Control Panel: Where did Covid stimulus go?

Investment Analysis Clubs Macro Economic Trends and Risks
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Happy New Year to all METARs!

Where will the economy and markets move in 2022?

Part of the answer involves the immense fiscal stimulus sent to households in 2020 - 2021. Intended to prevent sudden poverty when Covid shut down the economy, the 3 waves of stimulus succeeded and also increased the savings rate.

https://www.wsj.com/articles/americans-finances-got-stronger…

**Americans’ Finances Got Stronger in the Pandemic—Confounding Early Fears**
**Stimulus payments brought millions out of poverty and allowed them to clear debt, and households of all income levels built up savings. The stronger finances are expected to aid stability as normal spending and higher inflation return.**

**by Rachel Louise Ensign, The Wall Street Journal, Jan. 9, 2022**

**Though initial shutdowns caused unemployment to surge to levels not seen since the Great Depression, trillions of dollars in government stimulus and the economy’s swift, if turbulent, recovery helped many families reach a new level of financial security.**

**The first two rounds of stimulus payments lifted 11.7 million people out of poverty, according to the Census Bureau. Americans built up $2.7 trillion in extra savings. Some expect that, combined with rising wages, to provide them with lasting stability despite the return to more normal spending patterns and rising inflation. ...** [end quote]

Much of the stimulus money was spent immediately. This surge of consumer demand during supply chain constraints led to a surge in corporate profits, increased inflation in goods and services as well as the stock market and home prices.

https://fred.stlouisfed.org/series/CP

The personal savings rate spiked to a record. This buildup of savings can help smooth the economic recovery when gradually spent.
https://fred.stlouisfed.org/series/PSAVERT

The Federal Reserve announcement that it will be accelerating the normalization of monetary stimulus (raising the fed funds rate and tapering its bloated book of Treasury and mortgage bonds) resulted in a rise of Treasury bond yields. The entire yield curve shifted upward. Despite this, real (inflation-adjusted) yields are negative at all durations. If the 10-year Treasury returned to its historic norm of about 2% over the inflation rate the bond and stock markets would collapse.

Interest-rate sensitive “growth” stocks have been hard hit recently as predicted. The NASDAQ index has been very volatile for the past couple of months but has remained within a broad channel and the moving average hasn’t dropped – yet. SPX is still rising with moderate volatility.

The USD, gold, silver and copper are stable within their channels. Oil is in a strong rising trend. Natgas spiked and fell back somewhat.

The Fear & Greed Index is neutral. The trade is slightly risk-on.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2021 is 6.7 percent on January 6, 2022. GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

The December Manufacturing PMI® registered 58.7 percent, a decrease of 2.4 percentage points from the November reading of 61.1 percent. Manufacturing is growing, but it’s a strange time with constrained labor and supplies where it’s hard to meet demand. The decrease doesn’t necessarily mean that manufacturing is weaker since it’s not due to the usual reason of not enough demand to keep manufacturers busy.

Economic activity in the services sector grew in December for the 19th month in a row — with the Services PMI® exceeding 60 percent for the 10th consecutive month — say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business®. Services is a much larger sector than manufacturing, so the faster increasing prices, too low inventory and labor shortages presage faster inflation ahead.

The economy is recovering. There are two major potential Macro problems.

Covid-19 is spreading incredibly fast. The Omicron variant is extremely contagious. The New York Times charts the reported cases against death rates lagged by 21 days. As expected, the deaths from Thanksgiving are spiking up. It’s too early to see the deaths from Christmas/ New Year’s superspreader events. In New York City, Boston and Chicago — cities with some of the country’s earliest Omicron surges — deaths have followed cases at a slightly reduced scale than in previous peaks. But because of the extraordinarily high case count, even a proportionally lower death toll from the current case curve in the United States could be devastating.

https://www.nytimes.com/interactive/2022/01/09/us/omicron-ci…

Fortunately, vaccinated people don’t have severe outcomes unless they have multiple risk factors – basically, one foot already in the grave. The Covid fatality rate is 0.003% in vaccinated people, as I reported in an earlier post today. That was Delta and pre-Delta, not Omicron.

The second potential Macro event would be a Russian invasion of Ukraine. That won’t happen next week, since there’s a diplomatic meeting. With any luck it won’t ever happen.

The stock market bubble continues to inflate, even as the bond market bubble may be gently beginning to deflate.

https://www.wsj.com/articles/earnings-reports-this-week-will…

**Earnings Reports This Week Will Help Investors Prep Their 2022 Playbooks**
**Higher interest rates could make investors less willing to pay rich valuations for stocks. That means corporate profits will be critical to keeping the market climbing.**
[end quote]

The METAR for next week is cloudy. I don’t see any sudden disasters. Bond yields will probably continue to slowly rise (assuming the Fed doesn’t contradict itself again), depressing the value of existing bonds. (Except I-Bonds.) Stock prices will depend upon increased corporate profits but “growth” stocks will be hurt if their profits lag expectations while interest rates rise.

