I have to admit I didn't realize until our market chat on Power Lunch yesterday that people are already looking ahead to what the next stimulus bill will bring.
"We do believe that you could see another package passed after the next Congress is in session," said Rebecca Felton of RiverFront Investment Group. I asked Kirk Hartman of Wells Fargo if he also thinks there's more to come: "Oh definitely," he said. "I think when the Biden administration comes in there'll definitely be [another] package. Ninety-five percent of Americans are hurting...I think there's bipartisan consensus for more stimulus."
Or is there? And what kind of stimulus? And are 95% of Americans really hurting financially from Covid? Even as President-elect Biden is already calling for a third round of stimulus checks--and even as the Democratic House advanced $2,000 payments in a bill last night--other prominent voices on the left aren't so sure.
Take Larry Summers, for instance, who has caught a lot of flak in recent days for opposing the idea of $2,000 stimulus checks since he's been a Biden advisor typically in favor of more fiscal aid. "I am not opposing stimulus or favoring austerity," he wrote in an op-ed explaining himself. "The issue is whether...a one-time tax credit that would be worth $8,000 to a family of four and reach more than 85% of taxpayers makes good economic sense."
"What about the vast majority of families who are still working, and whose incomes have not declined...?" Summers wrote. "For this group, the pandemic has reduced the ability to spend more than the ability to earn."
Indeed, we've written many times here about the $1.5 trillion-plus in "excess savings" Americans have piled up this year, which just resulted in a strikingly normal holiday sales season. And we're not talking about only high-end consumers here. Shares of Macy's popped 10% for much of the session yesterday after Mastercard SpendingPulse said holiday retail sales overall were up 3% from a year ago.
Michael Darda of MKM Partners draws the striking contrast between the recovery now versus the aftermath of the Great Recession of 2008-09. Back then, labor compensation plunged 10% below its prior trend "and never recovered," Darda wrote yesterday. It eventually started growing again, but didn't close that gap.
This time around, compensation (which is to say, household earnings) also plunged 10%; but by last month --barely eight months into the recovery--had recovered so sharply that the gap was only 3.4%, or just over $400 billion. "Why," wrote Darda, especially with the vaccine rolling out and the Fed still pumping liquidity into the system, "are we enacting fiscal stimulus bills with a price tag of more than 2x that figure?" The $900 billion bill that was just signed, he said, "[should] have been both targeted to the pandemic itself and paid for."
Jason Furman, the past chair of President Obama's Council of Economic Advisors, was also tweeting last week about the surprisingly small compensation gap and growing pile of excess household savings. He too implied the focus should be on more targeted relief measures, like extending boosted jobless benefits when they expire again in March.
Already as of October, Summers noted, citing J.P. Morgan Chase, checking account balances were running above pre-Covid levels. Even for the lowest earners, balances were up about 25% year-on-year. "Without new stimulus, things would have normalized in 2021," he wrote. If the government were to send out $2,000 checks, "we [would be] in completed uncharted territory," he warned, "with household incomes more than 15% above their normal level" next year.
It's why the "economic boom" is quickly becoming the base case scenario for 2021 even without any further aid ("I don't know how your baseline could be anything but" that, Ben Carlson of Ritholtz Wealth tweeted last night ). And you can see why people are starting to worry about inflation--and why the dollar's been slumping--even if the bond market remains in its deep slumber. Are rates only still low because of the Fed's massive bond-buying? Perhaps. If they're forced to start "tapering," we'll see how big a tantrum bond yields throw.
But at least the Fed can pretty easily dial back its support, even sell some of its holdings, if it has to in order to "normalize." How exactly would lawmakers deal with higher interest costs while we're still running huge deficits from these relief packages? Let's hope we do get a boom next year; we'll need it to pay the bills.
See you at 1 p.m!