by Greg Valliere, AGF Management Ltd.
WE LISTEN CAREFULLY to questions from savvy retail investors, who have their fingers on the pulse of the economy. Many of them — citing the surge in the price of gold to nearly $2,000 per ounce — feel that a threat of higher inflation has been underestimated by policymakers.
OUR REACTION IS THAT FEDERAL RESERVE Chairman Jerome Powell would be pleased to see a pickup of inflation, which has consistently failed to meet Fed goals for the past decade. Powell, like many central bankers, still worries about deflation.
THE MAIN ARGUMENT WE GET FROM INVESTORS is that the enormous amount of fiscal and monetary stimulus since the pandemic began has already created a speculative bubble in the stock market, which is counting on the Fed to stay accommodative for years to come (Powell has virtually guaranteed it).
AND WHEN IT COMES TO CONGRESS, the sky’s the limit on spending. The stimulus this year has exceeded $3 trillion, with at least another $1 trillion coming by ealy August, and perhaps more after that.
TREASURY SECRETARY STEVEN MNUCHIN said yesterday that another bill is starting to take shape; it almost certainly will contain another round of relief checks, plus major aid to state and local governments. Nancy Pelosi’s response to Mnuchin’s suggestion that the next bill will cost $1 trillion: that’s not enough, she said.
THE DEMOCRATS HAVE CLIMBED ABOARD THE SPENDING BANDWAGON: Former Vice President Joe Biden yesterday listed several new programs the Democrats will embrace, with not a word on how they would be paid for. The Biden price tag could be several trillion dollars.
OUR CONCERN isn’t in the short-run; the economy has hit a wall because of the Covid-19 spike in Sunbelt states. But in the long-term, once there’s a vaccine, will Washington turn off the spigots? It may be exceedingly difficult to raise interest rates and cut spending, once consumers and the markets get used to all the stimulus.
SO WE’RE TELLING CLIENTS WHO FEAR INFLATION that the real threat isn’t this year or 2021 — it’s later. But some clients think inflation could come sooner, and they’re buying more gold. Inflation expectations have crept higher, which makes us worry that this could become a self-fulfilling prophecy.
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A WIN FOR TRUMP, A WIN FOR BIDEN YESTERDAY —
RUNNING OUT THE CLOCK: Donald Trump reacted angrily yesterday morning as the Supreme Court — and his two judicial appointees — ruled that he’s not invulnerable to subpoenas.
THEN IT SUNK IN: Trump can run out the clock this fall, he won’t have to release his taxes and other financial records before the November election, as lower courts deliberate. Trump dodged a crisis, no question.
BIDEN GETS THE JUMP: White House officials have stalled, inexplicably, over new proposals to bring jobs back to the U.S. — so Joe Biden, not looking very sleepy, took advantage. His sweeping “Buy America” plan, relying on federal procurement to wean the country away from China and other exporters, may make Rust Belt voters forget about his support for free trade deals.
THE IRONY is that as Biden and Trump bring jobs back to the U.S., products will be manufactured by employees here who will make far more money than workers in emerging countries — still another reason to worry about inflation, as consumers used to cheap imports may have to pay more for those products in the next few years.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
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This post was first published at the AGF Perspectives Blog.
