Tag: news

Word on the street – according to WSJ – is that Microsoft and TikTok-owner ByteDance were on the cusp of a deal for the software giant to buy TikTok’s business (which encompasses all global markets except China) when President Trump’s comment about barring the app from the US (which followed repeated hints that the administration was “looking into” some kind of action) prompted both sides to put things on hold, barring more concrete guidance from the administration.

It’s reasonable to suspect that any deal for Microsoft to buy TikTok would require dependable assurances from the administration that Microsoft would be protected should lawmakers try to turn around and target Microsoft alongside Amazon, Facebook and Alphabet, as anti-trust probes into the Silicon Valley titans ramp up.

And, apparently, the “OK” has been handed down, because Microsoft, which has, until now, refused to comment on the record about the purported deal, has reportedly just affirmed that it’s moving ahead with deal talks to potentially buy TikTok, which a private group of investors recently valued at $50 billion. The deal may involve outside investors from the US as well.

In sum: At a time when Congress is beating the tech antitrust drum louder than at any other time since the late 1990s during the landmark Microsoft antitrust case, the tech giant, which has a market cap of $1.6 trillion and already owns one social media platform with more than half a billion members (LinkedIn), is about to get even bigger.

To be sure, even with Trump’s blessing, a deal with TikTok would still be a risk for Microsoft, should Democrats take back control and redouble their anti-trust efforts. But right now, with the administration threatening to drop the hammer, the company might be able to get a reasonably good deal.

Microsoft is now planning to wrap up the deal talks by the middle of September:

• MICROSOFT SAYS IT WILL CONTINUE TALKS ABOUT US TIKTOK BUY
• MICROSOFT SAYS IT WILL MOVE QUICKLY ON TIKTOK TALKS
• MICROSOFT SAYS IT WILL FINISH TALKS NO LATER THAN SEPT 15
• MICROSOFT SAYS DEAL WOULD ALSO INCLUDE TIKTOK IN CA, NZ AND AUS
• MICROSOFT SAYS MAY INVITE OTHER U.S. INVESTORS FOR TIKTOK DEAL

Earlier today, Sec Pompeo dropped the latest threats about potential action against TikTok, WeChat and other Chinese apps.

Authored by David Stockman via Contra Corner blog,

Well, the Virus Patrol sure has done it. In a fit of reckless overkill they have managed to vaporize six years of economic growth during the last 90 days. And that’s just by the mechanical reckoning of the GDP accounts, where total output in Q2 weighed in at essentially the same level as Q4 2014.

The real damage is far deeper, however, and is reflected in millions of small businesses permanently destroyed, tens of millions of households wiped-out financially and the vicious daisy chain of delinquencies, deferrals and defaults just beginning to rip through the $78 trillion edifice of debt which entombs the US economy.

Real GDP Level

Of course, most of the Wall Street talking heads were nonplussed by this week’s release because, well, Q2 results are claimed to be ancient history: Reality is purportedly the “V”-shaped recovery on their spreadsheets, which really can’t fail to happen because it’s always two quarters out regardless of conditions at the moment.

So let’s get something straight. What is happening is an economic catastrophe the likes of which we have never seen before, even during the Great Depression of the 1930s.

In fact, the worst annual decline back then was a 14.8 percent drop in 1932, while the entire peak-to-trough real GDP decline between 1929 and the 1933 bottom was 30.5 percent.

So it would be fair to say that measured at an annualized rate, the idiotic Dr. Fauci and his Virus Patrol have now delivered a 32.9 percent GDP plunge, which single-handedly tops the entire contraction of the Great Depression.

Needless to say, the Q2 result also leaves the recessionary drops since 1950 way back in the dust. Even the auto industry induced plunge of Q1 1958 didn’t make the double-digit threshold. It clocked in at a 9.986 percent annualized decline or less than one-third of today’s cliff dive.

