Unless you live on Mars (before Elon Musk), I’m sure you’ve heard everyone talking about inflation and the upcoming elections on November 8th. Every election cycle, we hear about how important it is and how it matters. Unfortunately, most Americans disregard elections, as the Government just works. However, the Government now appears broken, so voter turnout may be historic.
There’s a lot of finger-pointing on why inflation isn’t slowing. Many will blame the Federal Reserve, the war in Ukraine, or the supply chain (China lockdowns). But, ultimately, our Government rightfully or wrongfully shut down the US economy to fight COVID. They pumped thousands of billions (trillions) of dollars into our economy to right the wrong. They pumped $2.7 TRILLION in 2020, $2.8 TRILLION in 2021, and another $739 billion (kinda) in 2022. The Federal Reserve must pull out a dollar from the economy for every excess dollar the Government spends by increasing rates. We will all pay for our Government’s actions with higher taxes, higher interest rates, and fewer benefits. Below is a list of bills passed to deal with the COVID pandemic. There are a lot of zeroes.
· 2020 Paycheck Protection Act: $483,000,000,000
· 2020 The Coronavirus Aid Relief and Economic Securities Act (CARES): $2,000,000,000,000
· 2020 Families First Coronavirus Response Act: $192,000,000,000
· 2020 Coronavirus Preparedness and Response Supplemental Appropriation Act: $8,300,000,000
· 2021 American Rescue Plan: $1,900,000,000,000
· 2021 Consolidated Appropriations Act $868,000,000,000
· 2022 Inflation Reduction Act: $739,000,000,000 – not directly COVID spending but added spending that increases inflation.
The money was spent everywhere. (See below)
Government Gridlock is Good
The Democrat party currently controls all three branches of the US Government. Controlling all the branches makes it very easy for Government to spend money. Typically, the party in power (President) loses House seats in the midterm election. The Republicans only need five seats to get the majority and will probably pick up a few more. The Republican party will likely take control of the House of Representatives. The US stock market tends to perform better when Congress is divided, as they don’t spend as much money or enact reforms (see below). At this point, Government spending is the primary driver of inflation, so a little gridlock will be nice.
Markets
U.S. equities ended the week lower as investors were conflicted about interpreting the latest FOMC statement and payroll numbers. The Nasdaq Composite Index sank 5.5%, while the S&P500 dropped 3%+ and the Russell 2000 slid 2.5%. Eight of 11 S&P sectors were down, as communications, technology, and consumer discretionary all lost 5-6%+. Energy stocks managed gains as crude oil jumped nearly 5% on demand optimism. After another 75bps rate hike, Treasury yields rose as Fed chair Powell said that it was “very premature” to be thinking about pauses, reversing initial buoyancy provided by hopes of a deceleration in hawkish policy.
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