they have been treated by the Royal Family and the Press?Desperation for something unique has taken a bad turn I think.
Just had to vent, sorry.
Now that we are closer to having this ridiculous relief package passed, let’s think about what it will do to stocks and the economy overall.
Flooding the economy with more cash, be it from direct payments (extended unemployment benefits, stimulus checks) or payments to states and local governments, should help the economy and in theory, this money will be put to work stimulating sectors of the economy that need it most, retail, restaurants and travel. However, with the present restrictions, it won’t help. The recipients will continue to buy online, possibly pay down some debt or save that free money.
Buying online, does that help the US economy? Not really. That money flows to Walmart, Target and Amazon which then buy a vast majority of their products from China so our stimulus ends up being their bread and butter. How many jobs will those purchases create in the US? Not many I suspect. While Walmart, Amazon and Target have hired people by the truckloads, most are making minimum wage and that hiring has slowed considerably since last September, mainly because these companies have become even more efficient in handling the increased sales and shipping. The transportation segment of the economy has done well and will continue to do well but the growth has stabilized and it’s time for those companies to start pressing for better rates. Higher shipping rates will not be absorbed by the retailer. Those costs will come back to the consumer. Can you spell I-N-F-L-A-T-I-O-N?
The reduction of consumer debt is never a bad thing, however, it can potentially negatively impact financial institutions. A fairly substantial portion of the financial sectors earnings come from credit card debt. A simplistic explanation is this: Banks take in deposits from savings accounts and money market funds that they underwrite, they pay less than one per cent in interest to those savers. They turn around and charge anywhere from 11%-29% on credit card debt which is backed by the savings they have on hand. Thus making a tidy profit as you keep paying off the minimum on your credit cards. Along with the 3-6% they charge retailers for transaction fees, you can see why banks and lenders love credit cards. Visa, Mastercard and to some extent American Express have created vast empires based on what I like to call “The Vig” of credit lending. So, as debt levels go down, so do those profits from that interest expense. No one is crying is for these companies and nor should you, they have income streams regardless of where the economy is going and have been printing money since the end of the financial crisis.
The savings rate has been increasing for quite some time and as previously mentioned, this benefits banks greatly, it can also be a positive to the economy. In another simple example: Increased savings rate create increased lending rates. Banks are more willing to loan money to businesses because they have more money to lend. This is one of the main reasons the economic recovery took so long to take hold after the financial crisis. Banks were gun-shy. They increased lending requirements to almost every borrower and without the free flow of capital, the economy stalled. This took years to work through and after the Trump tax cuts, the spigot of cash was turned back on and the rest is history.
In a previous column I mentioned how the states might use the relief money and my fear was that many would use a large portion of this windfall to reduce some of their unfunded pension liabilities and I think it bears watching because most Governors are tricky little devils when they get cash in their pockets. There are thousands of school districts across this country that are in dire need of funds to deal with the damage of the pandemic and yes, I do know that there is quite a bit of money allocated for that purpose as well but the states should fill in the gaps. Towns, cities and counties across the country have been dealing with the added burden of caring for and treating people and the shortfalls will be widespread. Their main sources of income during the pandemic have shrunk and there will be budget deficits everywhere. The governors should prioritize funds to allow these entities to function properly.
How does all this impact the market you ask and wonder why it took me so long to get to it?
Before I start on that, I am in the camp that believes that this stimulus package, no matter what it looks like, has already been priced into the market. What happens from here on out is strictly the economy and how it continues to rebound.
As we have all seen in the last several weeks, the markets have been very choppy and that is fairly typical I believe. You have the Tech sector retreating over 10% from it’s all time high (Correction?). Bond yields perking up for the first time in months. With valuations bordering on overvaluations I think you will be seeing a correction shortly.Not because the economy is souring, it’s not, but because it is a healthy readjustment of pricing and some of sloppy action over the last couple of weeks lends me to believe we are very close to a market downturn.
Remember, I tend not to back my ideas up with technicals, but yield more to fundamentals and honestly, the fundamentals look pretty good right now. this is more of a gut feeling and some experience with these types of markets. I won’t ramble on about it but I will make this point: We have seen some fairly good data and markets have been inconsistant in their reactions to positive data. It’s sloppy and sloppy just feels tired and tired is not where you want to be with a recovering economy. The markets have been dislocated from the economy for quite a while and this just feels like that the market is moving more towards the reality of the economy and getting more aligned. It happens occasionally and it can be painful at times but it is healthy and in the long term a solid positive.