What was especially notable, however, was the vaporization of personal consumption spending on services, which ordinarily accounts for upwards of 70 percent of total PCE; and which is also ballyhooed by the paint-by-the-numbers Wall Street economist as the ballast the keeps GDP moving ever higher.

Not this time!

Services spending literally fell through the trapdoor, contracting at a 43.4 percent annualized rate. That compares with the 11 recessions since 1950 where real spending on services never went negative, save for the pinprick decline of -1.6 percent annualized during the Q1 2009 bottom of the Great Recession.

By every account, the economic plunge in the winter of 2008-2009 was the worst since the 1930s, but this week the Commerce Department reported a PCE-services drop that was 28X deeper!

Our purpose here is not to marshal scary numbers, even as they surely are.

Rather, our point is that what is coursing through the Q2 numbers is not anything that resembles a normal chain-of-reactions macroeconomic cycle. For instance, where job losses cascade through to shrinking incomes, thereby causing consumer confidence and spending wherewithal to diminish and household spending to be curtailed.

To the contrary, what is depicted below is essentially economic martial law. Agencies of the state commanded airports, restaurants, bars, hair salons, gyms, movies, dentist offices, theme parks, sporting events etc. to close or operate at drastically reduced capacity, which meant, in turn, that day-in-and-day out commerce and economic output vanished instantly.

Stated differently, this 43 percent plunge in services spending didn’t happen for the ordinary reason that people were short on cash. As we show below, personal income during the quarter – thanks to the massive flow of free stuff from Washington (aka government transfer payments) – clocked in at a record level!

Consequently, there will be no rebound in the plunging red line below no matter how much fiscal and monetary “stimulus” Washington pumps into the main street economy.

The services sector accounts for nearly 66 percent of total PCE, which, in turn, accounts for 68 percent of measured GDP. So the latter will not recover until the Virus Patrol gets its foot off the neck of what we call the social congregation activities of daily economic life; and also until it and its MSM collaborationist desist from fanning the false claim that the Covid is the equivalent of the Black Plague, thereby causing people to voluntarily quarantine out of misplaced fear.

Of course, you don’t have to listen to Dr. Fauci and the Scarf Lady for long – yes, they have not yet been locked up in padded cells where they belong – to realize that the Virus Patrol is on a once-in-a lifetime power trip.

In ultra-busy body/Nanny State fashion they are virtually regimenting the comings and goings of a $20 trillion economy – even as they keep the US economy on indefinite idle waiting for the vaccines and antivirals from their allies in Big Pharma and the Gates Complex to ride to the (mandatory) rescue.

Annualized Change In Personal Consumption Expenditures, Services, 1950-2020

We don’t expect the Virus Patrol to be put out of business any time soon because the Donald is too confused and weak to shut them down.

Moreover, if he keeps shooting himself in the kneecaps via tweets like this week’s “lets-postpone-the-election” numbskullery, he will guarantee an even worse scenario: Namely, that while Sleepy Joe is being oxygenated and propped-up behind the Resolute Desk for daily Oval Office photo ops, the left-wing health Nazis who surround him will really go to town on Lockdown Nation.

Nor is that any kind of unhinged trashing of the camarilla of out-and-out statists who will form the core of the Biden Administration. The fact is, the Donald’s malpacticing doctors, the MSM and the Blue State mayors and governors have now unleashed a full-on public hysteria that is self-fueling.

It is now transforming ordinary sheeples into obedient and unquestioning brown-shirts. Even in the purportedly enlightened, socialist republic of Aspen, where we are sheltering for the duration, we see them “mask-up” even with no one in sight, while pumping strenuously up the mountain side on a fat-tired bike.

One manifestation of the Covid-Hysteria is the soaring level of “testing” going on as people either try to get a hall pass in order to return to work or just plain run to the nearest testing station every time the media sends off new alarm bells.

During April, for instance, which was the very worst month of the contagion in terms of serious illnesses and deaths, 5.2 million new tests were reported or 175,000 per day.

