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Perhaps the oddest market development this week has been the rally in U.S. government bonds after what has been a terrific run of economic data, including Thursday’s report of a nearly 10% surge in retail sales in March.
It is also telling that sectors that would be helped by falling rates, like home builders
XHB,
haven’t reacted. “The macro and fixed income community is pointing to 1.5% as an important level. If we hold that, it would be a good place to reengage on Cyclicals trades (if you believe that the economy improving and world reopening will lead to higher 10yr yields like we do). Further, inflation expectations and commodity prices holding firm is not consistent with a 10yr yield collapse,” says Dennis DeBusschere, strategist at Evercore ISI.
That macro view ties nicely into a new report from Dario Perkins, managing director for global macro at TS Lombard, a London-based research service. Perkins says the philosophy known as modern monetary theory, or MMT, is driving the political and macroeconomic debate and may fuel an economic supercycle.
MMT, very crudely defined, is the idea that a government with control over its own currency can spend however much it likes, up to the point that spending generated unwanted inflation. Over the last decade, Perkins notes, MMT adherents have been correct on all the major policy questions.
Central bank quantitative easing in response to the 2008 financial crisis didn’t fuel inflation, as the MMT camp said it wouldn’t. Greece and Italy struggled during the eurozone crisis because they had given up control of their monetary policy to Frankfurt and the European Central Bank. The subsequent fiscal austerity pursued in the U.S. and the U.K., both with independent monetary authorities, resulted in a languishing economy, again as MMT theory said they would.
The MMT side again was correct in saying the Trump administration’s tax cuts wouldn’t lift interest rates, and correct a fifth time, now, as governments haven’t struggled at all to fund the biggest fiscal expansion since World War II in response to the COVID-19 pandemic.
In the 1980s, economist Milton Friedman’s monetarist/neoliberal ideals had the endorsement of U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher, to bring his ideas into reality. Now, “The Deficit Myth” author and MMT advocate Stephanie Kelton has perhaps the unlikely political benefactor of President Joe Biden, who wasn’t known for advocating aggressive fiscal spending in his decades as U.S. senator but has successfully advocated for a $1.9 trillion stimulus and is pushing for an infrastructure spending package.
Read this 2017 MarketWatch interview with Stephanie Kelton
A less-discussed political swing toward MMT could happen in the federal elections in Germany in September, with a coalition between the Green Party and the Christian Democratic Union leading the notoriously austere country to exclude public investment from its zero deficit rule, which could fuel activity not just in Germany but throughout the eurozone. The one exception to the swing to MMT is in China, where the country is now becoming reluctant to continue down the path.
The problem with MMT is that it might not work when inflation takes hold and interest rates pick up, says Perkins. But that is a problem that is years if not decades away. “This is because the influence of MMT has (so far) been confined to the way the mainstream thinks about fiscal policy. It hasn’t yet spread to other institutions and policy settings. Trade unions are weaker than in the past, international competition/technology continues to restrain wage demands (and prices are no longer just a markup on costs) and — crucially — central banks have retained their independence,” he says.
For now, the adoption of MMT will deliver both stronger economic growth and less inequality, “which would tackle some of the severe political – and ultimately
market – risks that have appeared over the last decade,” says Perkins.
What are the investment implications? He said, over Twitter
TWTR,
a rotation in equities and a secular “but controlled” breakout in yields. In other words, an extension of what 2021 has already provided.
Shooting in Indianapolis
Another gun massacre happened in the U.S. overnight, with eight people dead and more injured in a shooting at an Indianapolis FedEx facility.
Biden is due to meet Japanese Prime Minister Yoshihide Suga, in what is expected to be a meeting touching on issues including Taiwan and 5G investment.
Housing starts in March and consumer sentiment for April highlight the economics calendar. In China, first-quarter gross domestic product lagged behind expectations after a revision to the fourth-quarter numbers, and retail sales surged 34% year-over-year in March.
Aluminum producer Alcoa
AA,
reported much stronger earnings than anticipated in the first quarter. Morgan Stanley
MS,
wraps up earnings season for the Wall Street banks, with other reports due from Bank of New York Mellon
BK,
and State Street
STT,
Automobile maker Daimler
DAI,
rose in Frankfurt, after saying first-quarter results will beat expectations, helped by demand from China in particular.
Product management software company PTC
PTC,
is joining the S&P 500, replacing Varian Medical Systems, which is being acquired.
Bitcoin drops, 10-year climbs
Bitcoin
BTCUSD,
dropped sharply, cooling off after the interest in the Coinbase
COIN,
direct listing earlier in the week. The Central Bank of Turkey also imposed a ban on cryptocurrency payments.
U.S. stock futures
ES00,
NQ00,
were mixed, while the yield on the 10-year Treasury
BX:TMUBMUSD10Y
edged up to 1.58%.
The tweet
Hedge-fund manager David Einhorn didn’t have a great first quarter — more on that here — but in an investment letter he did highlight the incredible story of a publicly traded deli owner
HWIN,
with a valuation of over $100 million. Many of the company’s owners are based in China, CNBC reports.
Random reads
Here’s the incredible video of a man throwing a bobcat after it attacked his wife.
Residents in Krakow, Poland, were fearful of an animal in a tree. It turns out it was a croissant.
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