While the combination of a massive fiscal stimulus and coronavirus vaccination campaign appears to put the US economy on track of a powerful recovery, several economic indicators issued recently have thrown the market into confusion, which may serve as an early warning that America’s re-opening may enter an unchartered territory.

Judging from recent statistics, there will be no shortage of surprises and cliffhanging moments in the coming months. The disappointing jobs report for April, which fell well short of economists’ estimates of adding 1 million new jobs, already had many wondering whether generous unemployment benefits issued by the Biden administration has led to hesitancy about taking a job.

Then came the big inflation scare… Click for the complete article

“I have little doubt that with excess savings, new stimulus, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine, and euphoria around the end of the pandemic, the U.S. economy will likely boom. This boom could easily run into 2023 because all the spending could extend well into 2023.” – Jamie Dimon, CEO JP Morgan Chase

There are many problems with this view looking forward.

To begin with, the vast majority of American’s do not have excess savings. If they did, then repeated stimulus payments wouldn’t be needed to support economic growth. The reality is “savings” get skewed by the top 20% of income earners, notably the 0.01% like Jamie Dimon.

The top 5%, of income earners skew the measure. Those in the top 20% have seen substantially larger median wage growth versus the bottom 80%. (Note: all data used below is from the Census Bureau and the IRS.)”

Since the top income earners have more than enough income to maintain their living standards, the balance falls into savings. This disparity in incomes generates the “skew” to the savings rate and obfuscates the ability to “maintain a certain standard of living.”

More Stimulus Not The Answer

Such remains problematic for many Americans and consistently forces them further into debt.

“The debt surge is partly by design. A byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it. Companies increasingly can’t sell their goods without it. And the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit.” – WSJ

I often show the “gap” between the “standard of living” and real disposable incomes. In 1990, incomes alone were no longer able to meet the standard of living. Therefore, consumers turned to debt to fill the “gap.”… CLICK for the complete article

Yield Curve Control

You’ll be hearing a lot about this if interest rates continue to edge up. Basically it means that the central banks create money to buy the government bonds needed to finance the deficit spending – and they buy them at low interest rates (yield). The Bank of Canada has bought over $300 billion in Gov bonds during the pandemic.
Many analysts think they’ll be forced to buy even more because inflation fears will precipitate more selling. After all, who wants to be stuck with a 10 year government of Canada bond that pays 1.5% if inflation is at 2% or more, which guarantees losing purchasing power.
During the pandemic interest rates would have been 3x higher or more because of the increased risk due to the pandemic fallout but 5% or 6% interest would push the government’s interest expense through the roof – plus cause massive losses in the bond market (remember bond prices drop when rates rise).
So the Bank of Canada stepped in – created hundreds of billions out of thin air and said we’ll buy the bonds thereby lending the government the money at record low rates.
But now rates on a 10 yr. Gov of Canada bond have moved from 0.46% in August to 1.5% in March. That’s a big difference when it comes to the cost of new borrowing.
So the big question is – how high will the Federal Reserve or the Bank of Canada let rates rise before they step in and create even more money and buy all the government bonds being sold in order to keep the interest rates down. In other words, CONTROL THE YIELD.

Real Interest Rates vs Nominal Rates – the difference between borrowing and lending rates (nominal rate) minus inflation = real rate.
ie 5 yr bond annual interest rate is just over 1% per year – you then subtract the inflation rate, 1.1% = real rate of negative 1/10th of 1%. In other word, if inflation stays the same bond holders lose 1/10th of 1% per year of purchasing power. Not a good time to lend (buy a bond) but a good time to borrow because borrowing money costs 1% per yr in interest but buying power of the money you pay back with will be 1.1% less.

(P.S. for gold owners – note a strong inverse correlation between gold and real interest rates. When real rates up, gold prices tend to drop)