This week has seen enough unsurprising volatility to complete a near 5% correction in the broad indexes. However, just as the decline was blamed on the potential collapse of the largest real estate developer in China, the rebound has the Fed to thank. To repeat, this all happened this week, and it’s Thursday. All of this is in the name of the new normal, boosted from both from Covid and the mix of dynamics that are prevailing globally and given the go ahead, except the definition of what’s normal is getting lost in the narrative. Never let a good crisis go to waste a politician once said, the meaning, in my opinion, justifies the concern that a new normal is in the cards. However, the normal that concerns me are not just more in reference to going out to restaurants, back to school and all the free activities and routines that consumers crave. But, from my perspective, there is missing one huge component, the financing of that normal, and that requires focus on financial normalcy.
First is the main driver of the economy, wage earners. Since the pandemic began the level of employment has bounced back significantly and so has the savings rate of individuals. Access to insurance, estate planning, legal and financial advice, homes, cars, debt and plans for the future. Those with discretionary capital will choose to consume, but many save to invest. According to the Bureau of Labor Statistics as of March 2020 67% of all working Americans were in some form of employer-provided retirement plan. Add to that, retired individuals and countless young Pindudes and that’s a lot of money. Add to it all is the inspiration normal financial activity gives to business owners, innovators and those who invest in both. That includes the government providing the resources and legislative programs to promote competition through tax fairness for industries and individuals. To this scenario history has shown us that the capital markets react favorably.
Another Financial Normal
Important to every economic strategy must include the low wage earners and unemployed. The customary procedure in these instances was household assistance programs and unemployment compensation, all provided by the state and federal government. And to help change the situation a $1 trillion dollar bipartisan infrastructure bill was passed by the senate. But government, which I don’t need to remind anyone has changed somewhat, that has extended to offers such as student debt forgiveness and universal healthcare. But neither is in the other infrastructure plan, referred to as the Human Infrastructure Bill, that by all available data is less focused on providing job opportunities to those in need, and more focused on providing comfort for those with less need, one meant to source, the other to influence. All financed by higher corporate and individual taxes. The capital markets may not react as favorably.
Another Financial Normal
Last November the Chinese government (CCP) began to unravel 20 years of economic growth as measured by the countries real GDP, which grew at an average rate of 6.8%. It began with the outspoken tech billionaire founder of Alibaba (BABA), Jack Ma, who made a comment during a speech that was unfavorable to the CCP. The first result was halting the IPO of Ant Finance, the financial arm of BABA followed by new government rules for all online lenders. After the disappearance of Mr. Ma, numerous attacks on the tech industry and ensuing comments from the CCP that the strategy going forward was new rule for all online lenders. Needless to say, the ensuing results are increasing the concerns from outside investors. Time will tell, but in my opinion reward, not control, encourages innovation. Hence too much control would not be favorable to their capital markets. Unless, of course, the CCP becomes an investor.
I’m writing this commentary because so much is going on that is ignoring rising inflation, government debt, a static employment participation rate and the wavering data on production and consumption suggesting a lower GDP for the year than was previously predicted. This has less to do with the array of financial normalcies and more to do with the distractions ranging from vaccines to political grandstanding to the medias fear mongering and even climate change, serious but to which, in my opinion, is mostly the pandering of the corporate entities that has been going on for fifty years, with no solutions in sight and capital markets that don’t seem to care. Not always a favorable condition, but that’s why we have a strategy.