by Greg Valliere, AGF Management Ltd.
STIMULUS AND MORE STIMULUS: We’ve always believed that the key to a solid economy is real disposable income — the amount of available cash in people’s pockets. This supports our view that the current outlook is very solid, despite yesterday’s panicky reaction to a Covid spike.
THERE’S ONLY ONE FACTOR that could change the Covid path (see below), but for now we think the markets are overlooking several factors that will keep real disposable income — and the economy — in very good shape. Some examples:
Gasoline prices: They’re headed back down, perhaps sharply, as oil prices plunge after the OPEC production agreement. Americans who worry about inflation cite gasoline prices as their biggest concern, but by September they could be 10% lower than they are now — a de facto tax cut.
A real tax cut: There’s a stunning — and under-appreciated — tax cut now going to most American families: a huge hike in the existing child tax credit. The March stimulus bill set a maximum credit of $3,600 annually for children younger than age 6 and $3,000 for those between 6 and 17. The regular child tax credit had been $2,000 annually for children under the age of 17.
The math is remarkable: in households with joint income under $150,000 the full benefit will be $300 extra per month for children under the age of 6 and $250 for those between the ages of 6 and 17. Many households with three children are now getting $800 monthly checks, a stimulus that is likely to be continued well into this decade.
A big hike in Social Security payments: It’s likely that the annual cost of living rise could be about 5%, based on current inflation trends. For the roughly 65 million people receiving benefits averaging about $1,262 per month, that would be a significant increase; for those receiving the maximum benefit, in many cases over $3,000, that will be a massive increase. The final number will be released in late October and the higher benefits will take effect in 2022.
Rock-bottom bond yields: With the Treasury 10-year bond yielding less than 1.3% now, another wave of mortgage refinancing appears likely. And the housing boom, which was starting to look tired, could revive — stimulated by ultra-low rates.
Fiscal stimulus: It’s unclear whether an infrastructure deal will begin to take shape by this Wednesday’s goal; it could snag for a few days. But more spending is coming, even if infrastructure bills stall, as Congress debates the fiscal 2022 budget, which almost certainly will pass by late this year.
We think there will be at least one infrastructure bill but even if infrastructure spending stalls, there will be new stimulus — and massive deficits — coming in 2022. Who cares about deficits with interest rates this low?
More hiring: The simplest way to boost real disposable income nationwide is to hire more workers, and that seems very likely as desperate employers in the service sector continue to offer higher wages and sign-up bonuses — still another plus for real disposable income.
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THE COVID GAME-CHANGER: Only one person could persuade the un-vaccinated to get their shots — Donald J. Trump, who is fully vaccinated. The explosion of new variant cases is overwhelmingly in states that voted for Trump, who could change the narrative instantly by telling his supporters to get vaccinated (Sean Hannity is urging his viewers to get shots, that’s a start).
WE’RE HEARING THAT PEOPLE CLOSE TO TRUMP (including his daughter Ivanka) are urging him to tape a public service ad or issue a statement urging people to get vaccinated. He has grievances and is reluctant to do anything that might help Joe Biden, but Trump realizes that he would get enormous attention, which he craves, with a statement urging vaccinations. Stay tuned.
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.
