Why the Relentless Spending?
Biden will need to do whatever it takes to increase the majority and it always comes down to the economy.
With the $1.9 trillion stimulus bill done and dusted, the Biden administration is now moving on to get a few trillions more approved for infrastructure projects and Green initiatives. With the economy recovering, why is Biden bent on spending even more?
The Democratic party has only a razor thin majority in the Senate (currently 50–50 with the Vice President holding the tiebreaker vote) and the midterm elections are in 2 years. Biden will need to do whatever it takes to increase the majority and it always comes down to the economy.
That means that he has 2 years to engineer an economic boom to ensure the Democratic maintains their hold on both chambers of Congress. With the Federal Reserve governor and US Treasury Secretary pretty much in agreement on money printing and spending policies, and both chambers of the Congress and the White House in his hands, this is an unprecedented opportunity to spend as much as he can to boost the economy to increase support among the voters.
The consequences of money printing and unbridled spending are not something he’s going to be worried about now. The clock is ticking, and we know his incentives. He needs to win more seats in the mid-terms to maintain and solidify his majority in the Senate.
He needs a strong economy to create the 10 million jobs that were lost during the pandemic and he needs strong asset markets to keep the middle class and the rich happy. The outcomes are inevitable.
This Is What “Hyperinflation” Looks Like
Since October 2020, the USD has nearly met the IMF definition of hyperinflation (50% per month inflation), as BTC’s compounded annual growth rate (CAGR) was 42% per month v. the USD in that time.
Bigger picture, our view is this is merely another example of the “cash is trash” narrative. We think the US fiscal dilemma (debt too high, can’t cut anything politically sensitive, can’t afford market-driven interest rates) will likely continue to be positive for BTC as well as gold, silver, equities, and commodities. To be clear, we do NOT think the US is going to suffer from broad hyperinflation, but we did find the comparison interesting and useful.
With a relatively sparse data calendar, the market will be focused on Fed Chair Powell and US Treasury Secretary Yellen’s testimony before the Congress (Today & Tomorrow) regarding pandemic policy response. As long as the speed of the rise US bond yields slows and is not sudden, the market will eventually get used to this new normal of a steeper bond yield curve and higher long end yields, and risk sentiment will steadily improve as the stimulus spending kicks in.
1. Currencies : Keep short USD and long NZD, & CNH. USDCNH looks likely to remain in the 6.45–6.55 range for now. NZD is dipping as the NZ government tries to rein in the rising housing market. The chance to add to longs may be at hand soon.
2. Commodities : Silver — Support for Silver is at 24.70–80. Stay patient.
Key risks: Spikes in US bond yields may lead to a stronger USD and weaken risk sentiment. .
3. Equities :
Equity Index: : Long Nasdaq futures. When things are quiet, the market drifts higher. That is a good sign. Stay long and look to buy dips.
Single Stocks: As the market stabilises, certain sectors which have been trending higher will resume their strong rallies. Don’t miss out on the asymmetric opportunities we highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields and inflation fears are the key risks.
TRACKRECORD MODEL PORTFOLIO
WHAT HAPPENED YESTERDAY
As of New York Close 22 Mar 2021,
- Dollar stumbled from four-month highs against a basket of currencies on Monday, in line with a dip in U.S. Treasury yields. Investor outflows triggered by Turkish President’s sacking of yet another Central Bank Governor over the weekend caused the Turkish Lira (TRY) to weaken by 8% ish (17% at the intraday lows) and did not really have too much of an impact in other emerging markets.
- The dollar index fell about -0.35% to 92.09, following last week’s gain of +0.5%. US 10-yr Bond yield decreased 5 basis points to 1.69%. The 2-yr yield decreased 1 basis point to 0.15%. Investors are now looking ahead to a Treasury auction later this week, which could send yields rising again if demand is anaemic.
- New Zealand’s government introduced a suite of new measures to tackle runaway house prices and prevent the formation of a “dangerous” bubble by announcing that it will phase out the ability of investors to claim mortgage interest as a tax-deductible expense. It will extend the period in which profits on the sale of investment property are taxed to 10 years from five. NZD fell on the news as measures to prevent a housing bubble effectively reduce the likelihood of the RBNZ having to hike interest rates to rein in rising housing prices.