By contrast, in July to date (thru the 29th), there have been 21.5 million new tests reported or an average of 745,000 per day.

In a population that has been thoroughly exposed to the virus after five months, it is a given that with the number of tests soaring, the number of positive cases will rise proportionately. But that’s a misdirection because the real issue is the true medical severity of the new cases, and that has dropped precipitously.

The death rate has dropped from 1,800 per day in April to 780 in July; and whereas 15-20 percent of new cases were being hospitalized in most states during April, that figure has now fallen to 2-4 percent.

That is, after the Grim Reaper’s original romp through the most vulnerable populations – especially the nursing homes and long-term care facilities in March/April – the preponderant share of the remaining populations being infected and testing positive appear to have stronger immune defenses, and are mainly either asymptomatic or treating and recovering at home in the normal flu-season manner.

So on the facts, the Hysteria should be dying out, but, alas, the facts are of small moment in the context of a runaway public hysteria that is being turbocharged by a severely aggravated anti-Trump partisanship that has no modern precedent, or any at all.

We are constantly reminded that there are less than 100 days until the election, but probably of even more salience is that the next flu season will be arriving even sooner in October. And it won’t matter whether the obvious herd immunities building up against the SARS-Cov-2 cause the next flu season to be unusually mild or not.

That’s because the Virus Patrol will be at shrill alert for the “second wave” in the run-up to October, keeping the suffocated economy evident in today’s GDP report on its back foot for the balance of the year, at least. That means the ballyhooed V is now surely dead-as-a-door nail.

In this context, it needs be recalled that the services sector of the US economy is bearing the brunt of the Lockdown orders, but that it now counts for fully $8.7 trillion or 45 percent of GDP. That compares to a mere 26 percent back in the days of America’s industrial might in the mid-1950s.

In the big picture context, therefore, national policy – especially at the Eccles Building – caused the off-shoring and hollowing-out of the US industrial economy over the last three decades. In turn, that has left main street especially vulnerable to a state-orchestrated attack on its new services sector center of gravity such as outpatient surgery clinics, Pilates studios and tapas bars.

Again, an economic martial law attack on the new epicenter of the US economy means that the issue is not traditional stimulus, but clearing the decks and clearing the air of the Virus Patrol orders and Covid-Hysteria, which was the real culprit behind the Q2 GDP disaster.

Nominal GDP (light brown) Versus Service Sector PCE (dark brown), 1955-2020

Perhaps nowhere is the impact of economic martial law more evident, ironically, than in the health care sub-sector of the services economy.

The former, of course, has been the workhorse of US GDP growth for decades. However, after peaking at $2.50 trillion in Q4 2019, it weighed in at just $1.89 trillion in Q2 2020. That’s a $608 billion decline, reflecting an astounding -24 percent contraction.

And this is supposed to be the worst medical crisis to hit America since the Spanish Flu of 1918!

But, actually, the government’s data mill is telling an absolutely opposite, nay crazy, story. Namely, that the single largest sector of the US economy plunged at a 61.6 percent annualized rate in Q2 – meaning that the figure gives the notion of being “off the charts” of history an altogether new definition.

Needless to say, health care spending is not now and never has been amenable to Washington’s vaunted stimulus machines. The overwhelming share of spending is government funded directly through Medicare/Medicaid et al or through the $300 billion per year tax shelter for employer health plans; and whether public or private, consumer health payments are overwhelming made by third-parties, thereby further limiting the efficacy of the cheap money from the Fed and free money from Uncle Sam.

The plunging red line below, therefore, is the doing of the Virus Patrol and its orders to shutdown most so-called discretionary healthy care services, such as cancer screenings. So until it is put out of business and the public Covid-Hysteria is substantially abated, the rebound of the health services sector is likely to the contained and protracted.

In short, what we have is a government-ordered depression, not a macroeconomic recession that is purportedly remediable by a huge dose of monetary and fiscal stimulus. So the truth is, the Virus Patrol, not the Fed and Washington’s everything bailout brigade, is in charge of the recovery from the Q2 disaster, and they are not much interested in letting it happen.

