Wednesday, May 12, 2021

“Who You Gonna Believe, Me or Your Own Eyes?” – Groucho Marx

I know I have used this famous Groucho Marx quote in many of my postings, however, I find it particularly compelling at this particular time.  It is hard for me to imagine that a great many Americans cannot see the explosion of the economy that is occurring around us.  I guess it is influenced by the overwhelming negative attitude of Washington and the continuing flood of cash into the economy from our lawmakers.  Of course, that will lead to short-term positive trends, however clearly long-term negatives. 

Ava and Byrdie catching a 
 Braves game – Braves won in 12

In this posting I want to give you the facts and not the fiction.  I recently had a client tell me that he did not like reading my newsletter since all I did was express positive thoughts.  I guess I am guilty of the obvious.  However, as I pointed out to him, the S&P Index of 500 stocks has had positive returns in 16 of the last 18 years.  I also pointed out that when it was down 37% in 2008, it was followed by an increase of 26% in 2009 and 15% in 2010, making back most of the losses.  In 2018 the market was down 4%, but up 31% in 2019 and 18% in 2020.  If you had odds of 16 chances in 18 to double your money in Las Vegas, I rather suspect you would take those odds any day. 
 
I want to cover so many things that indicate the strength of the economy.  The evidence is all around us and if you do not grasp the facts, you may miss one of the greatest buying opportunities of all time.  Before I can get into all those interesting items, I must report on the month of April which was quite an excellent month.  For the month of April 2021, the Standard and Poor’s Index of 500 stocks was up 5.3% and up 11.8% for the year in 2021.  The one-year performance on that index is a cool 46%.  The Dow Jones Industrial Average was up 2.8% for the month of April and up 11.3% for the year 2021.  The one-year return on that index is 42%.  The NASDAQ Composite was up 5.5% during the month of April and is up 8.6% for the year 2021.  The one-year return on that index is 58%.  Just to give you a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was up 0.8% for the month of April, yet it was down 2.7% for the year 2021.  For the one-year period ended that index had a negative return of 0.5%. 

As you can see from the above analysis, the lowest return for any of the major indexes for the one-year period was the Dow Jones Industrial Average which was up 42%.  Compare that with the bond index, which was a negative for the one-year period then ended, and you will see the divergence that is occurring between stocks and bonds.  Anyone not recognizing the underperformance of bonds will probably continue to lose money for the remainder of 2021, which is sad given the upward potential other asset classes hold. 

Lucy and Eddie Wilcox after
 the Girls on the Run 5k

As I predicted in the last several postings, the economic explosion in the United States is just beginning.  What we are now seeing are the early stages of an economy unlike any we have seen since World War II.  The GDP growth for the 1st quarter was a very high 6.4% and based upon the projections of the Federal Reserve, this year should generate a total GDP growth of 7.2%.  Take into context that growth percentage would be the highest since 1984 when Ronald Reagan was President.  Also remember that in 1984 we had basically come out of recession from the previous three years and that jump in GDP was somewhat prevailed by lower tax rates and reduced oil prices in the economy.  The GDP growth in 2021 is not a reflection of a jump back from a recession, but clearly an explosion of printing money by the Federal Reserve and turning that money over to the average consumer. 

The evidence as to this explosion is occurring everywhere around us.  If you are unaware of the shortages in the economy, you really have not read current financial news.  The automobile companies are reporting that they have cut back production because they do not have enough semiconductors to build a car.  Take into context that virtually everything we buy nowadays has semiconductors and the production around the world is not adequate to keep up.  That tells you the public is on an unprecedented buying spree. Currently, Home Depot has no dishwashers, refrigerators or washers and dryers available for delivery.  Their latest indication is that it may be October before they are resupplied.  Just when exactly have you ever known Home Depot to not have refrigerators available? 

Even more distressing is that contractors are reporting that they have no 2x4’s of lumber.  How can the housing boom continue without 2x4’s?  Those contractors lucky enough to find 2x4’s are noting that the price is double what it was 6 months ago.  I am also sure that you have read that home sales are beyond ridiculous at the current time.  It is reported that homes selling in Atlanta oftentimes will get double digit offers to purchase above the asking price.  The days of taking the asking price and discounting it 10% are long gone.  In fact, for a decent house inside the perimeter of Atlanta, to stay on the market more than one day, there must be a serious problem with the house.  Now how could any potential consumer not understand these shortages and not understand how good the economy will be if all these shortages occur? 

