“My personal outlook for the economy has strengthened since December…” Federal Reserve Chairman Powell to Congress in his first address to members.

My immediate reaction – “oh boy, this guy doesn’t get it. We’re at a peak on the roller coaster and he’s looking backwards. This is going to be an interesting ride.”

Take Aways From Chairman Powell’s Testimony

Among my strongest takeaways from Chairman Powell’s testimony was that there will be a shift from monetary economic support to fiscal. Consider this passage:

“We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative…”

While I don’t think the “slow growth forever” global economy is suddenly solved, nor will it ever be, I have been for a few years suggesting that fiscal policy needed to take precedence over for monetary. Why? Because eventually, in order to adjust to slow growth forever, we have to do something real. Now that there is plenty of money floating around for capital spending, there really is, but we need capital projects. The budget agreement just passed is a baby step in the right direction. An infrastructure bill would be bigger, huge even.

There is a concern that equity markets will continue to soak up capital though and that would make it tough to do the private/public partnerships on infrastructure that President Trump has proposed. (I have an idea though.) Morgan Stanley (MS) just put out a report that said about half of all the repatriated money from the tax cuts are going to stock buybacks. That’s not as much as when we repatriated as under President Trump, but it is still pretty heady. Somehow, money needs to find its way into capital projects. My suggestion is that President Trump ask Congress for a $2 Trillion, bah-humbug on $1 Trillion, go for two, double tax-exempt 50-year infrastructure bond at 3%. Heck, maybe go for 3 trillion.

I think it is also very likely we see 4 rate hikes this year and not the 3 that markets have priced in. If that’s the case, then dividend paying stocks get more competition for dollars as new bonds pay more. Old bonds of course will get smoked.

Interestingly, I don’t think the rate hikes will be enoug to support the dollar with the coming deficit spending due to the tax cuts and budget bill for the next few years. We also have to remember China getting into oil trading putting pressure on the Petrodollar – which is countered by the U.S. exporting oil and gas. So, with a weaker dollar, that will push inflation a bit, including in energy. Powell did say that 2.5% on inflation could be the real target now. That’s a harbinger in my opinion. 

Powell doubled down on this good eocnomy thoughts with: “I would expect the next two years, on the current path, to be good years for the economy…” What is the obvioius question to that? What about in 3 years? Well, I have already #hashtagged #crash2020.

Volatility, as I said in my article “Welcome to President Trump’s Economy and Markets” is about to make comeback. Most people won’t notice until it makes their 401k statements. This means we can do some trading ahead of any real damage, but we have to be mindful to “sell the rips” with conviction. As I mentioned above, stock buybacks are huge, so huge I have an article coming out tomorrow for you about that, and the buybacks will support the market this year. By next year though, I think we should be a lot more careful. We need to stick to the A list, errr, VSL ideas.