August 12, 2020
The declines of yesterday in both stocks and gold, proved to be good buying opportunities.
As we discussed, the VP selection from Biden yesterday didn’t introduce any surprises, so markets should continue the focus on the big themes: the progression on the health crisis front, the massive global stimulus (and a bulldog President that will continue force things through to keep the bridge intact) and building momentum toward a showdown with China, which includes moving the global supply chain to “freedom loving” countries.
Within that second “big theme” (stimulus), we’ve laid out the simple math that shows the response has been bigger than the damage.
The economy in Q2 produced an annual equivalent of $19.4 trillion of output. That is down $2.3 trilion from the Q4 peak.
More than offsetting that is the $6.6 trillion worth of fiscal and monetary stimulus still working through the system.
Even ignoring the additional monetary stimulus that is available through Fed facilities, and ignoring the growth in money supply that will certainly come with the Fed’s loosening of bank reserve requirements, and ignoring the possibility of more fiscal stimulus, we still have more than $3 trillion in excess response.
As we’ve discussed, this will unleash a global reset of asset prices.
We’ve already seen a big spike in the wage data, thanks to an aggressive federal unemployment subsidy and increased essential worker wages (hazard pay), which is an important driver of prices. We’ve seen a spike in food prices, thanks to supply chain disruptions. And today, we’re seeing some of the growth in money supply show up in the consumer price index, as you can see in the chart below. This is likely just the beginning of an aggressive bounce in prices.
As we’ve discussed now for months, inflation is coming. Be long asset prices.