To take another salient example, the go-to strategy of the Virus Patrol has been to shutdown large scale public gatherings entirely, but that’s obviously the venue of the recreation sector.

So it is not surprising that the PCE spending rate for this sector has given “cliff-diving” a run for its money. Compared to the $590 billion annualized rate of spending in Q4 2019, the current quarter clocked in at just $272 trillion.

The amounted to a 53.4 percent decline from Q4 and an out-of-this-world contraction of 61 percent annualized in the current quarter. Or alternatively, recreation spending in Lockdown Nation during Q2 reverted to the level first crossed in Q2 2002.

That’s 18 year’s worth of growth gone in a virtual economic heartbeat.

Of course, there was one thing that was way up in Q2 – transfer payments and personal income. And every dime of the massive increase in transfer payments shown below was borrowed by Uncle Sam and monetized by the Fed.

Yet the only thing it accomplished was to further balloon the public debt because the current depression does not flow from the want of means or desire to spend: It’s the product of economic martial law ordered up by the Virus Patrol.

Still, it is worth noting that wage and salary income (brown line) was down by $680 billion at an annual rate in Q2, while the Washington spending machine boosted transfer payments at a $2.4 trillion annual rate, or by nearly four times more!

Once upon a time, that would have been considered insane overkill, and at least caused Republicans to screech at the top of their lungs about fiscal profligacy.

Alas, as they put up their $1.2 trillion Everything Bailout 5.0 against the House Dems’ $3.3 trillion alternative in the days just ahead, the chart below will be nowhere seen in the porkers’ lounges of Capitol Hill.

Change From Prior Quarter In Billions: Transfer Payments (purple line) Versus Wages and Salaries (brown line)

Deutsche Bank has launched an internal investigation into Rosemary Vrablic, the longtime personal banker of President Trump and Jared Kushner – after a Friday disclosure by Trump’s son-in-law revealed what may have been an inappropriate real estate transaction between Vrablic, two Deutsche Bank colleagues, and a company part-owned by Kushner in 2013.

On Friday, Kushner disclosed in an annual personal financial report that he and wife Ivanka Trump received between $1 million and $5 million in 2019 from a company called Bergel 715 Associates.

The New York Times did some digging and uncovered that in 2013 Vrablic and her Deutsche Bank colleagues purchased a Park Avenue apartment for approximately $1.5 million from Bergel at the time Kushner held an ownership stake in the entity, posing a potential conflict of interest which may have violated firm rules.

When Ms. Vrablic and her colleagues bought the apartment on Manhattan’s Upper East Side, Mr. Trump and Mr. Kushner were her clients at Deutsche Bank. They had received roughly $190 million in loans from the bank and would seek hundreds of millions of dollars more.

Typically banks restrict employees from doing personal business with clients because of the potential for conflicts between the employees’ interests and those of the bank. –NYT

According to the report, Deutsche Bank was unaware of the potentially inappropriate nature of the transaction until the Times contacted them.

“The bank will closely examine the information that came to light on Friday and the fact pattern from 2013,” said bank spokesman Daniel Hunter.

Until now, Deutsche Bank has tried to shield Vrablic from outside scrutiny, presumably in part because she knows *so much* about the Trump and Kushner relationships.

It is therefore quite interesting that the bank is now publicly stating that they are looking into her conduct.

— David Enrich (@davidenrich) August 2, 2020

Christopher Smith, general counsel at Kushner Companies, told the Times that “Kushner is not the managing partner of that entity and has no involvement with the sales of the apartments.”

Kushner’s stake in Bergel – which has sold dozens of high-end condos in the Park Avenue building since the 1980s – is unknown, though at least one apartment was sold to the Kushner family’s real estate company according to the report.

Bergel 715’s main owners include George Gellert, a close friend of the Kushner family and an investor in numerous deals with Kushner Companies.

