The Fed, Regulation, and MMT - Irresponsible

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 22, 2021

You’ve got to hand it to the Federal Reserve. With the cleverness of a seasoned head coach – think Jim Boeheim leading Syracuse in the NCAA basketball tournament – they figured out how to accomplish a great deal while making it look like they didn’t have many tools at their disposal.

The market keeps expecting the Fed to bow to pressures to lift rates, and the Fed knows that it can’t keep interest rates at zero forever. But it wants to keep them there for as long as it can. So, how do they do that? Well, one way is to forecast higher inflation and real GDP growth so that if (and when) it occurs, you can say “well, that doesn’t surprise us at all.”

Follow the bouncing ball. At its last meeting, the Fed raised its 2021 real GDP forecast to 6.5% growth, while it expects 2.4% inflation (and argues that it wants inflation to rise above 2%), and unemployment is forecast to fall below 4% in 2022. Despite that outlook, most Fed members are still projecting no increases in short-term interest rates until 2024 or beyond.

As a result, the economy can accelerate to its fastest growth rate since the early 1980s and inflation can move above the Fed’s 2% target, all while the Fed sits back and yawns.

Of course, the bond market has a say in things, too. Rapid growth and higher inflation could push up long-term interest rates even further, and at that point the “bond vigilantes” may force the Fed’s hand. But the Fed feels confident that it has the tools to deal with this…specifically, asset purchases.

Right now, the Fed is buying $80 billion of Treasury debt each month and $40 billion of mortgage-backed securities. The Fed could raise the total every month, it could shift purchases to longer-dated Treasury debt, or it could buy fewer mortgages and more Treasuries. After all, the housing market is booming, so the Fed can withdraw support.

We think, in the end, the Fed will change its mix of bond buying and be pressured to lift rates before it now expects. Either way, the change in its forecast has bought some time before it does either. And that’s good, because the Fed is now wrestling with an entirely different issue. In order for the Fed to operate within an economic policy that certainly looks like Modern Monetary Theory, it must purchase trillions of dollars of government debt.

While many think the Fed can do this all on its own, it actually needs the US banking system to help. Big banks, and their primary dealers, buy bonds from the Treasury and then the Fed buys these bonds from banks by creating new reserves. So, the banks end up holding either the Treasuries – if the Fed doesn’t buy them all – or the new reserves (deposits) that the Fed created to purchase them.

Historically, no one cared how many Treasury bonds or reserves that the banks held because they are the most creditworthy assets on the face of the earth. Regulators only worried about personal or business loans or risky bond debt that banks held because, as we saw in 2008, when these loans start to default the banking system can get in trouble.

After 2008, regulators and politicians made banks hold more capital so that shareholders, not taxpayers, would be on the hook for loan losses. But they didn’t stop there. The Fed invented something called the Supplementary Leverage Ratio (SLR), which is a rule requiring banks to hold 5% capital against ALL their assets – including Treasury bonds and reserves.

In normal times, this new rule had little effect. But last year, when politicians decided to run up a $3 trillion dollar deficit to offset economic damage from the COVID shutdowns, the Fed stepped in and bought over $2 trillion of assets. This money flowed into the banking system, threatening to overwhelm banks with new money. If loan losses increased because of forced business closures, at the same time banks had to hold more Treasury debt and reserves because of Congressional and Fed actions, they might have breached the SLR capital requirements.

So, what did government do? It relaxed the SLR, and exempted banks from holding capital against Treasury debt and reserves. We don’t think banks should need to hold this extra capital against risk-free assets, especially when it is the government forcing them to hold them.

Unfortunately, late last week, at the urging of progressive lawmakers, the Fed announced it would not extend the exemption beyond March 31. Senator Elizabeth Warren said “The banks’ requests for an extension of this relief appear to be an attempt to use the pandemic as an excuse to weaken one of the most important post crisis regulatory reforms…” But this really isn’t true. While we can understand holding extra reserves to offset exposure to risky assets (and regulators can raise this requirement whenever they want), it makes no sense when required of non-risky assets.

What we think is really going on is that banks are making money by holding risk-free Treasury assets and it is Modern Monetary Theory that is forcing these bonds into the banking system. When the Federal Government spends money, and the Fed pays for it by printing new money, it expands the private banking system in the United States.

