Fauci and Senate From Home: Will we spurt into inflation or slip into deflation?

Dr. Anthony Fauci made some pointed remarks from his home office yesterday. It was the first Senate hearing in which lawmakers attended via video conferencing as a number of attendees including Dr. Fauci, are in medical quarantine. He probably bust President Trump’s bubble.

Dr. Fauci believes that the death toll is higher than the reported 81,000 as he reckons many who died at home were not counted as COVID because they never got to the hospital.

He also emphasized that the pandemic is not under control as yet, but the country is moving in the right direction. Opening the economy too fast can result in a spike in COVID cases. He said there are eight promising vaccines under development, and some could show positive results before the end of the year.

In the last 90 minutes of trading yesterday, this report from Dr. Fauci really spooked the markets and it made a U-turn. These are reasons that I give now for why the markets fell, but I had made clear references to the market topping out close to yesterday’s highs. Will elaborate on the markets tomorrow.

The other major news was that the April core CPI rose just 1.4% year over year, staying below the Fed’s target rate of 2%. This was the biggest decline ever in April. However, food prices rose by 2.6% in April, but the core CPI does not include food and energy.

Dr. Lacy Hunt, former Economist at the Dallas Fed and chief economist at Hoisington, said the recovery from all the stimulus initially will look impressive, only because it’s an improvement from a catastrophic decline. He predicted that by the end of this year the US will face a Debt to GDP levels of up to 400%. The EU, Japan and China will be even worse off.

David Rosenberg, founder and president of Rosenberg Research said, “This is not fiscal stimulus with any future payback. It is government assisted life support. He warned of the economy falling off ‘a fiscal cliff’ if the relief programs aren’t extended at the end of summer.”

Effective yesterday, the Fed started buying ETFs made up of corporate bonds. The next could be corporate bonds and may be even equities.

Once the Fed gets directly involved in businesses and corporate sector, we are moving into a new type of capitalism.

But the conundrum that we are facing at the moment is, do we have a spurt of inflation due to locked up demand and supply chain issues? Or do we move into deflation straight away? If you noticed on Mar 26 as part of the Fed’s policy moves, they cut the reserve requirement ratio at banks to zero from 10%. This was a big move. The Fed desperately wants inflation, but we fear they may not get it. You can take a horse to the water, but you cannot make it drink.

The world is gripped in fear and with so much uncertainty about the future, the public will be in a saving mode besides spending for immediate essentials. So, deflation is the biggest issue going forward. If you have any doubts, ask Japan.

GDP is like being on a bicycle. If it is not moving forward and if it stops or turns down, the fall is faster. Don’t think the 1000 PhDs at the Fed can find a solution for the problem that we are in now.

Be safe. Be small. Be home.