There is no indication that the three Deutsche Bank employees bought the apartment — described on Zillow as a 908-square-foot, one-bedroom, one-bath unit with a balcony overlooking Park Avenue — at a below-market price.

In 2014, the deed for the apartment, Unit 12A, was transferred to a limited liability company registered to Ms. Vrablic’s home address, according to property records. The next year, the apartment was sold for $1.85 million — a not-unheard-of 22 percent increase from the 2013 purchase price. –NYT

The Kushner family has a long relationship with Vrablic predating her employment at Deutsche Bank which began in 2006. As one of New York’s leading private bankers, Kushner brought Vrablic to meet his father-in-law in 2011 at a time when many banks avoided business with Trump over his previous bankruptcies.

“I introduced him to this woman Rosemary,” Kushner told the House Intelligence Committee during closed-door testimony in 2017. “She is one of the biggest private wealth bankers, probably in the world. Amazing banker, amazing woman. Very smart banker. And she banked my family for a long time.”

Authored by Rick Moran via PJMedia.ocm,

Democrats around the country have begun to pressure the Biden campaign to call off all debates with Donald Trump due to the coronavirus pandemic, they say.

In truth, the reason they don’t want Biden to debate Trump is that they don’t think Trump will play by their rules. The president would take over the debate and make it about what he wants, not what Biden wants.

Democrats are also worried about Biden’s mental stamina and his ability to remain engaged for an hour and a half during a debate.

Newsweek:

Democratic strategists and supporters of Vice President Joe Biden are urging him not to debate President Donald Trump in the lead-up to Election Day, citing Trump’s publicity stunts and disregard for the rules in 2016. Meanwhile Biden backers, including some conservatives, applauded the University of Notre Dame and the University of Michigan for cancelling their scheduled debates over COVID-19 concerns.

Former White House Press Secretary Joe Lockhart joined several Democratic Party strategists in bluntly advising Biden, “whatever you do, don’t debate Trump.” Speaking on CNN Saturday, Lockhart said Trump shouldn’t be given another platform which will enable him to “repeat lies,” which he said occurred in the 2016 debates against Hillary Clinton.

Trump has a knack for exaggeration and hyperbole that Democrats don’t like. It’s very effective in debates and Biden would spend most of his time on the defensive.

CNN political analyst @joelockhart tells @smerconish that Joe Biden shouldn’t debate President Trump.

Trump “will take the truth and destroy it, and Biden will be in the position of correcting him over and over and over again. I don’t think he should give him that platform.” pic.twitter.com/4EOR4Q9Um7

— CNN (@CNN) August 1, 2020

“We saw in the debates in 2016 Hillary Clinton showed a mastery of the issues, every point she made was more honest and bested Trump,” Lockhart told CNN. “But Trump came out of the debates doing better I think because he just kept repeating the same old lies: ‘we’re going to build a wall and Mexico is going to pay for it,’ ‘we’re going to keep all those Mexican rapists out of the country,’ and ‘we’re going to make great trade deals’ — none of these things have come to pass.”

Campaign promises that don’t come to pass are not lies. They may be failures, but they’re not lies. The fact is, Trump is building a wall and has renegotiated NAFTA — both promises made during the campaign in 2016.

“Biden shouldn’t feel obligated to throw Trump a lifeline by granting him any debates at all. This is not a normal presidential election and Trump is not a legitimate candidate,” Petkanas tweeted last week, expressing his “opinion that no one asked for.”

Well, it takes a special kind of idiot to say that Trump is not a “legitimate candidate.” He was elected legitimately, has served legitimately, and is running for re-election legitimately. Not to recognize that is to substitute an alternate, liberal universe for reality.

But the debates may be canceled anyway. Two universities have already canceled the events and while Case Western Reserve in Cleveland has agreed to host the first debate, no one can say what the situation will look like a month from now. Higher education may cooperate with Democrats and the media to deny Trump the opportunity to debate Joe Biden.

