Fed: Stage 1 of 4

Macro Perspectives: Mon 26 July 2021

On Friday (my last note)  we talked about the $5.5 trillion of additional government spending that appears very likely to be dropped onto an already hot economy. This will follow the (unimaginably bold, at the time) $3 trillion emergency stimulus that manufactured the fastest recovery last year, from the deepest recession in modern U.S. history.

With this, the great macro trader and dot-connector, Stanley Druckenmiller, spent time during the week meeting with Senators to warn them against pouring more fiscal gas onto the economic fire.

He rightly pointed out, with the passage of these next two spending bills, that more than half (more like two-thirds) of the money that will ultimately be spent in the name of "crisis," will have come AFTER the economy has already recovered. He says, if he wanted to destroy the U.S. economy, this is exactly what he would do: Aggressively spend into an already hot economy.

It's a recipe for bubbles and hot inflation - both of which historically lead to large economic declines.

He says, after the "sugar rush" wears off, and the large economic decline ensues, "every dollar we spend now that we don't need, won't be available in a future crisis."

Druckenmiller is a common sense investor and this is common sense: Blow out spending AFTER the recovery, and you not only create future crisis, but you have no ammunition to fight the crisis.

So this all affirms the inflation case we've been discussing here in my daily notes for quite some time. For now, we continue to ride the wave of asset prices. The damage will come; First, from inflation and lower quality of life, and then, the economic decline is typically triggered by the Fed.

When the Fed finally, 1) acknowledges the hot inflation, 2) stops fueling it, 3) starts chasing it, and 4) ultimately kills it with higher interest rates, then the economic damage will come.

The Fed is still at stage one (i.e. the fuel will continue for quite some time).