Attempting to take away any profits from banks for holding these Treasury bonds reduces returns for shareholders. And if banks eventually hit these new liquidity rule levels, they must stop accepting deposits, stop making business loans, or stop buying Treasuries.

The fear that banks may stop buying Treasuries caused a jump in longer-term interest rates last week (the 10-year Treasury jumped to over 1.7%). At the same time, bank stock prices fell. It’s simple math. If these banks are forced to hold more capital, then returns to shareholders will fall as they stop buybacks, limit dividends, or even issue more shares.

We think all this was a short-term over-reaction. Right now, banks have enough excess capital to keep absorbing federal debt. According to a Bloomberg News article, banks have roughly $200 billion in capital above the 5% required.

If we apply a 5% requirement to $200 billion, technically the banks could absorb another $4 trillion in Treasuries, reserves, or loans. But, remember, the government just passed another $1.9 trillion “rescue” bill which must be financed by borrowing, and the Fed is scheduled to buy $1.4 trillion in assets this year. On top of this, team Biden is saying it wants to pass another $2 trillion to $4 trillion infrastructure bill. And while this is going on, we expect real GDP to expand by 6% this year, which will certainly increase the demand for business loans.

In other words, as the future unfolds, the cushion of capital will be absorbed. Banks have said they face no near term problems and we don’t disagree. Lending can continue as the economy picks up. But in the longer-term this regulation threatens to undermine the government’s desire to spend more and more. That’s what makes the progressive push to renew the SLR a bit of a mystery. Why interfere with borrowing?

Maybe, and we are not trying to be conspiracy theorists here, progressives want to revert to a national bank, or have regulators gain even more controls over the private banking system than they already have.

Evidently, all of this may become moot. The Federal Reserve has said that it is reviewing these rules and will likely make modifications in the near future. While we expect the Fed to escape the dangerous downside to these new rules, we are also cognizant of the fact that the US has entered an unprecedented period of government regulation and growth.

Former Clinton Treasury Secretary Larry Summers has called it “the least responsible fiscal macroeconomic policy we’ve had for the last 40 years.” We think he is right about the irresponsibility, but wrong about the time period. It’s not the past 40 years, it’s the entire history of the United States. In the near-term, investors are safe from the stagflation we saw 40 years ago. But, as 2023 rolls around we aren’t so sure. Stay positive for now, the worries are long-term.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

3-22 / 9:00 am Existing Home Sales – Feb 6.500 Mil 6.320 Mil 6.220 Mil 6.690 Mil

3-23 / 9:00 am New Home Sales – Feb 0.875 Mil 0.872 Mil 0.923 Mil

3-24 / 7:30 am Durable Goods – Feb +0.7% -0.1% +3.4%

7:30 am Durable Goods (Ex-Trans) – Feb +0.6% -0.4% +1.3%

3-25 / 7:30 am Initial Claims – Mar 21 730K 735K 770K

7:30 am Q4 GDP Final Report 4.1% 4.2% 4.1%

7:30 am Q4 GDP Chain Price Index +2.1% +2.1% +2.1%

3-26 / 7:30 am Personal Income – Feb -7.2% -5.7% +10.0%

7:30 am Personal Spending – Jan -0.8% -0.7% +2.4%

9:00 am U. Mich Consumer Sentiment- Mar 83.6 83.0 83.0

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Plan Ahead for the Unexpected with Long-Term Care

Government programs, such as Medicare and Medicaid, and most private health insurance have limited coverage for long-term care services, and tapping into the money you have set aside or being dependent on a loved one for everyday tasks may not be viable options.

Planning for a long-term care event not only helps protect your financial future, but also your family’s emotional peace of mind. Hear from Rob Lowe, Maria Shriver, Maggie Gyllenhaal and other star-studded guests as they share their personal experiences with long-term care planning for their loved ones in this short video by Genworth. Watch Video

Be the architect of your own life and start the conversation by contacting me today. Together, we will develop a plan so you and your family feel prepared for whatever needs may arise.

Sincerely,

Matt Goodrich, Financial Advisor                

President, Goodrich & Associates, LLC

Branch Manager, RJFS

12 Bellwether Way, Suite 215 // Bellingham, WA 98225 // 360.671.0226
Matt.Goodrich@raymondjames.com // https://goodrichassociates.net

These policies have exclusions and/or limitations. The cost and availability of long-term care insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of long-term care insurance. Guarantees are based on the claims paying ability of the insurance company.