If you thought the retail bubble in U.S. stocks was out of control, take a look at China.

The country’s market has ballooned to a record $10 trillion in value with daily average volume of $214 billion thanks to an influx of new investors. Billions worth of new money has poured into Chinese markets as both foreign and domestic investors chase FOMO. 

Surprisingly, high frequency traders have also helped along the Chinese markets, according to a new report by Caixin. 

One trader at a private equity fund in China said: “More traders are engaging in T+0 trading amid the brisk market, and many institutions joined in algorithmic trading that greatly amplified the transaction volume.”

The same-day T+0 trading he refers to accounts for 10% to 20% of overall trading volume, the trader said.

While that type of trading is allowed in most places, China isn’t really one of them. While the A-share market allows investors to settle transactions in one day, they can only exit a position on the day after a purchase. But due to new margin financing, traders hae been able to skirt these rules. This allows HFTs to employ same day strategies, which can be well suited for markets as liquid as China’s. 

In addition to the HFTs are hundreds of millions of amateur investors who have “few options” for investment other than stocks and real estate. As of June, China had 167 million retail investors, which represents about 12% of the total population. They held a total of 28.6% of the market’s total value. Despite this, about 80% of them make less than $700 per month and only 4% of them have the equivalent of $70,000 of their accounts.

At the same time, professional investors held only 17% of the total market. The rest is held by corporate shareholders and insiders. 

This stands at stark contrast with the U.S., where institutional investors hold significantly more of the market since its citizens participate through passive funds. 

The influx of retail investors adds both volatility and “speculative sentiment” to China’s markets, creating opportunity for HFTs, which seek out retail investors as targets. Retail investors in China have a notoriously poor track record of profiting from their domestic market. One study found that between January 2016 and June 2019, retail investors lost 1.6% to 20.5% on their stock investments while, at the same time, institutional investors gained 11.22%. 

Regulators in China have encouraged retail investors to step back from trading in the market and to turn to institutions for help. But these calls have so far resulted in little change.

A report led by the Shanghai bourse said: “Small-time investors hold 21% of China’s stock market value but contributed to over 80% of transactions. With speculative and gambling motion, many of them tend to trade frequently. But the more they trade, the more they lose.”

Zhang Xiaoyan, one of the authors of the report, said: “Chinese retail investors are weak in wealth management and can’t achieve the goal of wealth expansion by making stock investment decisions by themselves.”

Wu Xiaoling, a former deputy central governor, noted that there were imbalances in the market due to margin trading and restrictions on short selling. That means the “market could surge easily but always be followed by a sharp fall,” he said.

Just days after the famous (former) deflationista (turned reflationist) Russell Napier explained why he believes that central banks have “become irrelevant” in a world in which governments have taken control of the money supply, none other than Morgan Stanley’s Michael Wilson (whose bullish market outlook on risk assets is predicated on the foundational view that the coming reflationary tsunami will lift all boats) has published a note agreeing with Napier and pointing out that not only is M2 exploding at a pace never seen before, but also writing that “Congress is now a critical player in driving money supply growth, given that the Fed has already committed to expanding its balance sheet as much as needed to support the recovery.”

But how is that any different from the post financial crisis period when M2 also soared yet broad inflation failed to materialize (at least when measured with faulty CPI metrics)? Well, according to Wilson, “this time around, with the financial system in much better shape, and the direct intervention of Congress, there’s a real chance that the money multiplier doesn’t fall so much, and money supply growth remains elevated, thereby driving aggregate demand and inflation – i.e., nominal GDP growth.”

And while Wilson warns that there may be some near-term weakness in stocks due to “uncertainty” until Congress passes the next stimulus round, the long-term picture is clear and “Congress is now in the driver’s seat when it comes to the money supply with its fiscal programs and, as Milton Friedman also famously said, “Nothing is so permanent as a temporary government program.”

