Beyond the Infrastructure Stimulus

You are seeing the optimists rave about the reopening, all that pent up demand, all that stimulus money.  And then the pessimists with their calls for raging inflation and a Fed that will be forced to tighten more quickly than the dot plots show.  

One thing you can always rely on Wall Street is herd behavior.  It is instinctive, pervasive, and hard to ignore.  If you read what they write, you would believe that the infrastructure stimulus will be followed by more big pork projects and stimulus packages in the Biden era.  They all believe the government will just keep pushing out more stimulus, no matter what.  Even when the GDP growth numbers will be high well into 2022, and even when the Republicans take over the House or Senate in the midterms and create political gridlock.  Oh, you say, no way, if the economy is doing great, the Dems will gain seats in 2022.  That's not what history shows.  Midterm elections have almost always been a disaster for the party in the White House for the last 40 years.  

It is a bit too soon to look beyond the infrastructure stimulus, but let's do that anyway.  It seems like everyone has the next 9 months of economic activity figured out.  Unlike the crack high of stimmy checks and pork direct to state governments, the infrastructure spending will be drawn out over many years.  Knowing how slow the US government works, it will take several months to even figure out what to build and where, much less start hiring, buying the necessary equipment and materials, etc.  Really the only big variable left until the 2022 midterm election is how hot the economy gets in the reopening.   Based on all the economic forecasts, most are expecting a booming economy for the next 12 months.  But what the 15 minute macro experts aren't considering is how the economy looks after the stimulus wears off, sometime in 2022.  

The developed world population continues to get older, and the demographics are unfavorable for maintaining high aggregate demand.  Add to that the lack of productivity growth and increasing welfare mentality from all the stimulus.  People in the US are now used to getting government handouts and fat unemployment compensation.  There is less incentive for these low wage workers to look for work or even care if they get fired.  With states now well funded after the 2 giant boosts of federal stimulus to fill their cash hoard, they can now splurge on all kinds of welfare.

When the government takes up a bigger part of GDP, capital is deployed less efficiently, because the government has no accountability.  Most voters vote for their party, no matter what.  Government waste, grift, and incompetence means that the return on investment on all the government spending is very low.  In many ways, the US is becoming more like Europe, except for one big difference:  taxes.  Europe actually tries to keep government deficits under control with high taxes and strict rules from the technocrats in Brussels.  

The US has given up on that "old game" of balanced budgets and taxes to pay for spending.   The new game, government spending fueled by debt that is bought by the Fed, is the magic bullet that suddenly US politicians have discovered as being extremely popular among the public.  It is a game that leads to eventual ruin, but in the beginning, it works great so they will keep doing it, but only under 2 scenarios:  

1.  A unified Democratic government OR 2. a Republican President.  Democrats need to have both the White House and both houses of Congress to pass additional pork stimulus because as we've seen already, Republicans will not vote for anything a Democrat President tries to pass.  But it doesn't work the other way around.  A Republican President can pass whatever he wants even if his party doesn't control Congress.  Because Democrats are always in favor of additional government spending, even if it requested by Republicans.   And that easily assures enough votes to cover even a few dissents from Republicans who don't support pork stimulus.

With the Republicans likely to win at least one House of Congress in 2022, that gives Biden about 18 more months to pass legislation.  And if the economy is as strong as everyone predicts over the next 12 months, it makes it unlikely you will get more stimulus after the infrastructure bill passes.  Will Biden start watching the stock market and try to support it by passing more stimulus if you get a bear market?  I wouldn't rule it out, but unlike Trump, Biden doesn't seem like a guy who really keeps a close eye on the stock market.  

 

About the current market:  I see that there is a growing divergence between the S&P 500 and a majority of stocks which are lagging the index.  You can see this most clearly in the retail and momentum favorites.  Just look at the YTD performance for the ARKK ETF, and the SPX.  Huge divergence there, from outperformance to underperformance.  And also bonds continue to stay weak.  Another negative.  I'm not shorting, but it wouldn't surprise me if you saw a sharp pullback down to SPX 3700-3750 within the next 2 months.