Wesley's Rant: Sugar High, Inflation, and Taxes

Have you noticed that the “noise” coming from the writers and talking heads on television that work for the financial networks has been very loud lately? With today’s announcement from the Federal Reserve that they will continue with an extremely loose monetary policy, and a federal government cutting checks like it is going out of style combined with the extensive roll-out of the COVID-19 vaccines what do you think you will get? The answer is some strong economic data going forward.

On April 29 at 8:30 a.m., the U.S. Bureau of Economic Growth (BEA) will release its first estimate of first-quarter GDP. The consensus of expectations is that GDP will come in between 6%-7% on an annualized basis for the first quarter. In addition, the expectation is that this strong growth will continue for the rest of 2021 as the United States and the world continue to lift restrictions on businesses and its citizens. According to data published by the World Bank, you would have to go back to the year 1978 to find a year with United States GDP growth above 5%, except for the year 1984 when U.S. GDP was 7.2%. You can thank President Ronald Reagan for that year!

If these estimates end up being accurate that type of rapid growth from where we were one year ago will be historic. The problem is that this rapid growth, like a “sugar high” is not going to last. Do not get me wrong I am all in on expecting record economic growth over the next 12 months as the economies of the world begin to recover from the effects of government shutdowns. However, the unprecedented government spending we have had in the last year and the amount of money the Federal Reserve has been printing will slow down from its current pace. In addition, tax rates are going to go up. It is only a question of when and by how much? The news last week of a top possible capital gain rate and dividend rate of 43.4% for investors will have an impact on the markets if those numbers become reality. Not to mention higher corporate tax rates and higher individual marginal tax rates on high wage earners.

Have you also noticed the actual inflation numbers we are seeing currently? The Federal Reserve is still targeting 2% as their inflation goal and in the most recent meeting indicated that any inflation will be temporary. 

Milton Friedman defined inflation as too many dollars chasing too few goods. In the last 12 months, the price of lumber is up 300%, aluminum is up 50%, oil is up 89%, and corn is up 70%.[1]  The Producers Price Index is up 7.6% and the Consumers Price Index is up 3.6% in the last 6 months.[2]  The governments of the world decided to shut down the economy which has severely impacted the supply chain. We are going to have increasing demand as the world reopens with a very limited supply of goods and services. Higher prices have already arrived and will continue to climb over the next several months. 

This will result in higher interest rates driven by market forces and the FED will find itself behind the curve.

My wife ordered a new chair for our home in January. It is supposed to arrive sometime in August. I ordered new garage doors for our home in March. They are supposed to arrive sometime in July. Have you driven by a car lot lately? Where are the cars? Again, supply chain issues. Enjoy the rapid growth while we have it, and I hope if you are an investor, you have been participating in the rally. Just know that higher prices, higher taxes, prolonged inflation, and the eventual slow down in government spending have all historically led to slower economic growth. 

Make sure you plan accordingly!

[1] IMF, March Report

[2] U.S. Bureau of Labor Statistics

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