You know what a lot of the best surfing spots in the world have in common? A dangerously shallow reef. The reef at Maverick is about 20 feet deep at the break. Pipeline's reef is less than 10 feet from the surface. The reef at Teahupo'o is less than 6 feet deep.
Give a wave a lot of open ocean to conserve energy, then stick a shallow reef with a steep drop-off down to the continental shelf in front of it. The drag caused by the bottom of the wave interacting with the seafloor drives all that wave energy up into a crest and over into a hollow barrel. (Knew that oceanography degree would be good for something!).
How is this relevant to investing, you may ask? Well, despite a false start a couple months ago, the Blue Wave finally materialized this month, and it looks like it's carrying an entire 4-year ocean's worth of fiscal stimulus.
Before we "dive in", as it were, with the new administration that starts this week, a quick side note: as of January 1, hospitals are required (by Executive Order) to provide up-front pricing on medical procedures. If you're bored, just spend some time Googling what hospitals near you charge for various procedures. It's fascinating...and hopefully a first step towards some meaningful healthcare transparency and reform!
Okay, here we go. First thing to do is paddle out through the seventeen Executive Orders that are hot off the presses, more than half of which just undo Executive Orders from the previous administration in areas that could broadly be considered "social" as opposed to "economic". The only new things on the economic front are an extension of the federal student loan pause until at least September 30 and an extension on the nationwide eviction/foreclosure moratorium until at least March 31.
Current estimates put the total amount of missed housing payments (rent and mortgage) at about $100B. Moratoriums don't erase this debt (or the interest and penalties it accrues), but can kicked for now. Ditto for student loans. Over 90% of student loan debt is federal, so while the pause doesn't get rid of the debt (more on this in a bit), at least the number isn't getting bigger.
Alright, we've made it to the break! Or technically just passed the break, that area of calm where you get to just watch the horizon and see what's coming. And what's coming is...a proposed $1.9T stimulus package.
Now, there is some question as to what amount of bipartisan support is actually required, depending on whether the package gets passed via regular order in Congress (10 Republicans needed) or via the reconciliation process (zero Republicans needed). At the moment, regular order looks more likely, meaning there will have to be some compromises. Goldman estimates a deal coming in at $1.1T instead of $1.9T, and passing sometime late-Q1.
Here are the highlights:
We'll see how that wave develops over the next few months, but right now it looks eminently rideable. And we mean "rideable" in the "large government deficit spending gets monetized by the Fed and ends up in the stock market" sense of the word. A nice, rolling left to surf, if you will.
So what's the reef in this scenario? The reef is inflation.
Currently, as in 2008, record amounts of government spending have not caused rampant inflation. The reason, without wanting to get too technical, is that the velocity of money has collapsed. Essentially, demand is down and savings is up, so dollars aren't moving through the economy as fast as they have been. Here's the full 60+ year dataset for the velocity of money, back to 1959:
The potential closeout we're watching is called B117, and it's the UK COVID variant. We'll toss in the B1351 (South Africa) and P1 (Brazil) variants as risks as well, but it's B117 that is the larger threat at the moment.
Currently, it's thought that B117 accounts for less than 0.5% of all cases in the US, but has been doubling every week (in the US and in other countries). If that exponential growth continues, B117 is the dominant strain in the US by March. The thing about B117 is that it's more infectious. Not more deadly, not immune to the effects of the vaccine, just more infectious. Meaning that one would reasonably expect numbers to be higher across the board - more infections, more hospitalizations, more deaths. If that materializes, Biden's "100 Days Masking Challenge" will become a "100 Days Masking Order", and you'll likely experience lockdowns that will make you wish it was 2020 again.
Now, that is not our base case - we're optimistic around the temporary immunity conferred by having already had COVID alongside a hopefully increasing pace of vaccination - but it's something we're keeping an eye on. The market has been "looking over" the valley of COVID to the normalization on the other side, and nothing will bring it back to the precipice so much as feeling like we're going back to square one.
You do need to keep an eye out for rogue waves, but it looks like 2021 is starting with a nice swell that could turn into a good ride for markets. Knock on wood.
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