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Inflation and The Fed

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 15, 2021

We believe inflation is still, and always will be, a monetary phenomenon. It is defined as “too much money chasing too few goods and services” – but that doesn’t mean every period of higher inflation is going to look exactly the same.

Today’s case for higher inflation is easy to understand. The M2 measure of the money supply is up about 25% from a year ago, the fastest year-to-year growth in the post-World War II era. And while measures of overall economic activity such as real GDP and industrial production are still down from a year ago (pre-COVID), Americans’ disposable incomes are substantially higher, boosted by massive payments from the federal government with more “stimulus” on the way.

Right now, the consumer price index is up only 1.7% from a year ago. But, this year-ago comparison is set to soar to 2.5%, or higher, as we drop off the big declines in prices we saw during February - April 2020. The extent of this increase will likely be held back by the government’s measure of housing inflation (which only focuses on rental values, not home prices). Excluding rents, inflation will be more like 3.0% this year, and will likely move up by about another percentage point in 2022.

Producer prices are already up 2.8% from a year ago, with much faster growth in prices further up the production pipeline.

Does this mean we are heading back to double-digit inflation, bell-bottoms, disco balls, and the return of Jimmy Carter-style stagflation?

We think we are a long way from that. As Mark Twain once said, “History doesn’t repeat, but it often rhymes.” In the 1970s, if the Fed would have fought inflation harder early on, we would have never seen it hit double-digits. As a result, for now, we are thinking more of the late 1980s, not the 1970s.

Consumer prices rose only 1.1% in 1986 as oil prices collapsed, but then it revived in 1987, rising above 4.0% by late Summer. To fight this rise in inflation, the Fed raised short-term interest rates by about 140 basis points, to about 7.3% from 5.9% towards the end of 1986.

As the 10-year bond yield rose in 1987, the stock market took it on the chin and crashed in October. Alan Greenspan responded by providing as much liquidity as needed to restore confidence in the financial markets, and had the Fed cut shortterm rates through early 1988. The money supply didn’t soar, but short-term interest rates were lower than the trend in nominal GDP growth (real GDP growth plus inflation), signaling loose monetary policy.

Once the smoke cleared from the stock market crash, the Fed found itself behind in the inflation-fight. Inflation jumped to 5.4% in 1989, before Iraq invaded Kuwait, and then higher oil prices from the war pushed it to 6.3% after the invasion.

As a result, the Fed eventually lifted short-term rates to almost 10.0% to get inflation under control. The result was the tight-money-induced recession of 1990-91, which some still wrongly blame on the Iraqi invasion.

We don’t know if the late-1980s pattern is the one we’re about to follow. What we do know is that just like with the stock market crash of 1987, the Fed has demoted inflation as its top concern and pushed COVID recovery to the top of its list. Letting M2 growth rise to 25%, and holding rates at basically zero, in spite of an economic recovery, is the proof.

The biggest question is how quickly the Fed turns its attention to inflation as it builds and how far will they go to fight it. In the 1970s, it was double-digit inflation, in the 1980s, it was 5% to 6% inflation.

Either way, this Fed has made it clear that it will remain easy through 2022. As are result, we remain bullish on the economy and stocks, but cautious on bonds as inflation picks up. We all need to wait until 2023 to see what history we rhyme.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

3-15 / 7:30 am Empire State Mfg Survey - Mar 14.5 15.0 17.4 12.1

3-16 / 7:30 am Retail Sales – Feb -0.5% -0.5% +5.3%

7:30 am Retail Sales Ex-Auto – Feb +0.1% +0.7% +5.9%

7:30 am Import Prices – Feb +1.1% +1.2% +1.4%

7:30 am Export Prices – Feb +1.0% +0.8% +2.5%

8:15 am Industrial Production – Feb +0.4% +0.2% +0.9%

8:15 am Capacity Utilization – Feb 75.5% 75.7% 75.6%

9:00 am Business Inventories – Jan +0.3% +0.3% +0.9%

3-17 / 7:30 am Housing Starts – Feb 1.555 Mil 1.538 Mil 1.580 Mil

3-18 / 7:30 am Initial Claims – Mar 14 700K 720K 712K

7:30 am Philly Fed Survey – Mar 24.0 25.7 23.1

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Powell Disses Uncle Milty

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 1, 2021

Those of us who are concerned about inflation increasing faster than the Federal Reserve anticipates are focusing on the rapid increase in the M2 measure of the money supply. This measure has soared since COVID-19 hit the US, up about 25% from a year ago, the fastest growth on record.