The numbers for April were nothing short of spectacular.  Consumer income during the month of April was up over 20%.  Yes, I understand a great deal of this was due to the stimulus payments paid to most anybody who asked for them, but it also had a lot to do with more people going back to work.  What was more interesting to me was that retail sales for the month of April were up 21.3% over a year ago at the same time period and the savings rate of consumers set an all-time high of 21%, as compared to a  normalized savings rate of 7.5%.  So, in summary, people were making more money, but were also saving more money and clearly this saving of money bodes well for future spending by consumers. All this explosion in the economy has to be taken in perspective of the actions of Congress where they have already distributed almost $4 trillion in stimulus money and are desiring to distribute another $4 trillion in the upcoming months. 

Mitch Musciano-Howard accepting
 his Varsity Letter for soccer

While certainly things on that list of Federal expenditures are needed, the vast majority of this amount will do nothing but create hyperinflation in the United States.  If you take an economy that is already scalding hot and you flow an additional $4 trillion of liquidity into that economy, almost assuredly the economy will overheat leading to adverse economic effects of inflation in the coming months.  Just exactly what they are looking at in Washington defies the ability of someone trained in economics to actually understand. 

Make no secret about it, the way the Federal Reserve has created all this money to be distributed is by using their very efficient printing presses to produce more cash.  While the flooding of the economy certainly has positive economic effects over the short-term, if you overheat the economy and if interest rates start to go up because of the overheated economy, the long-term trends on $8 trillion of manufactured money would be significantly bad.  I do not want to imply that negative aspects will occur in the next day, week or month, but certainly 10 years from now we will all feel the burden of repaying debt that was created today. 

I told you in prior postings that you should be extraordinarily positive with the progress that has been made on vaccinations in the U.S.  I indicated that you were likely to see by the middle of the summer the ability to reopen the economy virtually everywhere.  I was certainly wrong in that projection.  That day is here today, and it is happening.  I went to the Atlanta Braves game last night and the stadium was at full capacity.  There was no social distancing occurring, but the numbers support that confidence by consumers.  For all the people in the United States over the age of 18, 43% are now fully vaccinated and another 57% have already had their first vaccination.  Everybody wonders why this percentage is not higher.  Remember that there are no vaccinations given to anyone under the age of 18.  However, beginning next week children between the ages of 12-17 will begin vaccinations, which should run the percentage up dramatically over the next few months. 

Ava and her bunny sharing 
a delicious snack 

But even more encouraging are the U.S. citizens above the age of 65.  A remarkable 83.5% of those U.S. citizens over age 65 have already had one vaccination.  Also remarkable, is that 71%  of U.S. citizens over the age of 65 are fully vaccinated at the current time.  We are going to see an explosion of the economy as the U.S. citizens feel confident that the vaccinations will allow them to travel and spend money once again. 

People think it is remarkable that the amount of increased savings during April was 21%, however, do not forget that people have not been allowed to travel and eat out for the last 14 months. If all those restrictions are lifted you will see an absolute explosion of spending throughout all levels of the economy and, in fact, we may be seeing it right now with all of the shortages that are occurring.  

Almost every day I hear from an investor asking how the stock market can keep going up because stocks are clearly “overvalued.”  I wonder exactly where those investors are getting their information.  If we all agree that stock prices are based on earnings and earnings are going up, there is a high likelihood that stock prices will continue to follow earnings.  But have you or has that investor looked at the current increase in income?  For the first quarter of 2021, the high-tech companies such as Apple, Facebook, Google, and Microsoft reported income that was nothing short of breathtaking.  The numbers were absolutely staggering in their magnitude and shattered all expectations as to future income. 

DeNay visiting scenic Roswell, New Mexico

It is now anticipated that net income as we go forward for all S&P 500 companies will be 25% higher by the end of the year than they are today.  That almost seems to me to be a conservative estimate given the avalanche of cash that is going to be spent by the consumers in the next nine months.  Once these consumers feel comfortable that their job is protected and they do not fear from the COVID pandemic, they will once again travel, eat out in restaurants and spend money on consumer goods.  We as investors do not really care what happened last year, that is in the past.  What we want to know is what is going to happen in the next couple of years.  It is fairly clear to everyone that is reviewing the information that the next couple of years should bring a substantial increase in profits due to this pent-up demand that is now going to be released on the American economy.

