After initially showing reluctance, President Trump over the weekend signed a $900 billion COVID-19 stimulus package that includes direct payments to Americans, extends unemployment benefits, and sends money to businesses hurt by the pandemic. For some insight into the expected impacts of the legislation, WAMC's Jim Levulis spoke with Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors in Albany.
Johnson: When we take a look at the fourth quarter, and we look at the numbers through November, the economy was losing momentum. And it was clear that individuals’ incomes were going down, their consumption had started to contract or was contracting and they were using their savings to try to, you know, basically keep ends meeting, meet their meet their obligations. What this does is it gives them sort of new life, it gives a real lift to the incomes of individuals. And I might add, very importantly, with the Paycheck Protection Program, those loans, it also gives a lift to companies, small to medium-sized companies. So what we're going to see is that, whereas we've been worried about not only the fourth quarter, but worried about what was going to happen in the first quarter [in 2021], this gives a real lift to the economy. So I think what we're looking at, I had been looking at the possibility of a negative first quarter, that's still a possibility. But I think it's a little bit more removed now. And I think we're going to have a positive first quarter. And then when we get past the first quarter, I think things will start to get better, or they'll start to respond to the vaccine. But most importantly, this gives a real lift to individuals, businesses, and the first quarter economic output, or results that we see.
Levulis: And looking into 2021, in your latest market notes, you state that a meaningful risk is the US fiscal policy, what's your basis for that? And what do you mean by that?
Yeah, you know, when we take a look at these numbers, and when you take a look at the numbers and in the what was just passed or signed by the president, you take a look at what we're building up as far as the deficit in the US as well as the debt in the US, these numbers are getting to be fairly high. Our deficits have gone from something in the order of 4.6% of gross domestic product, that's what we were looking at. Now we're looking at numbers like 16 or 17%. The US deficit for 2021 got up to $3.3 trillion that's above the $900 odd billion that we saw for 2019. So we're building up a lot of debt. And what that really worries me is that I think everybody's cognizant or aware of that. And it might cause the government, as we start to work our way through 2021, to become concerned about the deficits as we probably should be, and start to do something to shrink those deficits, such as increased taxes or reduce spending. I don't think the economy is on firm enough footing right now, to really absorb an increase in taxes and a cut in spending. And that might lead to problems for the stock market and problems for the economy. So you've got to get the timing right. And I think that 2021 is probably going to be too early, I don't think we're going to get back to the output levels that we saw in 2019, at the start of the pandemic, until the third quarter 2021. So I think it'd be wise for policymakers to wait, otherwise, we could have real problems for not only the stock market, but the economy, broadly speaking. So I think waiting to 2022 minimally, is probably called for.
As Joe Biden prepares to take office as president, are there certain administration actions or policies that you are watching in terms of how they might impact the economy?
Yeah, you watch, of course naturally, some of the fiscal policy things that I've been suggesting. And one of the things, of course, is the increase in taxes. And the other thing is the cut in spending, I don't think that's in the cards. A lot of this is going to depend on the outcome of the Georgia election and who controls the Senate as to how much the Biden administration is going to be able to accomplish. So that's going to be an important piece or a variable in the equation. But I think it's pretty clear that what he's looking for, what he liked to do, is he liked to have some modest increase in taxes. And some of those taxes, of course, are mostly to try to create a little bit of income equality, in other words would be taxes on the wealthy, over $400,000 in income and some capital gains tax increases. Very importantly, though, that it's important to understand that he would offset the tax increases and the revenue production from those tax increases with spending, mostly on infrastructure. A big part of his program or plans are to increase spending on infrastructure, especially environmentally driven infrastructure, but health care also is very important. So he's got some tax increases in his plan, and also some offset by some spending increases, which makes a deficit or let's say, fiscally neutral. That is, it's not likely to have a major impact. If you offset, it's not likely to have a major impact on the economy. But again, all of this depends very heavily on how much of his programming he can get through the Congress. And whether he can get it through the Congress or not, which really means the Senate depends on the outcome of the Georgia election in early January.
We've been looking forward. But looking back, what actions or policies under the Trump administration do you think had large impacts on the economy?
You know, well, the largest impact on the economy was the significant tax cuts that he initiated in 2017. And that's had a very big impact on the stock market on income inequality, I might add, but a big impact on the stock market and a big income impact on the earnings of US companies. I think that was probably the number one thing, when I look back on the Trump administration that he did, it’s his fiscal policy. There were also some spending increases that they initiated. And I think that it's you know, but there's not much when I look back and I say what was done that was positive, I also look back and ask myself for the some things that he could have done or should have done, that might have had a better outcome or positive impact on the US economy. And of course, I think that the handling of the pandemic was somewhat suspect. I think that there wasn't enough really transparency and honesty, quite frankly, in the early stages of the pandemic. And I think the outcome for the pandemic, especially its impact on the economy, which was nothing short of very significant, would have been different if we'd had a little bit more disclosure, and a little bit more of a shall we say a coordinated government response to the pandemic and something that was also consistent with what scientists, particularly Dr. Fauci, who's now really a hero, particularly what they'd been advising, and I think that was probably the shortcoming. So you had the tax cuts, significant increase in tax cuts on the economy, but also the lack of a really coordinated, and I think, directed pandemic approach, I think that was somewhat missing.
