I appeared on CNBC’s Power Lunch this Friday with Ron Insana, and Ron’s comments got me thinking. (As Ron tends to do – Ron’s insights are almost always useful for an investor.) In short, Ron said that the markets have to adjust to a new regime from both the Fed and fiscal policy makers that favors “Main Street over Wall Street.”
Certainly, in the relief packages over the past twelve months, much of the nascent recovery has been fueled by transfer payments into the hands of the consumer. Where for the last 40 years, government intervention has largely been top-down, supporting businesses and producers, the latest interventions have been, to a large extent, bottom-up, supporting workers and consumers.
I’ve said in the past, I wholeheartedly support supply-side policies for the economy – but only for supply-side problems. The sand in the gears of the economy in recent years has not been supply – we have been able to produce all the donuts we want – but instead on the demand-side; we haven’t had people lined up to buy the donuts we make. The trillions of dollars of relief and stimulus should, in theory, stimulate demand. In practice, it certainly has over the short term.
As anecdotal evidence, I spoke with my long-time friend Terry this afternoon who manages a sporting goods store in Louisiana, not far from New Orleans. He says this week has been crazy with people receiving their stimulus checks. People have bought trampolines, $900 above ground swimming pools, firearms. As Terry put it, “basically anything to keep the kids out of the house.” (My friend Terry is a very funny man.)
The recession caused by the pandemic has been unique in many ways, not the least of which is the suddenness of its onset. The rebound has been nearly as sudden, and perhaps the willingness to inject money directly into the hands of the American consumer (who spends reliably like no other) is a major cause for the swift rebound. Certainly, it has contributed. Already, as shown in the graphic below from The Wall Street Journal, worldwide manufacturing output has taken less than half the time to reach pre-crises level than during the Great Financial Crisis.
Ron’s words of caution on Power Lunch were that investors will have to adjust to a new regime, and markets will be volatile as they no longer have the Fed standing at the ready to intervene with another dose of cold medicine anytime the market sneezes. Where the old mantra has been trickle-down, we are now experimenting with percolate-up. There will be different winners and losers, and the adjustment may be painful.
I am not completely convinced I agree with Ron’s assessment that the Fed has taken the punch bowl away from the financial markets, but is keeping the party going for the consumer. Certainly, a lot of the relief and stimulus has gone to businesses, and while retail sales are seeing a burst, much of the money injected into the economy has, and will, end up continuing to inflate asset prices. Will the Fed step in to prop up markets at the first taper tantrum? At the next correction? Will Capitol Hill step in and adjust fiscal policy?
Although from my perch on CNBC, as an investor, and as a money manager, I am clearly a “financial insider” I hope the Fed and The Hill do let the market stand and fall on its own and continue to support the consumer and the worker. While in the short term, the tantrums and corrections markets may have are painful, ultimately the health, and wealth, of the equity markets are a reflection health of the economy as a whole. Policies that support workforce participation, education, infrastructure, may have little impact on the markets over a quarter or a fiscal year, but over business cycles and generations, those policies reap rewards.
I have long been of the mind that focusing too much on the financial markets has led to policies putting band-aids on markets instead of strengthening the health of the overall economy. The result has been an economy that has struggled for tepid 2- 2.5% growth.
Will the change that Ron sees come to pass and become permanent? Always listen to Ron Insana – he isn’t always right, as no one can completely predict the future, but Ron has one of the clearest crystal balls of anyone in the business. If he is right, it could be an uncomfortable time of adjustment for the markets, but in the long run a healthier economy and healthier (and wealthier) markets emerging on the other side.