It almost seems comical to me that in the 1970s, ExxonMobil reported a quarterly profit of $10 billion and the congress of the United States was outraged.  In fact, there were calls at that time by Congress to break up Exxon and to impose a windfall of profits tax on them due to their higher profits.  This last quarter, the company Google reported net earnings that were double Exxon’s quarterly earnings and there was not a whimper out of Washington.  In fact, when you think about it, Exxon spends substantial sums of money to extract oil from the ground, refine it and sell it to the public.  Google sells no products to speak of and collects money at an invisible way by key stroke.  Today the super large technology companies dwarf the oil companies and are likely to report substantial profits that will stagger the investing public and embarrass the older companies like Exxon and GE. 

It must be spring – the roses are
 blooming at my house

What is interesting about this time and the reaction of the Federal Reserve is the distinction between what happened in 2008 and what happened in 2020.  You remember in 2008, we reached the point where all the banks were virtually going to fail, and the financial backbone of America was in danger.  The reaction to that by the Federal Reserve was to bail out the banks and the brokerage houses and other significant financial businesses to protect the general public.  But the Federal Reserve did nothing whatsoever to try to help the individual consumer.  Their assumption was if they help the banks, the banks would help the public.  They could not have been more wrong.

It has been reported by many that even though the banks received over $300 billion in Federal TARP subsidies they did not go out and lend to the consumer.  In fact, they used that money to shore up their own balance sheets and to compensate their people.  It is little known, but true, that virtually all the banks paid 100% of their money back to the Federal Reserve.  In fact, now the reports indicate that TARP was a roaring success for the government.  The Federal Reserve actually made more money on this plan than it cost them.  However, it cost the American public quite a lot more.  There was huge unemployment, many people lost their jobs, and it would take years to recover from that recession.

In comparison, what occurred in 2020 was the exact opposite.  During March and April of 2020, the Federal Reserve did not bother with helping the banks, but went directly to compensate the individual citizens in the U.S.  By virtue of throwing $4 trillion into the economy, they instantly turned it around.  As I pointed out in those postings in 2020, if you do not realize what $4 trillion will do to the economy, you have not been around economics very long.  By flooding the economy with money, the Federal Reserve created an economy supported by Federal money that only lapsed into a recession for a few months in 2020.  Now, less than a year later, we are looking at an economy that is virtually exploding.  The Federal Reserve Bank of Atlanta is now forecasting GDP growth in the second quarter at 11%.  Short of wartime, this country has never had such high GDP growth. 

What is bewildering about the reaction of Congress today is that they just cannot be satisfied with the good work that the Federal Reserve has already done.  They are insisting that they need to throw another $4 trillion into the economy, which as pointed out above is likely detrimental.  Almost daily we hear speeches of how many people are unemployed and the terrible economic circumstances of the unemployed.  As we all now know, we could quickly solve the unemployment issue if we just reduced the subsidy by the U.S. government.  We have paid unemployment greater than what was necessary during the crisis, which has continued almost beyond any time of realistic need for the money.  Virtually every employer that I know cannot hire employees to work at their business.  The golf course that I am a member of had to close two of its three restaurants because it does not have enough employees to work.  Everywhere you go you see help wanted signs and employers with the inability to hire workers.  That is not an economy that is represented by high unemployment.

DeNay hoping to spot some 
UFOs in Roswell

Not only did the Federal government pay too much in the way of unemployment, most recently it has been determined that the first $10,000 of unemployment is tax-free for many recipients.  It is estimated by the Bank of America economist that the unemployment today would be equivalent to a salary of $33,000 in the private sector.  Most of the hospitality workers do not make that much money anyway and therefore it is better for them to not work than for them to give up the governmental subsidy.  While it is true that there are still eight million U.S. workers not working today, you must wonder if they cut unemployment, a great number of those would return to work immediately.  As of today, there are already two states that have totally rejected Federal unemployment subsidy not because they do not like receiving Federal money, but because there is such a shortage of labor in their state.  They are hysterically trying to get people back to work by cutting the unemployment benefits.  There are 8 million open jobs in the U.S.

