The first reading of 4th quarter GDP showed a healthy gain of 4%, a promising number given how many states remain only partially open for business. However, not all is rosy, as weekly unemployment claims remain elevated, and fears of new, more contagious strains of Covid-19 weigh on how long this pandemic will keep us from returning to our normal lives. Vaccinations must be pushed through in a race against time. The more people are vaccinated before a mutation that becomes unaffected by current vaccinations, the sooner we will all be able to return to full employment, travel, go to stores, and eat out. As consumption is 2/3% of the U.S. economy, these activities are essential to rebuilding our workforce and our restarting our economy.
Inflation is making more news lately as it is showing signs of starting to rise. A look back on the cost of oranges, soybeans, and even oil, from a year ago certainly supports the inflation narrative. Homebuilders. while bullish on demand for housing, are concerned about the rise of lumber prices. The Fed is actually encouraging inflation while also stating that if needed they will institute a policy of yield control, by which the Fed would not let rates go above a certain level. We remain wary of such policies, but we understand the Fed prefers inflation to stagflation or deflation. Inflating dollars in the future to pay off debts today is one of the ways out of this massive amount of debt central banks have taken on due to the pandemic. It also encourages people to own equities and real estate, two asset classes that are a hedge against inflation.
In what has been a very strange week in the equities markets, i.e., Gamestop, AMC, and Blackberry trading huge volumes as the retail investors squeeze out professional investors who were shorting these stocks. This trading is quite dangerous and may suggest trading in stocks is becoming more game-like, more closely resembling gambling rather than investing. What received less attention was that rates have drifted slightly higher during this week’s spike in volatility, an unusual response as interest rates typically fall when equity markets become volatile. A one-percent 10-year Treasury note rate appears to be the resistance point. With inflation being encouraged by the Fed, we are becoming more aggressive in our recommendation to take advantage of interest rates at this time.