I’m Not Unconfident
It was a good day for equities as we head into Nvidia earnings today. The combination of soaring consumer confidence and renewed tariff optimism seemed to do the trick. While I’m still not sure what to make of sentiment data these days, there is no denying that the Conference Board data was positive. The index rose to 98, well above expectations and with solid internal metrics, including a slight decline in inflation expectations. Consumers also reported that “compared to April, purchasing plans for homes and cars and vacation intentions increased notably, with some significant gains after May 12.”
And if you think consumers and “retail” are a contra-indicator then this observation might give you pause: “With the stock market continuing to recover in May, consumers’ outlook on stock prices improved, with 44% expecting stock prices to increase over the next 12 months (up from 37.6% in April) and 37.7% expecting stock prices to decline (down from 47.2% in April). This was one of the survey questions with the strongest improvement after the May 12 trade deal.”
The S&P closed at 5,921.
I’ll Keep Spending Until Ricardo Is Correct
I’m old enough to remember when deficits caused consumers pause, now they seem to ramp assets.
Economists used to have a tidy theory to explain how deficits might behave in practice.
Back in the early 1820’s economist David Ricardo posited what is now known as “Ricardian Equivalence” a theory that if governments resorted to issuing bonds rather than raising tax revenue, consumers would ultimately save the deficit funds in anticipation of higher future taxes. In short, deficit-financed fiscal policy may have no impact on aggregate demand.
With fiscal deficits and “bond vigilantes” part of the current financial lexicon, there is seemingly no evidence that Ricardian Equivalence holds in the U.S. today. In fact, it seems like recent trends suggest exactly the opposite. For example, consumers spent the Covid stimulus (likely rightly so), and even after incessant headlines about deficits, consumers continued to run up debt and spend.
So what gives? Is it just that we all think that deficits don’t matter, or that we don’t think tax rates will be raised until long after we’re gone, or that we’ll grow our way out of it, or in today’s attention economy are we just oblivious?
As usual, I don’t know, but if Ricardian Equivalence is a lost cause, it would seem like there could be some investment implications as continued deficits fuel demand. A couple of possible investment implications would be that strong stimulus via deficits is likely to support cyclical stocks or other sectors seen as beneficiaries of the deficit spending. Of course deficit-fueled growth could just as easily see inflation, “crowding out”, and perhaps instability (if you truly don’t think you’ll ever get paid back in real terms).
It’s Complicated
Now overlay tariffs into this whole discussion and “it’s complicated”. You see tariffs are taxes paid by importers but then we might have tax cuts for consumers, which as we discussed above, are likely just to be spent, then do we have rising demand crashing into constrained supply? That would seem to be a recipe for the dreaded stagflation.
Perhaps a higher pressure economy coupled with AI will lead to a productivity boom and solve all problems. Or maybe Crypto Solves This…sorry I just love saying that.
Until Our Problems Are All Solved
In the meantime, U.S. yield pressure has abated some with the 2Y back under 4.00% (at 3.99%) and the 10Y back under 4.50% (at 4.45%). And even for all the USD hate, the dollar index (DXY) still is above where it spent most of pre-Covid.
We’ll see if Nvidia delivers the AI miracle, or if we’re just buying GPUs at the top again.
XTODs:
XTOD: Mohnish Pabrai on The Investor's Podcast: https://pbs.twimg.com/media/Gr-PEbzXUAAxh7s?format=jpg&name=900x900
XTOD: Saying “it might bounce back” is not a great argument, and is not “especially true” of laddered bond portfolios. Myths never die. This is #10. https://aqr.com/-/media/AQR/Documents/Insights/Journal-Article/My-Top-10-Peeves.pdf
I feel so defeated
XTOD (P.S. I didn’t forget): Interesting, so Michael Saylor is refusing to publish on chain proof of $BTC reserves...How quickly everyone forgets $MSTR was found guilty of accounting fraud in 2001. 🤫 https://x.com/i/status/1927190678724850120
XTOD: Ego Is The Enemy. You’re not as good as you think. You don’t have it all figured out. Stay focused. Do better.
XTOD: Ethics and Human Well-being: Spinoza proposed that happiness or "blessedness" comes from living in accordance with reason and understanding the necessity of all things.
Note that this is a very stoic thought. https://pbs.twimg.com/media/Gr9HoBTWwAAtElB?format=jpg&name=900x900
https://x.com/kejca/status/1927416700137263261
https://x.com/CliffordAsness/status/1927362335099769210
https://x.com/FinanceLancelot/status/1927190678724850120
https://x.com/RyanHoliday/status/1927393613626905024
https://x.com/GodPlaysCards/status/1927337923013177490
Doesn't the theory fall apart because we'll just vote ourselves out of higher taxes? Both parties are allergic to them for one reason: constituents punish higher taxes and reward higher spending.
ReplyDeletePerhaps, but perhaps voters may also dislike the inflation, financial repression, higher risk premiums, etc. (if/when they realize these stealth taxes are being paid).
DeleteQuoting Irving Fisher:
“when a government cannot make both ends meet, it pays its bills by manufacturing the money needed” and further that “The government has an added responsibility when its own debts are involved. To borrow billions of dollars and then to depreciate the dollar is not even fair gambling. It is stacking the cards.”
And:
"Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."