A lot of ink has been wasted on the proposed tax increases proposed by the current administration.  Quite frankly, I think there is a high likelihood that I have a better chance of playing shortstop for the Atlanta Braves today than all these tax proposals getting through Congress. I have no doubt that some will, but the majority will not, or they will certainly be modified.  To give you an example of one that is an extreme, the President is proposing that for anyone making a $1 million, the capital gains rate would be equivalent to the ordinary income rate which is roughly 43%.  If you add to that number state income tax, that means on a capital gain that size, you would be paying over 50% tax of that gain.  In my opinion that will never happen.

People have lost sight of the real reason why taxation occurs.  The reason you tax things is because you want people to buy less of them.  Remember we have always overtaxed tobacco, alcohol, and gasoline, the theory being if we tax these items high enough, people will not spend money on them and therefore reduce consumption which will help the economy.  For us to even consider taxing capital is a dangerous precedent.  I thought I would never get to the point where the government is taking actions that are detrimental to the entrepreneurs of the U.S.

There is no question that capital is the secret to why America is the most inventive country in the world.  Have you ever considered that virtually all the software and medical achievements occur in the United States and not in other countries?  Japan and China have proven that they are very skilled workers that can copy U.S. products and produce them well.  Neither Japan nor China have proven that they can develop these products as the U.S. has. The reason that companies can participate and create new products is because of capital.  Sometimes it is private capital and sometimes it is government capital.  In the most recent example, there is no way that these pharmaceutical companies could have developed a COVID-19 vaccine in less than12 months without the government’s involvement. By virtue of throwing billions of dollars into these pharmaceutical companies, vaccines were created within one year that are inexpensive and actually work.  The last thing we would want to do is reduce the ability of entrepreneurship in America by taxing capital to such an extreme level.  While capital gains taxes may go up to something like 28% which is the rate that it was during the Clinton Administration, certainly, to tax at that ordinary income level is not in the cards. 

Marti Musciano-Howard celebrating 
her Varsity Letter and MVP
 award for soccer 

As we gear back up to full production in the U.S., it always concerns me when I hear Washington misstating the facts to prove a political theory.  The most recent example of that is the State of the Nation Address by President Joe Biden.  During the course of his speech he said, “Wall Street didn’t build this country.  The middle class built this county, and unions built the middle class.”  While not surprising, a similar opinion was represented by former President Barack Obama.  Why is the government misstating facts that are clearly easily checked to be incorrect?  I understand political payback and certainly the unions almost universally supported the President in the last election, and he would want to give them due respect - I understand that part of the program.  However, the facts are indisputable. 

Today less than 11% of the U.S. population is covered by union contracts.  And the number of U.S. workers covered by unions previously is even less.  The number of union workers during the 1920s was roughly 5 million.  That number declined to three million in 1930 and almost none of these union jobs were in large U.S. industry such as steel or automobiles.  In fact, most of the union jobs were all held in mostly craft skills that required specialized training to be a part of a union.  Therefore, to assume that labor unions were instrumental in building America, is disingenuous and incorrect. 

As we go into the summer, we have time to sit down with you and review your financial plan.  I anticipate that this year is going to be bumpy with many ups and downs, but the trend is clearly up, and you need to participate.  I believe bonds will not make any money in 2021 and that investment could potentially drag down your portfolio.  However, the biggest obstacle to building wealth today is this over-mounting gush of money that is being held by the public in cash.  I can almost assure you the vast majority of people reading this posting has more than one year of cash at their disposal, uninvested.  If you are talking about a lost opportunity, there it is, just as crystal clear as it can be.  


On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins 

Thursday, April 8, 2021

“It’s Tough to Make Predictions, Especially About the Future” – Yogi Berra

Every time I read the quote from Yogi Berra above, I have to nod my head in agreement.  He definitely had a way of simplifying complex subjects.  Predictions are difficult when the facts are unknown and the conditions heading into the future are unpredictable.  We found ourselves in that exact predicament one year ago, in March 2020.  Rarely have I seen as much fear by investors than I saw in that month when the first lockdown occurred.  

At that time, investors were falling all over themselves to get out of the market and into cash, which was earning nothing.  I tried to assure them that the economy would quickly turn around and the stock market would react positively with the economic support of the federal government.  When you throw basically $3 trillion into the economy at one time, that money is going to get spent and is going to create economic activity which will lead to higher profits and higher GDP.  