It is the key difference between the current situation and the situation in the aftermath of the Financial Crisis of 2008-09. During that first round of Quantitative Easing and big spending bills (like TARP), the M2 measure remained subdued because the Fed kept banks from lending, in part by raising capital standards. As a result, inflation remained subdued as well.

This is consistent with what the late great economist Milton Friedman (Uncle Milty) taught us. He said, watch M2: Nominal economic growth and inflation will tend to track M2 broadly over time, adjusted for any fluctuations in the velocity of money, the speed with which money circulates through the economy.

But Fed Chairman Jerome Powell disagrees. As he recently said, “When you and I studied economics a million years ago, M2 and monetary aggregates seemed to have a relationship to economic growth,” but, “right now ... M2 ... does not really have important implications. It is something we have to unlearn I guess.” In other words, Uncle Milty’s theories don’t work.

Wow! A Federal Reserve Chairman who casually dismisses the monetary lessons of Milton Friedman does so not only at his own peril but the country’s.

The yield on the 10-year Treasury note is already up about 50 basis points this year even though short-term interest rates haven’t budged and aren’t expected to do so anytime soon. Meanwhile, analysts are marking up their estimates of real GDP growth this year.

We’re not saying inflation is going to suddenly surge to 25% (the same pace as M2 growth) or anywhere close. COVID19 led to a crash in velocity and it will take time to recover, which also gives monetary policymakers time to reduce the pace of M2 growth before a serious inflation problem takes hold.

But that’s different from saying the money supply doesn’t matter at all, which was the message Powell sent.

The US economy is healing faster than expected, while the US Congress and President Biden are intent on pouring at least one more massive government spending stimulus into the system. They are doing this even though the pandemic is waning, and a double-dip recession seems highly unlikely.

The big risk for the next couple of years is an upward surge in inflation that’s larger than anything we’ve experienced in the past couple of decades. We still project 2.5% CPI inflation for 2021, as the government’s measure of housing rents holds the top-line inflation number down. But commodity prices are likely to continue rising and overall inflation will as well in 2022 and beyond. There is an old saying: When the Fed is not worried about inflation, the market should be worried.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

3-1 / 9:00 am ISM Index – Feb 58.6 59.0 60.8 58.7

9:00 am Construction Spending – Dec +0.7% +1.0% +1.7% +1.0%

3-2 / afternoon Total Car/Truck Sales – Feb 16.2 Mil 16.1 Mil 16.6 Mil

afternoon Domestic Car/Truck Sales – Feb 12.4 Mil 12.4 Mil 12.8 Mil

3-3 / 9:00 am ISM Non Mfg Index – Feb 58.6 58.9 58.7

3-4 / 7:30 am Initial Claims – Mar 2 755K 820K 730K

7:30 am Q4 Non-Farm Productivity -4.7% -4.6% -4.8%

7:30 am Q4 Unit Labor Costs +6.7% +6.4% +6.8%

9:00 am Factory Orders – Dec +1.8% +2.4% +1.1%

3-5 / 7:30 am Non-Farm Payrolls – Feb 180K 140K 49K

7:30 am Private Payrolls – Feb 190K 130K 6K

7:30 am Manufacturing Payrolls – Feb 10K 0 -10K

7:30 am Unemployment Rate – Feb 6.4% 6.3% 6.3%

7:30 am Average Hourly Earnings – Feb +0.2% +0.2% +0.2%

7:30 am Average Weekly Hours – Feb 34.9 34.9 35.0

7:30 am Int’l Trade Balance – Dec -$67.4 Bil -$67.9 Bil -$66.6 Bil

2:00 pm Consumer Credit– Jan $12.0 Bil $13.0 Bil $9.7 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Required Minimum Distribution Reminder

February 22, 2021

Dear Friends and Clients,

As a reminder, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed last year, suspended required minimum distributions (RMDs) for 2020. The relief provided by this provision was broad and extended to traditional IRAs, SEP IRAs and SIMPLE IRAs, as well as 401(k), 403(b) and governmental 457(b) plans. Both retirement account owners and beneficiaries taking stretch distributions were allowed to bypass RMDs for the calendar year of 2020.