Wendy

https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…

https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…

https://stockcharts.com/freecharts/candleglance.html?$SPX,$U…

https://money.cnn.com/data/fear-and-greed/

https://stockcharts.com/freecharts/yieldcurve.php

https://www.treasury.gov/resource-center/data-chart-center/i…

https://www.treasury.gov/resource-center/data-chart-center/i…

https://www.atlantafed.org/cqer/research/gdpnow

https://www.ismworld.org/supply-management-news-and-reports/…

https://www.multpl.com/shiller-pe

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Americans’ Finances Got Stronger in the Pandemic—Confounding Early Fears
Stimulus payments brought millions out of poverty and allowed them to clear debt, and households of all income levels built up savings. The stronger finances are expected to aid stability as normal spending and higher inflation return.

WSJ

This argues that giving poor or average joe money makes for inflation.

The bankers and other financial folks got that money if we read the above carefully. The PPP, UI and other programs have been over for a while. Now the thing that is only beginning to wind down is the FED bond buying which is from the rich and probably very connected.

Lets try to run an honest country.

The unspoken reason for the bond buying is to stave off a complete financial collapse. Right? Or am I wrong and FED just spends $120 billion in bonds any old time because…because what? More socialism for the very wealthy.

Most of us on this board are in an income category where we pay the taxes to create this socialism.

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Fortunately, vaccinated people don’t have severe outcomes unless they have multiple risk factors – basically, one foot already in the grave.

Wendy,

This is the second time I’ve read a post from you today saying something like this. And it feels a little harsh. Just because someone has multiple risk factors doesn’t mean they have “one foot in the grave.” For instance: a diabetic with high blood pressure who’s compliant with medications. Such a person might have lived years longer without COVID. It’s COVID that pushed them over the edge.

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More people are more easily surviving Omicron even with comorbidities.

As I stated a good friend with Lopus just got a soar throat.

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sore throat. I have had a very long day. At least that is my excuse this time.

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The second potential Macro event would be a Russian invasion of Ukraine. That won’t happen next week, since there’s a diplomatic meeting.

The Japanese Ambassador had an appointment with the US Secretary of State on December 7th, 1941. The Ambassador was a couple hours late, so Secretary Hull had already gotten the news when the Ambassador arrived.

I don’t think Putin will do anything. If for no other reason than he now has an op going in Kazakhstan. I have not heard of anything going on in Ukraine that had the smell of the FSB, that could create the excuse for a Russian move either. Actually, the Kazak demonstrations getting so far out of hand so fast, has more the smell of FSB provocateurs.

Steve…grew up watching “Mission Impossible” which was usually about destabilizing the government of the EEPR

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The unspoken reason for the bond buying is to stave off a complete financial collapse. Right?

The Fed’s dual mandate is to maximize the economy, making jobs readily available to all who want them, while also targeting stable inflation of around 2% annually.

The bond buying served both purposes back when the economy was lingering at or below 2% inflation and the job market was still improving. Over the last year, as inflation reared its ugly head, the Fed was hesitant to pump the brakes because the job market was still improving, and millions who left the job market due to the pandemic had not returned, and they judged that most of the forces causing the inflation spike were transitory.

Now, with high inflation lingering longer than they expected, and the job market in good shape (though the problem of people not returning to the job market still remains to some extent), consensus has developed that yes, it’s time to pump the brakes.

Krugman argues that despite the high inflation, policy makers at the Fed and in the Government made the correct choices. If we had pumped the brakes earlier, it may have reduced current inflation to some extent, but it also would have slowed the rapid economic recover we saw through 2021. He shows that the economic recovery in 2021 is the fastest since the ‘Morning in America’ recovery that made Reagan a legend. Better for the most people for us to endure some moderately high inflation for a year or so than to choke off the economic recovery prematurely.

Reasonable people can differ, but I buy his argument (consistently offered for decades) that we have the tools to deal with high inflation much easier than we do too low inflation/deflation/slow growing economy, so better to err on the side of a faster growing economy/more inflation until we’re sure that economic growth has really taken off.

Here’s the column from last week where Krugman discusses his thesis that policy was about right during the last year, despite the highish inflation:

https://www.nytimes.com/2022/01/06/opinion/inflation-unemplo…

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Well, on a macroeconomic level, a lot of the stimulus money was given to people who didn’t need it (like us,) so it ended up in the stock market, making the richest people look even richer. I always believed, from the outset of the COVID crisis, that the stimulus money should have been more focused, and directed through the unemployment insurance process, or the SBA, to people who needed it more.

As for our household:
The first-round stimulus payment, we used to pay for a new furnace when the old one (31 years old) died the same month.
The second payment paid a few bills, and we gave some extra money to our church, which was suffering from lower contributions, due to in-person attendance at services being curtailed.
The third payment went entirely to charity. ($2,800 divided equally between 4 local charities -not the church this time.)

Bill

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