Do you think Jerome Powell will serve out the remainder of his term as chair of the Federal Reserve under President Joe Biden?
Well, you know, depending on his willingness to do it. I mean, you know, it's a very tiring job, a very demanding and tiring job. But I'm assuming that he still wants to be chairman of the Federal Reserve. And my guess is that he's probably going to continue as chairman of the Federal Reserve. And I think that Biden would be well advised to continue to have him as chairman of the Federal Reserve, particularly if he's going to have Janet Yellen as the Secretary of Treasury, assuming that she gets approved by the Congress, which I think is a good bet. Janet Yellen has a significant experience having been the chairman of the Federal Reserve, and her ability to work with the Treasury Department and with Powell, as the chairman of the Federal Reserve, I think will help coordinate the two and probably lead to better government policy overall, I really think this is it would be a good idea to have Powell continue as chairman of the Federal Reserve, and I think that's what his decision is going to be.
Hugh moving back to your market notes, you note that the Open Market Committee at the Federal Reserve believes inflation will not get back to 2% until 2023. What is the importance of that?
That's very important. And the Federal Reserve has told us or promised us that look, even when inflation gets back to 2% or above 2%, they're going to be willing to tolerate above 2% for an extended period of time, more or less as a balance to the long period of time when inflation was well below 2%. So an extended period of time of tolerating inflation above 2%. They expect that it's going to get there at 2023, some think it's not going to get there to 2024. I think the consensus forecast as well as my own forecast, is that it's going to get there in 2021 to 2% and in 2022. And we might have a surge in inflation in the second quarter of 2021, which might scare a few people, particularly the members of the Open Market Committee at the Federal Reserve. But you know, I think quite frankly, but we're looking at Federal Reserve policy being essentially unchanged. Its interest rate policy will be unchanged through 2021 and probably through 2022, given what they've told us is going to guide their policy. So that really means that short-term interest rates are going to remain little change through 2022, which is probably good news for the economy and certainly good news for the financial markets. We might have a longer-term interest rates as measured by the yield on a 10-year Treasury, maybe inching its way a little bit higher from its current level of 95 basis points or .95% up to about 1.2%, but not a lot. And therefore, I think interest rates, generally speaking, what this means is that interest rates are going to remain fairly low. And that's, again, good news for the economy and good news for the financial markets. And hopefully, it doesn't get higher, than significantly higher than 2%, where it causes them to sort of rethink that policy. I don't think it will.
And finally Hugh, you say that you're concerned that markets have possibly moved from rational to less-than-rational, when optimism gives way to exuberance, which eventually gives way to euphoria. Now, those are some very descriptive words, how do they translate into movements on Wall Street?
Yeah, you really have to worry about things getting a little bit out of hand, are we moving from the rational to someone less than rational to optimism and exuberance, and then on to euphoria? We call it a mania when stock prices get just simply too high, that invariably leads to some problems further out. And so you have to really kind of worry that when you have any problems that emerged from a mania, when you have a very sharp decline in stock prices, that has a significant feedback effect on obviously, consumer confidence, as well as consumer spending, it's very demoralizing. So you want to prevent that in any way you can. I don't think we're at that stage of exuberance, or even euphoria at this point. But you've got to watch it pretty carefully. Particularly because we see some technical things going on in the markets, we see the IPO market, initial public offering market, where you see companies coming to market to raise capital, and then the price of their stock doubles. In the first trading in the aftermarket, or when you see what's called a SPAC. We're seeing an outbreak of SPACs. We're seeing Bitcoin that's another example where the price of the stock and Bitcoin goes from, say, 10,000 to 24,000. I don't have the exact up to date numbers, but I'm pretty close. Those are signs of, let's say, isolated, hopefully isolated cases of an outbreak of exuberance, maybe even bordering on euphoria, or a mania. And those are pretty dangerous. If you see that broaden, if you see that apply to the general market, to the overall market. That's when things would be very worrisome for me. And I would add not only worrisome for me and investors, but also worrisome for the Federal Reserve. The Federal Reserve is likely to respond to that. That's one of the things that they're watching pretty carefully. I think it's too soon to do anything. But nevertheless, it's something we've got to watch and watch carefully as we move through 2021. That's one of the big risks that we face in 2021 and 2022.