So, what does this mean for this year? Since last year’s exemption hasn’t been extended, anyone who is 72 or older in 2021 must make a withdrawal before year-end (December 31). If you turn 72 this year, you may delay your first withdrawal until April 1, 2022. As you know, it is important that we initiate your distribution by the appropriate deadline, as failure to withdraw your RMD can result in an IRS penalty of 50% of the amount that should have been withdrawn.

So, while you may have all year to withdraw the money, you can always calculate your 2021 RMD now and plan ahead using the life expectancy tables provided by the IRS. As a refresher, your required withdrawals are based on the balance in your retirement savings account(s) as of Dec. 31, 2020 and the applicable life-expectancy factor based on your current age.

Depending on your tax situation, you may want to direct the RMD amount toward a Qualified Charitable Distribution (QCD). Briefly, a QCD, which can be made only by IRA participants who are at least 70½, may be as high as $100,000. The funds must be sent directly to the qualified (IRS-approved) charitable organization. In most cases, you will report the QCD as a nontaxable distribution from your IRA on your tax return. If you wish to take advantage of this provision, please let me know and I will make note of it.

Please contact me at 360.671.0226 if you have any questions about your 2021 RMD as part of your overall retirement plan.

Sincerely,

Matt Goodrich, Financial Advisor                

President, Goodrich & Associates, LLC       

Branch Manager, RJFS 

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Goodrich & Associates, LLC. is not a registered broker/dealer and is independent of Raymond James Financial Services Inc. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. and Goodrich & Associates, LLC.

It's Not a Bubble

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

February 16, 2021

Ever since the stock market bottomed in 2009 during the financial crisis, people have been coming up with reasons why the bull market was about to end. We heard every reason – Brexit, the end of Quantitative Easing, too much debt, COVID, etc. – and while we understood each may be a cause for consternation, we focused on valuations, which suggested the bull market would continue. Over time, math wins.

After the recovery in stocks from the 2020 lockdowns (and especially the latest surge in equity values) some analysts have been saying the US stock market is in a bubble, maybe even like the one it reached in March 2000. Some buttress this claim with the so-called “Warren Buffett Model,” which says the market could be overvalued when total stock market capitalization exceeds GDP, like it does now.

Meanwhile, others are convinced that the social media fueled jump in some very small stocks (like Gamestop) and commodities (like silver) signal a building bubble.

But a bubble this is not. At least not yet. The Buffett Indicator is not reliable, the Reddit-fueled burst in some stock prices is very narrow, and signals more of a change in the investing market than any serious sign of fundamental issues.

The bull market still has further to run, and we stand by our year-end projection for the S&P 500 of 4200.

The Federal Reserve has the US economy awash in liquidity, with the M2 measure of the money supply up 25% from a year ago. Another very large fiscal “stimulus” package is wending its way through Congress, and is likely to hit the President’s desk relatively soon.

Meanwhile, the vaccine for COVID-19 continues to rollout, while cases, hospitalizations, and deaths are all falling so rapidly that teachers unions in many states are being forced to move the goalposts and come up with new reasons why they can’t go back to teaching in-person classes.

All of this is reason to believe 2021 is a hard year to be out of the equity market. Yes, tax rates are likely to rise, but not in 2021. Have you noticed how few politicians are even mentioning this anymore? With businesses shut down and unemployment high, tax hikes will likely be put off until 2022.

So, in short, we are still bullish. Profits are headed up and have much further to go, while interest rates would have to move substantially higher to make our cap profits model turn bearish. Yes, the 10-year Treasury yield hit 1.25% last night, but it would have to go to at least 2.0% or higher before it’d be a headwind for equities.

Eventually the bull market will come to an end. Maybe it’ll be the much faster money growth translating into persistently high inflation and interest rates, perhaps tax hikes will go farther and be more damaging than we think. Perhaps, some exogenous factor like a mutant strain of COVID forces another shutdown. Perhaps, perhaps, perhaps.

