US Fed and new stimulus plans make inflation great again

Local market was flat as a pancake after damning weak job data driven stimulus hope in the US was waved away by US Fed flagging inflation is back baby!!! Job data was weak and confirmed the first negative month since pandemic to finish the year from ADP and Non Farm payrolls. More about the job data in the paragraph below. US Fed flipped from no rate rises for 3 years to no rate rise till inflation takes off. US Fed is starting to prepare the market for reflation cycle after calling the cycle wrong as per historical trend. The current White House hasn’t even left the building and US Fed is already singing a different tune to match the new administration. Market flipped on a dime and fell to negative territory and the sliding bond yields found support. China is moving to start tightening conditions little by little after being overly accommodative. There is a stark choice for US Fed and the White House….time to flip the policy setting from pumping the asset prices and hurting the economy to creating inflation from bottom up stimulus to save the economy and deflate the asset bubbles. You can’t have the cake and eat it too. To borrow a well known phrase…We may be at a market cycle where US Fed may be about to ”let them eat cake”. Top end of town had their feeding frenzy for decades and they got greedy and pushed back on reform. Now everyone realizes that the trickle down economics model is broken. It is the bottom end of town’s turn to get handouts and drive growth. Time will tell if this strategy works. Unless we roll into another global lockdown, inflation is coming…ready or not!

US economic recovery has been fading since the White House has lost focus after election loss. The political infighting has left the fading economy on the chopping block with pandemic mess breaking all records. US planned to vaccinate 20m by year end and the latest data points to 1.5m. The last major job data from ADP and Non Farm Payrolls delivered surprisingly big negative job losses when expectations were for low positive numbers. The real worry is that it was the first negative month since pandemic recovery and it was the last month of the year. Unlike politicians and central banks talking alternative facts, business owners are acting on their expectations of 2021. They are cutting back on costs and preparing to tough it out in a weak economy. So….it was no real surprise that the weak data overnight shows the weekly Initial Claims were the highest since Aug while Continuing Claims were also flagging a rise. Pandemic and economic management has been on autopilot for years with stimulus and rate cuts to keep it from falling over. The lack of real reform has left the economy weak and the new waves of pandemic may be too much for some of the zombie businesses!

Given the macro, what was the response from the White House? they lost interest after losing the elections and that lead to infighting and blame games. Now the new administration has delivered their take on stimulus. It is more of stay in business capex than growth capex. Most were expected and should not be a surprise but yet the minimum wage will be huge for low income earners and in context to inflation. There are a handful of states already have $15 per hour minimum wage and others have slight boost. But this will raise the bar for the lowest of the low. Someone on the lowest federal per hour wage will more than double their income in most states!!!

CNBC take on Joe Biden’s stimulus plan:

• Direct payments of $1,400 to most Americans, bringing the total relief to $2,000, including December’s $600 payments

• Increasing the federal, per-week unemployment benefit to $400 and extending it through the end of September

• Increasing the federal minimum wage to $15 per hour

• Extending the eviction and foreclosure moratoriums until the end of September

• $350 billion in state and local government aid

• $170 billion for K-12 schools and institutions of higher education

• $50 billion toward Covid-19 testing

• $20 billion toward a national vaccine program in partnership with states, localities and tribes

• Making the Child Tax Credit fully refundable for the year and increasing the credit to $3,000 per child ($3,600 for a child under age 6)

New administration has delivered the good news but higher taxes and more regulations will come after the inauguration. Tech, Health Care and Financials better prepare for volatility.

Pandemic waves are hitting all parts of the world. US is a shambles at best and they are betting everything on vaccine. Best case scenario is that they get control back in late Q2 but execution track record is as bad as Canberra on tech apps. South America and Africa are being decimates and being used as pawns by bigger nations with questionable vaccines. Europe is in rolling lockdowns and they will extend well into Q1 at least. Japan, China and South Korea are facing new waves and lockdowns. Rest of Asia are similar to South America and Africa. We may be repeating the same mistakes we did a year ago and the new variants may go rampant.

US market last close > US market started positive on stimulus but US Fed took the wind out of sail to finish slightly in the red. Job data was the weakest in 5 months and that started the market positive as it will be hard to block Biden's $2T package but US Fed flipped from no rate rise for years to no rate rises as long as inflation does not run. If it runs they have options. Bond yields climbed and markets rolled. Russell is up over 2%...classic reflation trade and danger for growth stocks that dominate US markets. USD weaker and commodities higher. Picking the dips in growth stocks like Tech and Health Care just got really risky. Energy and Financials keep doing well while Tech and Retail were struggling today. Pandemic lockdown piling up in Europe and Asia.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

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