The Over-heating Economy

Insights and Market Perspectives

Author: Greg Valliere

February 18, 2021

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YESTERDAY’S BLOWOUT RETAIL SALES REPORT, combined with steamy PPI inflation data, confirm our view that the economy does not need $1.9 trillion in fresh stimulus.

ECONOMISTS EVERYWHERE REVISED THEIR GDP FORECASTS upward yesterday, with the Atlanta Fed now predicting 9.5% growth in the first quarter, which traditionally is soft (bitter winter weather makes 9.5% unlikely).

BUT THE SECOND QUARTER COULD ROAR, as new stimulus looks increasingly likely to win enactment in March — at least $1.5 trillion, maybe something closer to President Biden’s $1.9 trillion request.

WITH UNEMPLOYMENT STILL ELEVATED and a need to speed up vaccine shipments, there’s still a case for more economic medicine, but as we continue to caution — medicine yes, overdose no.

HOUSING IS RED HOT, EARNINGS ARE A HUGE SURPRISE and now retail sales are clearly on the upswing, which means inventories will have to be rebuilt — but pipelines are clogged, especially at U.S. ports. This has led to higher prices, which may persist.

WASHINGTON IS FAMOUSLY OBLIVIOUS TO MARKETS, so there’s little attention in this city to what’s happened to the Treasury 10-year bond yield, which has rocketed higher in recent weeks. Even with a relatively soft labor market, the bond market vigilantes see inflation on the horizon.

THE MARKETS HAVE IT CORRECT: The economy doesn’t need a $1.9 trillion stimulus; maybe something like $1 trillion would be plenty. But as Rahm Emanuel famously declared, “never let a crisis go to waste.”

JANET YELLEN AND JEROME POWELL seem determined to let the economy over-heat, and they consider higher inflation an acceptable risk. So they’ll get what they wish for, with one important drawback: rates are headed much higher — which may prompt Fed officials to re-assess their massive asset purchases, perhaps by fall.
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INVESTIGATIONS AND MORE INVESTIGATIONS: When things go wrong, investigations follow — and there are three big investigations to come, starting today:

GameStop: There’s an excellent article on the Reuters web site this morning about today’s GameStop hearing on Capitol Hill. This may be a classic example of a frothy hearing after the crisis has passed, but populists will call for much tougher regulation — perhaps even curbs on “shorting.” It won’t happen.

Texas: The blame game is in over-drive as Texans shiver. The Wall Street Journal editorial board wants to blame wind power, but a closer look at this complicated narrative will focus on natural gas. In any event, the bloom may be off the rose for Texas; seemingly everyone in California wanted to move there just a few months ago. Incumbent Texas politicians suddenly look vulnerable.

Andrew Cuomo: The media darling last spring and summer is now in free-fall. He faces widespread investigations, alleging the New York governor concealed nursing home data on Covid fatalities. The issue isn’t whether Cuomo’s political career is over (it is), but whether he can simply hang on as governor.