Ava celebrating winning first place in
 her Figure Skating division

So Yogi, we actually projected that one correctly.  If you look at the time period from March 2020-2021, the S&P was up 56.3%.  The NASDAQ Composite was up 73.4% and the Dow Jones Industrial Average was up 53.8% over that one-year period.  Those types of gains are not normal.  They are extraordinary gains based on extraordinary circumstances.  The one thing we absolutely know when it comes to economics is that money creates spending and spending creates profits.  Remember, the most important driving force in making stock prices go up is earnings. 

As I sit here today reading all the financial information, I am blown away by the positive nature of the economy, yet the negative nature of so many investors.  All around, commerce is returning to normal, yet for some reason there is a high level of skepticism by the public based on fear or unknown economic circumstances that I am not aware of.  I will attempt to cover some of those items as well as some other information that I find interesting.  

As I must provide in all my postings, here are the rates of return for the month.  The Standard & Poor’s Index of 500 stocks was up 4.4% in March.  Year-to-date it is up 6.2% and as mentioned up 56.3% for one-year.  The NASDAQ Composite was basically breakeven at 0.5%, year-to-date is up 3% and for the one-year period is up 73.4%.  The Dow Jones Industrial Average was up 6.8% during March, up 8.3% for the year 2021 and up 53.8% for the one-year period.  Just for purposes of comparison, the Bloomberg Barclays Aggregate Bond Index was down 1.3% for the month of March, down 3.5% for the year 2021 and for the one-year period was up a measly 0.4%.  During the month of March there was this highly publicized conversion from growth into value type stocks.  As you see the excellent month that Dow Jones Industrial had, that is because many of its components are value-related stocks.  I think that will be a temporary shift and as earnings start to come in during the month of April, investors will convert back to growth investments.  

Cameron, 13, enjoying virtual “band class”
 while his parents are at work

Everyone asks me about the so-called axioms of investing - the unwritten rules of traders.  One of those axioms that has been illustrated lately is the concept that if interest rates go up, you sell growth investments.  The theory goes something like this.  If interest rates are going up that means the Federal Reserve is doing so to slow down the economy.  If you slow down the economy, then growth instruments would clearly suffer.  Therefore, one of the axioms that is held dearly to trader’s philosophy is that once interest rates start to go up you must sell growth and buy value-related investments.  

As we all know, axioms sometimes fail because they are not supported by facts.  In this particular cycle, we already had the Federal Reserve telling us that they have no intention whatsoever to increase interest rates until 2023.  We are in a situation now where the economy is exploding with growth and the government keeps throwing gasoline on the fire with new stimulus and governmental spending.  In March of 2020, the U.S. came into that month with a deficit of roughly $22 trillion.  Over the intervening 14 months, if the infrastructure bill is passed we will have added another almost $6 trillion in debt over a one-year period.  If you truly don’t believe that $6 trillion is going to move the economy, then you do not really understand economics.  If the GDP in the United States is $23 trillion this year, but you dispose another $6 trillion worth of stimulus into the economy, whatever the Federal Reserve does to try to slow that down would be a complete waste of time.   

I am not sure where most people get their economic facts, but as we sit here today this economy is getting ready to explode upward.  As we have learned, the most important component to making the economy come back is the vaccinations.  As of this morning, roughly 162 million Americans have been vaccinated.  Based on the last 30 days, we are newly vaccinating 3 million people a day and the simple arithmetic would be that by the end of April we should have at least 250 million Americans vaccinated out of the 330 million population.  I am absolutely positive that everyone will not get vaccinated, but we don’t need 100% to reach herd immunity.  

Reid and Caroline at 
Drive, Chip & Putt

Everywhere you look the economy is picking up.  The Employment Report that just posted yesterday was nothing short of gangbusters.  That report showed that not only was the hiring of new employees paramount, but we also saw hiring in such industries as entertainment, restaurants and hospitality.  You may rest assured those employers would not be hiring if they did not feel safe after vaccination.  

You are getting ready to see a tsunami of spending occur in America.  All the money that has not been spent over this last year for travel, vacations and outside entertainment has accumulated in people’s checking accounts.  It is estimated that today there is roughly $5 trillion in checking accounts waiting on some sort of resolution for the future.  It is my best guess that as we get closer to the summer you will see an explosion of spending unprecedented in the United States for many years.  

