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The Last Year

We look back at where things stood a year ago with the declaration of a pandemic and a market in meltdown to both remember how far we’ve come and glean some helpful reminders as we move forward.

We look back at where things stood a year ago with the declaration of a pandemic and a market in meltdown to both remember how far we’ve come and glean some helpful reminders as we move forward.


  1. Equity Markets – rallied on the week with U.S. stocks (S&P 500) up 3.23% while international stocks (EAFE) gained 2.57%
  2. Fixed Income Markets – were mixed this week with investment grade bonds (AGG) down -0.04% while high yield bonds (JNK) rose 0.53%
  3. J&J Vaccine gets WHO Approval – Following the European Union’s emergency authorization of the Johnson & Johnson vaccine on Feb. 27th, the World Health Organization granted its own emergency authorization to start use of the vaccine. As opposed to the current vaccines in place that require two shots across a few weeks, the J&J offering will be a single shot vaccine.
  4. Consumer Sentiment Hits 12-month High – Sentiment spiked in March according to the University of Michigan’s monthly consumer sentiment survey with a reading of 83. This is the highest reading since March of 2020 amidst growing numbers of vaccinations and widely anticipated passage of additional stimulus. While increased optimism was broad-based, it was especially strong amongst households in the bottom 3rd of income earners as well as those aged over 55.
  5. Key Insight – [VIDEO] We look back at where things stood a year ago with the declaration of a pandemic and a market in meltdown to both remember how far we’ve come and glean some helpful reminders as we move forward. [ARTICLE] As the U.S. implementation of modern monetary theory begins, we discuss what it is and share a great article by Brian Wesbury on whether it is likely to work.

INSIGHTS for INVESTORS – by Tim Mitrovich

This week was “phase 1” of Secretary Yellen’s plan to implement her version of modern monetary theory, a concept that is being touted more and more these days. Kevin Muir provided a succinct definition for those of you unfamiliar summarizing it as “a macroeconomic theory that contends that a country that operates with a sovereign currency has a degree of freedom in their fiscal and monetary policy which means government spending is never revenue constrained, but rather only limited by inflation."

This theory rests in large part on the premise that deficits don’t matter as long as a government can print the money it needs. Of course nothing is ever truly new, and such “logic” has been tried before without much success and more often than not has resulted in abject failure. One of the reasons history repeats itself is the belief that someone has found a new angle. Time shall tell.

In the meantime, interest rates and inflation continue to dominate headlines and the market’s attention due to their likely impact on the Fed’s ability to continue its easy money policies.

Tom Essaye summed up the way we feel as well when he stated, “We have been consistent in saying that as long as the four pillars of the rally (Historic Fed accommodation, massive government stimulus, COVID vaccine optimism and no double-dip recession) remain in place, the trend in stocks was higher and any pullback should be viewed as an opportunity to add cyclical and value exposure, and while we still believe that is the case (and are not reducing equity exposure) the truth is that one of those pillars got cracked last week and as such we need to brace for the possibility of a near-term “air pocket” in stocks. The pillar I’m referring to is the Historic Fed accommodation, because after a full year of the Fed doing whatever it takes to support asset markets, suddenly Fed Chair Powell is uncharacteristically non-committal on the Fed pledging not to let a rapid rise in longer-dated bond yields derail the rally or the recovery.”

Both Secretary Yellen and Fed Chair Powell are of the belief that the risks of setting off hyperinflation remain low, this despite notable gains and accelerations in commodity prices almost across the board. Lance Roberts addressed the situation this week pointing out that “Ms. Yellen noted in her statement, inflation from "doing too much" is a risk. However, not surprisingly, she dismissed that risk suggesting the Fed has the right "tools" for the job. The problem is that her "toolbox" to fight inflation has just one tool: rate hikes. As we have discussed previously, once the Fed starts hiking rates to combat inflationary pressures, it quickly leads to an economic recession and a financial crisis.”

