The Reflation Trade

Reflation — “the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle.”

We selected this topic as more stimulus discussions continue, the money supply rapidly expands, and cash remains on the sidelines. Combine those factors with the prospect of improving unemployment as vaccinations roll through the population and mobility/aggregate demand improving. We continue to see 2021 GDP estimates revised upwards by analysts.

More Fiscal Stimulus

Congress is working through President Biden’s $1.9 trillion stimulus proposal. It will take several weeks to sort out the details and ultimately sign a package into law. With select Republicans hesitant to approve another sizable stimulus bill after signing a $900 billion package in December 2020, Democrats may pursue the budget reconciliation process to pass a larger bill on a party-line vote. Without bi-partisan support, getting the full $1.9 trillion will be a challenge but is not off the table. From what we are seeing, we would expect at least $1.25 trillion at some point this spring. The chart shown here illustrates the fiscal stimulus as a percentage of 3Q 2020 GDP. And do not forget the over $90 trillion of fiscal and monetary support issued around the world since COVID-19 began.

Watching the Money Supply

M2 is the measure of the total amount of money in circulation. The trend inflected in March 2020. Last week, the money supply re-accelerated, growing 26% year-over-year and has maintained a 28% growth rate since March 2020.

The U.S. Treasury General Account has nearly quadrupled in size from a year ago. With over $1.6 trillion in cash, the expectation is that this will drawdown over the summer. The implications are putting more money into investors and consumers hands. While a decline to 2019 levels may not be in the cards yet, there is a meaningful amount of cash to be released in the coming months.

Pressure on Longer-Date Interest Rates

Longer-date interest rates have steadily moved higher since August 2020. The chart below highlights various US interest rates since the start of 2019. While costs to borrow may be climbing, interest rates remain historically low and companies continue to refinance debt at lower rates.

Who is Winning?

A few areas of the market have emerged as out-performers early in 2021. Notably, gold is underperforming.  

Sources

1. The Wall Street Journal, “Senate Moves Forward With Biden’s $1.9 Trillion Covid-19 Relief Plan”, February 5, 2021.
2. The Wall Street Journal, “What’s in the $900 Billion Covid-19 Relief Bill”, December 27, 2020.
3. bea.gov, Federal Reserve Bank of St. Louis.
4. Bloomberg.
5. Bloomberg.
6. Bloomberg.
7. Bloomberg. YTD through 2/09/21.

Disclosures

Investment Solutions at Hightower Advisors is a team of investment professionals registered with Hightower Securities, LLC, member FINRA/SIPC, & Hightower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through Hightower Securities, LLC and advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources; as such, neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates.