I have 4 observations.
- Why has US Gross Domestic Product (GDP) as reported by the US Bureau of Economic Analysis 7/31/21 hit an All Time High of $21.48 Trillion with 7 million fewer people employed than were employed 18 months ago?
I believe the addition of $5 Trillion of new US government debt and $4 trillion of Federal Reserve ‘money printing’ has helped grow GDP. The proposed 2022 US Government budget is estimating spending could be $6 Trillion with $3.5 Trillion of taxes collected.
Yes, over a 3-year period 2020-2022 the US Government is expected to add $7.5 Trillion of new debt. On Tuesday July 27, 2021 the Chairman of the US Federal Reserve was asked why 10-year US Government bond interest rates have declined from 1.8% early this year to 1.25% now with all the new debt being issued? He responded ‘I don’t know.’
Most believe that the more you borrow the higher the interest rate should be. Something is not right here. I remain underweight on long-term bonds and overweight TIPS, Bank Loans and commodities.
- US stock indexes have been hitting new all-time highs with US Company actual earnings still 45% below pre-pandemic levels?
Yes, earnings are growing. However, most of the wildly optimistic forecasts for economic recovery seem already priced in. Any stumble could be very negative. I remain underweight on US stocks.
- Stumble? The Global Pandemic rages on. Last summer (2020) global deaths were running about 6,000 people/day. This week, we have climbed to 10,000 people/day globally.
I believe the Delta Variant is real and global markets may begin to get worried. I hope I am wrong, but we should expect another COVID spike this winter. This may prove to be a significant stock market shock as ‘supply chains’ remain vulnerable to disruptions.
- Stumble? I see actual inflation is high and perhaps staying high. The US Federal Reserve believes this inflation will be short lived.
- Stumble? ‘American Airlines and Spirit Airlines cancel hundreds of flights as there is a shortage of Pilots, Flight Attendants and Mechanics.’ August 4, 2021 WSJ Page 1. I believe the shortage of workers in every industry and service is real and may become a barrier to ‘returning to normal’.
I believe IF the Federal Reserve begins letting interest rates climb, inflation will be short lived. IF the Federal Reserve doesn’t act by Christmas, we are in danger of inflation spiking further. I hope I am wrong, but I believe the Fed will not act in time and we get very low growth and higher inflation. Wall Street calls this phenomenon ‘stagflation’. Like the 1970’s.
By early 2022, we may see an excellent opportunity for buying stocks and long-term bonds well below their current prices. Enjoy the rest of your summer and stay safe!
Disclosure: The information and opinions presented here are those of Wade McFee and are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions, views and information expressed in this commentary are subject to change without notice based on market conditions and other factors. You should contact your investment representative, attorney, accountant or tax advisor with regard to your individual situation