Most of the questions above center on the prudence of current monetary policy while the article below by Brian Wesbury questions whether the Fed’s actions are even effective given the challenges they are trying to address. I hope you find it of as much interest as I did.

Have a wonderful weekend,

Tim and the team at TEN Capital


The Fed Can’t Fix COVID Lockdowns

By Brian Wesbury

The Full Employment and Balanced Growth Act of 1978 gave the Fed a “dual mandate” – to promote maximum sustainable employment and stable prices. Over the years, the meaning of these two mandates has changed.

Initially, in 1978, it was to get the economy to 3% unemployment and 3% inflation, or less. Since then, the unemployment rate has never been as low as 3%. So, this morphed into a target of “full” employment – an economy where everyone who wants a job has a job. Because inflation remained below 3% for a long time, the Fed has reduced its target for inflation to 2%.

In recent years, under the leadership of Janet Yellen and Jerome Powell, the targets for employment have been the locus of change.

During the recovery from the 2008-09 Financial Panic, former Fed Chairwoman Janet Yellen shifted focus from the simple unemployment rate to targets that included broader measures of unemployment such as discouraged workers and part-timers, the rate of job openings, the share of workers quitting their jobs, labor force participation, and earnings growth.

Fed Chair Jerome Powell, under political pressure, believes equality (or “equity”) should also be a policy priority. As a result, the Fed is focusing more on the health of the labor market for those who fall behind when the labor market lags but benefit the most from a tight labor market. As a result, he is focused on the black unemployment rate, wage growth for low-wage workers, and labor force participation among those without a college degree.

Powell is looking for improvements in all these indicators to get us back to where we were pre-COVID.

We understand the politics of this, what we don’t understand is how anyone thinks this is a job for the Fed. You can’t fix COVID with chemotherapy, or COVID shutdown problems with more money. It’s the wrong tool for the job. In February 2020 (pre-COVID shutdowns) all the employment indicators were showing massive success in broadening the labor force and raising wages. The pre-COVID black unemployment rate was the lowest on record. Wage growth for lower-wage workers was climbing faster than for higher wage workers.

Brian S. Wesbury – Chief Economist Robert Stein, CFA – Dep. Chief Economist Strider Elass – Senior Economist
Andrew Opdyke, CFA – Senior Economist Bryce Gill – Economist

This is exactly what we should expect when the overall unemployment rate was down to 3.5% and the economy was growing.

What’s interesting is that the Fed was not doing Quantitative Easing then; in fact, it was shrinking its balance sheet! Interest rates were not zero; the Fed was holding the federal funds rate in a range of 1.50 - 1.75% in early 2020.

What all this suggests is that we don’t need near zero short- term rates to get to where Powell wants to go. Milton Friedman prescribed more money growth to fix the Great Depression, but that was because the Great Depression was caused by a lack of money.

Unfortunately, the Fed does not seem to understand this and thinks it can fix any problem with more money. But, it’s the wrong prescription this time. The economic problems of 2020 were not caused by a lack of money, they were caused by COVID-19 and the related lockdowns.

Imagine if the unemployment rate jumped because Congress raised the minimum wage to $50 per hour. This is not the Fed’s problem, it’s lawmakers who caused the jump in unemployment. But the Fed, with its desire to fix the job market, would try to inflate the economy to bring back jobs. They could do this if they used inflation to bring a $50/hr. minimum wage back down to where it was before by diluting it– then the “real wage” wouldn’t change. But this would drive up all prices and burden creditors who lent at lower rates.

In other words, if unemployment is caused by something other than tight money, then the Fed is the wrong entity to fix it. COVID shutdowns are the problem, and opening up is the solution. Distributing the vaccine as fast as possible is the best stimulus. An easy Fed creates longer-term problems. The guideposts for monetary policy do not need to be updated for political reasons.

Pre-COVID, the US economy met all the conditions that the Fed and Jerome Powell are looking for today. This should make it apparent that zero percent interest rates and a massive expansion in both government spending and Fed bond buying are not the answer. The Fed can’t fix a virus.

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