It was only announced this week by the CDC that if you have been vaccinated it is safe for you to travel again, yet airline travel is up dramatically over the last few weeks and it is reported in the hospitality industry that vacation hospitality has reached the level similar to that of pre-pandemic.  All of that is interesting but should also lead you to the conclusion that earnings will follow all this money.  If you have the general public taking vacations, flying on airplanes and staying in hotels, it will benefit the hospitality industry, the restaurants and everything in between, which is exactly what is happening today.  

Caroline, Reid and Flat Stanley 
resting in the park

Just so you do not think that I have lost all perspective in connection to basic economics, I will explain my position on the economy. There is absolutely no question that all the stimulus that the Federal government has put into the economy will help businesses put people back to work and help America grow.  It is, however, a wonderful short-term asset, but a very much long-term negative for the U.S. economy.  When the Federal government goes out and prints $6 trillion, at some point someone has to repay that debt.  At the current time, interest rates are extraordinarily low and it does not take a whole lot of money to serve as the debt structure to keep that debt in place.  That will not be the case forever.  While I focus on the positives in this newsletter, I just want you to be aware that all of these positive moves in 2021 will more likely be negative moves in 2031.  However, for now let’s just enjoy this runup of the stock market.  

While there are many states in the U.S. that have already recovered, it is now estimated that there are roughly 1.7 million jobs in the U.S. that cannot be filled due to lack of qualification by employees.  One of the strange coincidences that is happening is with all the federal government funding of unemployment, there is a high disincentive for people to go back to work in lower paying jobs.  If you can make more money at home with unemployment, why would you actually go back to a job that doesn’t pay a livable wage?  It was hoped by many employers that the unemployment subsidies would run out but with the newest stimulus package, even those employment benefits have been extended to the end of 2021.  

But it is fairly clear that some states are already back to normalized rates.  In Florida, only 4.7% of their population is unemployed.  Nationwide unemployment is at 6%, but to clarify there are still 8.4 million less jobs than there were at the start of the pandemic.  Even the state of Georgia now has unemployment of 4.8% and every client I know is seeking new employees but cannot find them.  Recently our firm advertised for a CPA for our company and we did not get even a single resume of a qualified CPA looking to change work.  If you get into the more technical areas, the number of people that can fill these jobs with expertise are just not available.  

There is no question that certain states are actually falling well behind this unemployment report.  You could argue that it is self-inflicted, however, I guess we will never know exactly the reason.  As you compare Georgia’s unemployment report at 4.8%, California is 8.5%.  If you compare Florida’s unemployment report at 4.7%, New York is at 8.9%.  Therefore, much can be done to bring the economy back to normalized, but it is these larger states that will have to do the most.  It can clearly be argued that roughly one-half of the states are already back to pre-pandemic levels, while the other half are dragging behind.  

Ava showing off her favorite horse
 “Why the long face?”

So the general consensus is that if you throw $6 trillion into the economy, by necessity you will have to create inflation.  Yes, it is true enough that in recent weeks the long-term interest in the 10-year treasury has gone up to 1.7%.  At the current time, that 10-year treasury rate of 1.7% is equal to the dividend rate of the S&P 500 index.  Many would argue that numerous investors will leave the 500 index and invest their money in 10-year treasuries because the income component is the same.  I find that assertion to be absolutely ridiculous.  

One of the reasons why bonds have returned negative rates of return, as illustrated above, is because interest rates are moving up and will likely move up further.  Also, I do not believe that a 1.7% treasury rate will actually draw money out of the stock market to buy that bond yield.  There will be a time when interest rates will be high enough where money that is currently in the stock market will be drawn into the bond market.  However, I think we are a long way from that point.  So therefore, should we fear inflation as we go forward in the current environment?  

As many of you know the Federal Reserve sits down every six weeks and makes projections of the future economic circumstances.  Remember these are very conservative members that make up the Federal Reserve.  They are not one to exaggerate or even take extreme positions on any economic event.  At the most recent meeting of the Federal Reserve each member was asked to vote relative to their projection on GDP growth and in the United States for the year 2021.  As unbelievable as it sounds, the average projected GDP rate by the Federal Reserve was 7.2% for this year.  If you take that into consideration, that number is so over the top as to be clearly unbelievable.  