This, to Wilson, is potentially more inflationary than appreciated, which means that back-end rates can rise and as the MS strategist concludes “very few portfolios are prepared for such an outcome. Such shifts can happen quickly when they are so unexpected, which invokes one of our own favorite sayings, “being early is on time and arriving on time is late“.“

Below we republish the full note from Michael Wilson, chief equity strategist at Morgan Stanley, as posted in the latest Morgan Stanley Sunday Start.

Who’s Really Driving the Bus?

With the US and global economies in the midst of one of the deepest recessions and output gaps on record, most investors we speak with have dismissed our call for higher inflation risks. They ask how in the world are we going to get inflation with unemployment north of 10%, excess supply in everything from oil to hotel rooms and services no longer in demand?

While we are likely to experience big imbalances in the real economy for several more quarters, if not years, the most powerful leading indicator for inflation has already shown its hand – money supply, or M2. As Milton Friedman famously said 50 years ago,”inflation is always and everywhere a monetary phenomenon”. It’s fair to say we have never observed money supply growth as high as it is today (Exhibit 1). If Mr. Friedman was correct, then isn’t the risk of higher inflation greater than it’s ever been, too? Indeed, the sharp moves higher in breakevens and precious metals suggest that markets are considering the possibility.

Of course, money supply also grew rapidly after the global financial crisis (GFC) and we never saw inflation appear in a meaningful way. This fact has emboldened the view that the Fed can print money at whatever rate it wants and it won’t lead to inflation, at least not enough inflation to cause nominal and real long-term interest rates to rise. Given the current mispricing of long-end rates and crowdedness of long-duration investments of all kinds, this may prove to be a costly assumption.

We’ve argued for the past several months that the policy response to this crisis has been very different than what was used during the GFC. On the monetary front, the Fed reacted much more swiftly and aggressively with its immediate bazooka-style response and direct intervention in credit markets. In short, it went all-in from the beginning, showing no hesitation to do whatever it takes to support markets and the economy. Part of that aggressiveness was also likely attributable to the fact that we didn’t get any meaningful inflation after US$4 trillion in quantitative easing following the GFC. However, it’s the fiscal response that’s really different this time.

• First, the government has been sending money directly to both consumers and small businesses as a means of supporting the economy during the lockdown and reopening – aka ‘helicopter money’.
• Second, it has directly intervened in the lending markets by making loans via the Paycheck Protection and Main Street Lending Programs.
• Finally, and perhaps most importantly for the inflation call, is the decision by Congress to guarantee loans made by commercial banks and to offer mortgage and other liability (rent) forbearance via the CARES Act.

To me, this means that Congress is now a critical player in driving money supply growth, given that the Fed has already committed to expanding its balance sheet as much as needed to support the recovery. The health of the financial system matters too. The Fed can expand its balance sheet, but this might not necessarily translate to aggregate demand or inflation. This is what happened after the GFC. With the financial system impaired, banks were in no position to increase lending. Instead, they shrunk their loan books. This time around, with the financial system in much better shape, and the direct intervention of Congress, there’s a real chance that the money multiplier doesn’t fall so much, and money supply growth remains elevated, thereby driving aggregate demand and inflation – i.e., nominal GDP growth.

Finally, helicopter money and other stimulus programs are popular with the people and popular programs are what politicians run on. Therefore, we find it highly unlikely that Congress will fail to extend the benefits currently being negotiated in an election year. However, this doesn’t mean we won’t need to weather some uncertainty about it before it passes, and this may weigh on equity markets in the near term. In fact, this is what we expect, but we would use any weakness around such a delay to add to equities, especially cyclicals geared to higher inflation and economic growth.

To sum up, Congress is now in the driver’s seat when it comes to the money supply with its fiscal programs and, as Milton Friedman also famously said, “Nothing is so permanent as a temporary government program.” This is potentially more inflationary than appreciated, which means that back-end rates can rise. Very few portfolios are prepared for such an outcome. Such shifts can happen quickly when they are so unexpected, which invokes one of our own favorite sayings, “being early is on time and arriving on time is late“.