- S&P 500 advanced +0.7% on Monday, as quarter-end rebalancing efforts drove the mega-caps higher and suppressed Treasury yields, although it did close off session highs (+1.1%). The Nasdaq Composite increased +1.2%, while the Dow Jones Industrial Average increased just +0.3% and the Russell 2000 (-0.9%) fell victim to rebalancing activity.
- In the home stretch of the first quarter, which has greatly favored cyclical/value/small caps stocks, money appeared to disproportionately flow into the mega-cap/growth-stock laggards like Apple (AAPL 123.39, +3.40, +2.8%) and Tesla (TSLA 670.00, +15.13, +2.3%).
- The underperformance of the cyclical stocks despite encouraging U.S. Phase 3 trial data for AstraZeneca’s (AZN 51.20, +1.99, +4.0%) COVID-19 vaccine supported the view that price action was more technically-oriented than fundamentally-driven. AstraZeneca plans to file for emergency use authorization in the coming weeks.
HEADLINES & MARKET IMPACT
Notable Snippet: The United States, the European Union, Britain and Canada imposed sanctions on Chinese officials on Monday for human rights abuses in Xinjiang, the coordinated Western action against Beijing under new U.S. President Joe Biden. Beijing hit back immediately with punitive measures against the EU that appeared broader, including European lawmakers, diplomats, institutes and families, and banning their businesses from trading with China. Western governments are seeking to hold Beijing accountable for mass detentions of Muslim Uighurs in northwestern China, where the United States says China is committing genocide. The coordinated effort appeared to be an early slavo in a concerted U.S. diplomatic push to confront China in league with allies, a core element of Biden’s still evolving China policy.
THEMATIC CONTEXT: “As tensions between Washington and Beijing rise, the potential decoupling of the world’s two largest economies presents significant risks, a prospect that is firming China’s push towards more reliance on its own vast domestic market (Dual-Circulation). We believe this will be positive for the CNH in the long run (USDCNH to trade lower over time).” — 10th Sep 2020
Notable Snippet: Canadian Pacific’s $25 billion deal to buy Kansas City Southern will create a rail network from Canada to Mexico that farm groups say could smooth the flow of their goods to market. The deal, subject to approval by the U.S. Surface Transportation Board, would combine CP’s cross-Canada network, which stretches as far south as Kansas City, Missouri, with its U.S. rival’s network, which extends south into Mexico.
THEMATIC CONTEXT:“Is America’s political posturing into an increasingly multipolar world too late? We believe that Biden touting American leadership again may lead to more cohesive policies and will be better for certain trade relations, but will not change the fact that the world is deeply entrenched into the splintering of economic factions that is fuelled by de-dollarization efforts. Any Dollar strength that arises from this should be sold into as the greenback is facing headwinds both domestically (record twin-deficits) and internationally (de-dollarization).” — 5th Feb 2021
Notable Snippet: President Joe Biden will be briefed by advisers this week on infrastructure, climate and jobs proposals being considered by the White House that could collectively cost as much as $4 trillion, according to people familiar with discussions. Biden advisers are weighing a price tag of between $3 trillion and $4 trillion for new legislative action, including repairing the country’s crumbling infrastructure and tackling climate change, one source said. A second source said Biden advisers have a package of proposals totaling up to $3 trillion for infrastructure and other priorities they are discussing with the president this week.
THEMATIC CONTEXT: “In the early months of the crisis, we have been postulating that countries will “build their way” out of this crisis via unlimited fiscal policy. We believe China to be the frontrunner of this playbook and that western economies will be following behind. This is extremely good for asset prices and positive for commodities. We remain bullish on the economic trajectory and industrial demand only reaffirms it.” — 16th Feb 2021
COMMENTS/IMPACT: Infrastructure building continues to gather momentum. Find out what are our preferred picks to benefit from this trend by joining our Community Membership today.
Phan Vee Leung
CIO & Founder, TrackRecord