The last time the United States enjoyed GDP growth of that rate was in 1984 when Ronald Reagan was President.  Those of you that lived through that period know that the first two years of the Reagan Administration were recession years designed to break the back on inflation, which it did.  As the economy turned in 1983 and 1984, we enjoyed a period of hyper-economic growth, but it was more a reflection coming out of the economy than anything.  We are not in that situation today.  While the economy was bad during the pandemic, it could be argued that we only had recession for two months during that time frame.  If the economy actually generated returns of 7. 2%, that means a large portion of this economic growth will occur at the end of 2021.  All this falls in place with my projections above.  Six trillion creates a lot of economic activity.  

Ava reveling in the snow
 in Akron, Ohio  

As we get into the summer months, the fear of the pandemic will ease with the vaccinations which have proven to be extraordinarily effective.  As more and more Americans utilize their capital, to travel, visit their grandchildren or just go on vacation, it will improve the economy everywhere.  Already we are suffering through severe shortages of components in the supply line to produce products.  Over the last few weeks, the automobile companies have been closing production because they cannot buy enough semiconductors to build cars.  Think of that term for a second.  With all the semiconductors produced in the world we cannot buy enough to keep automobile production running.    

We hear about the major docks in California and along the Eastern Seaboard where ships are lined up to get in, sometimes having to wait weeks to be unloaded.  I happen to know someone who works on the docks in Los Angeles, and they are working 24/7 trying to unload the boats.  Why are all these boats coming to America at this time?  It is a very simple concept - money draws products and products go where money treats it best.  Already the economy is turning to a consumption economy and is growing so quickly we cannot even supply the products.  If you assume that the consumer is 70% of GDP, all this plays into a higher GDP rate of 7.2% for this year.  

So here we have the situation where the economy would be hard pressed to be in better shape.  It is fairly clear that the corner has been turned and with the excellent effectiveness of the vaccines, more and more people will feel comfortable with traveling and spending more money.  If all of that is true, which the evidence is overwhelming that it is, the byproduct of all this spending will be higher earnings which will bring higher stock prices.  

Cameron heading back to school
 after one very long year

If the government had not already provided enough capital, now we are discussing a bill that would provide infrastructure to Americans.  Who could possibly not be for better roads, highways, and airports?  That is almost as good as American pie. However, it is a very precarious time to be putting more stimulus and more debt into the American economy.  In reading the most recent bill proposed by the President, it only allocates about $500 billion a year for these types of repairs.  In respect to a bill of $2.3 trillion, that is relatively a small amount.  It might be worthwhile to postpone that passage of the bill until the economy is more stabilized, probably in a year from now.  

So those who would argue that the government has spent too much money would have a stable platform, however, no one will ever know because Yogi Berra and I cannot forecast it.  As an example, in 2008, when the economy clearly collapsed the government stepped in and provided support for the banks, but not the general public.  That was a very painful recession that lasted for two years and many people got hurt.  

Reid and Caroline waiting patiently
 to tee up at Augusta

During 2020, the government stepped up immediately and funded the economy with $3 trillion, which brought back the economy after only 90 days.  I had clients call in during this timeframe and ask my opinion on how long I thought this recession would last.  I continuously quoted a 90-day time period for this recession, which turned out to be pretty close.  Not that I was any better than anyone else forecasting the future, but I did know that if you throw $3 trillion in the hands of consumers, it would create profits.  

So, the argument could be made that the government is injecting all this money into the economy, which will clearly create inflation.  No one wants inflation like we had in the 1970s, where inflation was growing double digits per year, however the last thing you want in this country is deflationDeflation is much more difficult to come out of than inflation. If you study the 1930s in America and the Great Depression, it was principally caused by deflation more that any one item.  Deflation is the most difficult of all economic events to satisfy.  You may recall that in the 1930s, we suffered through deflation and 25% unemployment in the United States for over 11 years.  Not until the U.S geared up for World War II was the back of deflation broken.  

In summary, the economy is actually quite good and anyone that tells you otherwise really has not been reading the current numbers.  As America wakes up and gets on the road again in the coming months, economic activity will accelerate.  As I projected earlier, this economic activity will lead to more commerce and higher earnings and almost assuredly higher stock prices.  If you are not invested, now is the time without question.  

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins