Playing With House Money
I feel like we're living through the game Monopoly, where at any turn you could land on Chance or Community Chest and get an extra $50 while trying to get around the board to "GO."
There are two new bills in Washington, D.C. that propose to giving people money to offset inflation (more on that in a minute). Policymakers have grown accustomed to playing with house money. For the time being, volatility has dampened and stocks are on the rise. Here's what we're seeing so far this week...
Proceed to Go - Collect $200. In the game Monopoly, one of the coveted spots on the board is the "Go" space where you get to collet $200, just for making it around the board. Apparently, our fearless leaders believe that throwing more money at the problem of inflation could be deflationary? Such is the world of politics, but not the real world of economics. One of the reasons we're in this current inflationary spike is due to the massive amounts of money that were pumped into the financial system by both the Fed and fiscal spending by the Federal Government during the pandemic. Three representatives in the House have put forth a proposed bill to give every American $100 each month to offset the costs of inflation. The average car has a gas tank that can hold 14 gallons of gas.
The average cost of gas in the U.S. is currently $4.22/gallon. If the average car requires 1 fill-up per week, that would amount to $236/mth. Even to the low-income household, this stipend would not mean much at current gas prices. Not to be outdone, a second proposed bill by two different members of the House would provide a quarterly rebate to consumers based on a tax levied on oil & gas companies.
The problem with the first bill is that we would essentially be "robbing Peter to pay Paul." The stipend paid to each American would likely either increase the national debt and/or increase federal tax rates in order to pay for the stipend. The problem with the second proposal is that, while the money wouldn't come from federal coffers, it would put a tax on oil & gas companies - already struggling with higher input costs (see PPI) - who would therefore, pass along the new tax to consumers in form of higher prices at the pump. The reality is, throwing more money at the problem of inflation would be akin to a firefighter entering a burning building and lighting a match to try to extinguish the fire.
Just Visiting. One of the few spaces that is penalty-free in Monopoly is when you land on the "Just Visiting" space. You can visit someone who might have "gone to jail" without owing any money or being forced to purchase something.
We recently experienced this in the markets when the S&P 500 Index visited 10-month lows on February 24th and has bounced nicely off the bottom. Since then, equities are up 8.3% off the low and are within 6.5% of the market high last seen on January 4th of this year. The initial pullback in January had more to do with the Fed being behind the curve on inflation. The February pullback had more to do with the Ukraine Crisis. Since then, the Fed has raised the Fed Funds Rate by 25 basis points and reports of "careful optimism" in the negotiations between Russia & Ukraine. While we avoided disaster for the time being, there are concerns out there pointing to a recession in the next 12-24 months.
One of those markers is the inversion of the yield curve. Right now, the 10-year Treasury Yield is at 2.37%, while the 2-year Treasury Yield is at 2.13% (about 24 basis points apart). When those two yields become inverted (10yr less than 2yr), it has historically pointed toward recession. On average, when inversion occurs, recession results 13 months afterward. Now, the current gap between the 10yr and the 2yr is reminiscent of 2018. In the 4th quarter of 2018, the spread between the 10yr and the 2yr fell to only 11 basis points apart. The yield curve did not invert at that time, but did later in August of 2019. So, this is a situation that we will have to watch. By the way, the recent action in our Wealth Protection Signal has also been reminiscent of the 4th quarter of 2018 - nearing the 1st Cash Raise trigger, but ultimately not triggering.
Free Parking. One of the other spots on the Monopoly board that doesn't require you to spend money or get assessed a fee is the "Free Parking" space. It would appear at the moment that economic data is starting to trend in a positive direction.
Last week, Retail Sales came in about as expected for February, but the year-over-year number showed a 3% increase (+17.6% for February, 2022 vs. +14.0% for February, 2021). We were still dealing with pandemic restrictions in 2021, but the improvement is notable. Another positive sign is that inflation is not causing the consumer to go into saving mode just yet. In fact, the Personal Saving Rate has been trending lower over the last 11 months. Continued Jobless Claims (those who have been unemployed for multiple weeks) hit a new 5-decade low yesterday. Also on the positive side is the fact that manufacturing is seeing a resurgence. The Markit Manufacturing PMI jumped by more than a point in February and both the Richmond Fed and the Kansas City Fed manufacturing indices showed considerable improvement in February.
This activity, in the fact of rising inflation and rising interest rates, has caused the Atlanta Fed to adjust their projections for 1st Quarter GDP higher. At one point in late February, their projection was for a 0.5% decline in GDP. Currently, the Fed is expecting +0.9% GDP growth. While that is not stellar growth, it's also not in the wheel-house of a recession (two consecutive quarters of negative GDP growth). Last week, the S&P 500 Index recorded 4 consecutive days with a 1% gain or higher. That's only happened 14 times since the inception of the S&P 500 Index. In 86% of those instances, the S&P 500 was higher 3 months following such an event. For the time being, the "free parking" is in the equity space.