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How about a little Macro & Ease(mac & cheese)!

2/17/2021

The first structured study, came at Southwestern College in Winfield, Kansas.  I have found it intriguing to observe, forecast, admit I missed some things, and forecast again.  Great fun for a philosopher, though very challenging as a career.  Let’s take a look at the current environment - see if we can determine the forecast.  

Macro - big picture, pretty Easy. The Federal Reserve, is currently holding short term rates down to encourage lending, therefore stimulate growth and assisting the US economy out of the recent recession. This happened in the last recession as well(’08-’09).

There has been huge stimulus from coming from Washington, and worldwide - at this point something around $7 Trillion dollars, worldwide.  The US is contemplating another $1.9 Trillion.  In addition, Fed Chairman Powell has shown us his cards.  He does not intend to raise rates until inflation is above 2% average - that means we will have to go above 2% for a period of time to average 2%.  That means low rates through 2021, and likely 2022 as well.  Why is this important?

Recessions are caused by interest rates going higher to the point of restricting borrowing.  Credit is difficult to obtain, unless you are willing to pay higher interest rates to borrow.  Higher credit costs mean less profit for the borrower.  This happened in the last recession as well(’08-'09).  That recession was systemic, in other words there were problems in the system.  In the last recession, the banks were overextended in real estate and almost collapsed because of the overextension.  The recent recession was caused by a global pandemic - there were no bad actors.  The stimulus, fiscal and monetary, injected into the system to fuel the recovery is what we are currently experiencing.

The Corporate side.  First, I am amazed at the innovation of capitalism.  A year ago, we had no idea about the COVID virus.  Today, we have multiple vaccines, from several public companies to prevent the virus from spreading.  It has been a challenging year, though it looks like the vaccines are driving the cases, hospitalizations, and deaths down.
 The macro few are discussing?  Corporations are refinancing debt at record levels.  Much like a refinance on a home, huge interest savings are being achieved.  That savings means more earnings for companies.  This has produced the lowest interest, tax, and dividend payout since the 60s!  This money will eventually mean more jobs for the unemployed.

There is another Macro - unemployment.  This cycle like the last, unemployment claims spiked higher.  They have already come down substantially.  This is an important indicator to watch.  When we reach full employment, the Fed has achieved one of its missions.  Full employment is considered to be under 4% unemployment claims.  Before the pandemic, we were at 3.6%.

The two things that would alter our bullish stance of the market: 1) Fed raising rates (unlikely, until after 2022) and 2) unemployment dropping below 4%.  Until then, use selloffs as opportunities to add to exposure to equities.  We could see some nasty, short term drops.  Be patient - the big picture looks good for a while.

Thanks to our clients for making it possible to be doing what we Love.

Enjoy the day…r2