Deliver us from Inflation

The Biden administration plans to increase corporate tax, thereby fueling fears of a  contractionary fiscal policy. Developed countries addressed the unprecedented economic crisis with expansionary monetary policies, resulting in a rampant public debt level.  A natural question that arises is who will pay the COVID-19 bill?

When the Trump administration and the Republican Senate validated a massive tax cut in 2017, markets saluted the action, and fiscal conservatism seemed to be the United States’ new doctrine. The crisis generated by the pandemic outbreak could easily trigger a significant increase in taxes to rebalance public spending. Such direct approaches might turn unpopular and decrease the approval rate of politicians in office.  There are few alternative avenues to bypass a thorough tax rise.

Emission of perpetual debt is a tool used previously by governments to finance war or crisis expenses. A perpetual bond is a fixed income security with no maturity date. Perpetual debt is economically equivalent to the levying of a tax of the same base. It represents nothing else than the transfer of the cost of the current crisis over future generations. Such a debt strategy is, in reality, a disguised fiscal illusion.
Inflation is another tool that governments can use to disguise an increase in taxes. Under an inflationary scenario, the currency devaluation will automatically lead to a depreciation of currency savings and a potential rise in commodities and assets prices.

Most analysts are betting on an inflationary scenario that would result in an increased cost of labour, commodities and assets. The only weakness of such a scenario is that it’s based on a recovery of demand in goods and services to the pre-COVID level. Nevertheless, the economy has already shifted, and many sectors went through a restructuring process. Thus, the demand in the real economy may never fully recover, thereby leading to a price contraction.

The current market rally may be a warning signal of an inflationary scenario, but it is not yet clear what are the silos of the economy will be impacted by inflation. Everything else equal is better to have a small joy than a big sadness.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Alan Greenspan, Chair of the Federal Reserve of the United States

Market overview

S&P 500 Index futures spiked in the last trading session before the Good Friday after the nonfarm payrolls data release. US nonfarm payrolls for March showed that 916,000 jobs were newly created while the unemployment rate is stable at around 6%.

The stronger than expected jobs report and the faster vaccination rollout are clear indicators that the US economy is preparing for reopening. If growth indicators remain green, the stock market has no other option than to reflect the recovery.

Bitcoin gained over 9K USD over the past week tracking gains in the equities market. The gold ounce is caught in a technical claw below 1750 USD.

Focus:

Goldman Sachs

Goldman Sachs’s stock climbed to a one-year high, doubling in value since March 2020. The market rally and the relatively low market volatility were fertile ground for the world biggest investment bank.

Broker-dealers make money when the market is volatile but not too volatile. It was the scenario that unfolded over 2020, thereby giving a free ride to Goldman’s traders. As long as the money printing continues, Wall Street banks will stay in positive territory.

Focus:

Deliveroo

Deliveroo, the London-based online food delivery company should have been one of the hottest IPOs of the year. Backed by the American giant Amazon, pumped by the rampant increase in turnover brought by the social distancing, Deliveroo ticked all the boxes for a successful listing.  Nevertheless, London's biggest IPO since 2011 unravelled in a ravishing disaster.

Investors became reluctant amid significant regulatory risks. The listing came only one week before the implementation of the IR35 reform in the UK, which will massively reduce the fiscal leeway for independent workers. Moreover, in early March, Uber reclassified its drivers as employees. The perspectives of the gig economy are not so bright and companies like Deliveroo are directly impacted.

Forex:

British pound gets heavier

Three months after the United Kingdom left the European Union, the Pound-to-Euro exchange rate climbed near 1.18, a record for 2021. Since January, the British pound is following a bullish pattern.  The accelerated vaccination campaign, the plummeting number of daily new infections and a foreseeable reopening of the economy as early as May drove the GBP to its highest level since February 2020. The trend is sustainable and there are good chances to see the GBP/EUR above 1.20.

Commodities:

Copper

Copper prices increased rampantly and doubled in value since March 2020. This pattern is followed by most industrial metals, including aluminium and nickel. The rally was fuelled by increased demand from China. If the US economy recovers faster than expected the demand for industrial metals could furtherly surge, thereby bolstering the market prices.

Market outlook

The Dow Jones ended the week above 33,000,  on a slightly positive trend compared to last week. While a market contraction is still probable, the central scenario in the short term is a rally fueled by optimism from a global economic recovery.

Bitcoin moved north near 60,000 USD after dipping close to 51,000 one week ago. If the market optimism remains we could see Bitcoin above 60K. Brent Crude remained in the same tunnel around 64 USD, and the likelihood of a further price progression faded away as the block of Suez did not have a big impact on price.