This fiscal stimulus is coming in unison with easy monetary policy that has brought the US Federal Reserve’s balance sheet to US $ 7.09 trillion, up from US $ 4 trillion in the past 18 months.
The basic position of the Barclays economics team is that the Fed will be able to execute an orderly course of its accommodative policy “with the key rate only gradually approaching its terminal level, thus allowing a moderate overshoot of full employment. “.
“With inflation expectations firmly anchored, the tight labor market is pushing inflation only moderately above the 2% target, at its peak,” say economists.
“For similar reasons, the Federal Open Market Committee (FOMC) only needs to tighten policy slightly to bring inflation back to target.
“In short, the strong credibility of the Fed allows it to achieve a moderate overshoot of inflation in an orderly fashion, with almost no overshoot between the key rate and its terminal level.”
Barclays explores a messy accommodative policy course comprising two possible paths – a balanced approach where the Fed is reluctant to significantly slow the economy or an inflation-driven approach.
Both scenarios envision a recession in the United States, with the latter approach focusing on reducing inflation causing a much deeper recession.
The other scenario explored by economists at Barclays is the possibility of fiscal consolidation in the United States. They warn that a divided government after the 2022 midterm elections could trigger a shift in the benign approach to debt and deficits.
It seems indisputable that the role of the state in shaping and shaping societies and economies will continue to grow.
– Viktor Shvets, strategist at Macquarie Securities
“If political considerations force fiscal consolidation, we believe that the most likely scenario would be a material slowdown induced by the austerity of activity, leading in turn to a slippage of fiscal consolidation plans,” say the economists.
“Therefore, we view fiscal consolidation of any kind as disruptive. In our
In point of view, a much better policy objective would be to focus on relaunching the longer-term growth path. “
In other words, it makes sense for the United States to continue to allow its economic growth to be financed by a combination of public spending and the ever-so-slow withdrawal from easy monetary policy.
The second big theme, well described by Shvets, is the wave of social change coming to America as millennials and millennials become the dominant constituency.
According to him, “it is a mathematical certainty that by 2028-2032 cycles what is today considered a young cohort will be electorally dominant, and although their views may change, these will probably still be very much. more liberal than the current consensus “.
Shvets drew on the results of a survey called The American Freshman – National Norms, conducted annually since 1966, and several Pew research studies on the attitudes of Millennials and Gen Z towards social spending. funded by the government.
He says at least six policies will be supported by the powerful “youth cohort”.
“It seems indisputable that the role of the state in shaping and shaping societies and economies will continue to grow,” he says.
Shvets says no US government will ever target a surplus again and that deficits will be around 5-6% of GDP at a minimum.
“It is also likely that various income support measures for the younger or more vulnerable segments of society will persist and expand over the next decade, eventually turning into a basic or guaranteed income version. universal, rather than a simple minimum wage, ”he says.
Shvets says Biden has been smart in allocating only about 20% of his infrastructure plan to physical assets such as bridges, roads, dams and airports.
He says the future belongs to “new energies and transport
platforms, broadband, environmental controls, robotics and automation, basic R&D, human capital and health ”.
“It’s likely that the younger cohorts will insist on higher taxes, and so it’s pretty much guaranteed that the United States (which is currently trying to have a
large government on a narrow tax base), will see an increase in taxation for both funding and redistributive purposes (from increased revenues to taxes on goods and services, and capital gains and wealth to inheritance taxes and reducing loopholes), ”he says.
Shvets says taxation will be used as a method of income redistribution and that a centrally controlled digital currency will allow the Fed to directly finance the deficit.
Finally, he said, “fairness, equality and no waste” will become the main driver of all public sector policies, which in turn will reshape the private sector, including constraints on executive compensation and share buybacks.
According to him, the regulations will persuade the private sector to invest in certain types of projects while penalizing those which violate the “societal red lines” under the aegis of the ESG.
The third theme is the market outlook, which JP Morgan’s Normand outlined in his final report this week after 24 years of advising clients on asset allocation.
He took the opportunity to draw on his firsthand experience of four business cycles, three US / global recessions, and four financial crises.
There isn’t enough space here to cover all the lessons he’s learned, which are presented convincingly in an 18-page document.
But his knowledge of the current economic cycle supports those who believe the bull market in equities still has some time to run. In addition, Normand has some wise comments on the merits of investing in asset bubbles.
First, he says this cycle is barely a year old in terms of comparison to previous business cycle expansions in the United States. Normand assumes that this cycle began in June 2020, although he acknowledges that some will say that it is an extension of the cycle that began in 2009.
“I consider this expansion new because the Fed’s policy is ultra-loose rather than tight; output gaps are generally negative rather than positive; and profit margins are above rather than below average, ”he says.
“The bad news is that the equity and fixed income and commodities (FICC) markets have never been so expensive so early in an expansion, so that leaves little risk premium to be gained. as the cycle matures and provides little cushion for disappointments or random shocks. .
“When real policy rates are positive and profit margins are falling, we can properly use terms like end of cycle and implement the pretty drastic portfolio rotations that are needed to generate alpha.”
He believes there will be below-average gains on stocks over the coming year, as valuations are so full and commodities (excluding gold) are doing as well as the historical norm.
However, according to Normand, market analysis over the past 50 years has shown that “expensive markets, which I define as any equity or FICC market whose standard measure of long-term value exceeds a spread of two sigma in any given year tend to get more expensive before they go downhill ”.
“These trend extensions are on average about a year, but can last for a few years, until a systemic catalyst like a restrictive Fed policy or a recession deflates them. And the magnitude of these overruns can reach 50% on average in some markets, especially those that are not elastic like commodities. “