But the market is still undervalued, the Fed is easy, stimulus will boost the economy by borrowing from the future, and COVID data are very positive. We would never say that anything is certain, or that a correction won’t happen, but the stock market is nowhere near bubble territory.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

2-16 / 7:30 am Empire State Mfg Survey – Feb 6.0 7.6 12.1 3.5

2-17 / 7:30 am Retail Sales – Dec +1.0% +1.6% -0.7%

7:30 am Retail Sales Ex-Auto – Dec +0.9% +1.1% -1.4%

7:30 am PPI – Jan +0.4% +0.4% +0.3%

7:30 am “Core” PPI – Jan +0.2% +0.3% +0.1%

8:15 am Industrial Production – Jan +0.4% +0.4% +1.6%

8:15 am Capacity Utilization – Jan 74.8% 74.7% 74.5%

9:00 am Business Inventories – Nov +0.5% +0.5% +0.5%

2-18 / 7:30 am Initial Claims – Feb 13 773K 788K 793K

7:30 am Housing Starts – Jan 1.658 Mil 1.690 Mil 1.669 Mil

7:30 am Import Prices – Jan +1.0% +1.1% +0.9%

7:30 am Export Prices – Jan +0.8% +0.7% +1.1%

7:30 am Philly Fed Survey – Feb 20.0 19.6 26.5

2-19 / 9:00 am Existing Home Sales – Jan 6.610 Mil 6.550 Mil 6.760 Mil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

Immunity is Closer Than You Think

First Trust Economic Research Report

Brian S. Wesbury - Chief Economist

February 10, 2021

While the US has been a focus for criticism throughout the COVID-19 pandemic, its vaccine rollout has so far been the envy of the world. Since Operation Warp Speed eliminated many of the bureaucratic hurdles to FDA approval and helped deliver a vaccine in record time, the US has been steadily growing its distribution system. Currently, about 1.5 million Americans are being vaccinated a day, putting us on pace to easily beat the Biden Administration's original goal of 100 million doses in 100 days. Cumulatively, 44 million vaccine doses have been administered, with 10 million people having gotten the recommended two doses that offer 90%+ effectiveness. That means roughly 34 million Americans, or 10% of the population, have some level of immunity to the virus.

While controversial early in the pandemic, many are now more familiar with the term herd immunity, which represents a hypothetical threshold of the population that needs pre-existing immunity to a virus through antibodies in order for transmission to break down. The scientific consensus for that threshold seems to be about 70%, so from a vaccine-based measure we are about 1/7th of the way there.

However, we think that looking at vaccine doses alone is leaving out a huge part of the picture. We know that prior infection from COVID-19 generates an immune response, and that immunity seems to be long lasting. Recent studies have proven that immunity lasts 3-6 months, but even that is probably understated. There are currently 100 million confirmed cases of COVID-19 worldwide, but only 47 confirmed cases of reinfection. Given that the pandemic has been raging for over 6 months and reinfections are still exceedingly rare, a reasonable conclusion is that antibodies from prior infection will be an important component to reaching herd immunity.

So, how many people have had COVID-19 in the US? The official count of positive tests is currently 26.9 million according to the COVID Tracking Project. But this leaves out a huge chunk of Americans who have had the virus and never got an official test that shows up in the national statistics. The CDC currently estimates that we only find about one out of every four infections, meaning north of 100 million Americans have likely been infected at some point in the past year and now have antibodies from the virus.

By our calculations which you can see in the chart above, including official positive tests, estimated additional infections, and vaccine doses, shows that roughly 40% of the US population currently has antibodies. That means we are currently over halfway to the 70% goal, and projecting vaccinations forward shows we are likely to get the rest of the way there in mid-late April as vaccines continue to do the heavy lifting.

While this is bound to include some double-counting, with people who have been previously infected getting a vaccine for example, it's a much better measure than just looking at vaccine doses alone when estimating where we are in the fight against this terrible virus. In fact, with recent COVID data showing daily cases and hospitalizations are down by 57% and 36% respectively since the peak, we may already be hitting a point where preexisting immunity is playing a role in driving down transmission.

This in turn is positive news for the US economy in 2021 because it means we will be able to roll back the pandemic restrictions that remain the biggest impediment to a further recovery faster than many expect. Stay positive and stay invested, immunity to COVID-19 is closer than you think.

This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security. The opinions of Brian S. Wesbury, Robert Stein and Strider Elass are independent from and not necessarily those of RJFS or Raymond James.

The Return of Inflation

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

February 8, 2021

Inflation is not dead. It is not gone. It has not been tamed. We know it seems like it, especially after the past few decades which generated in many an “inflation-complacency” that feels justified. After all, following the 2008 Financial Panic, many predicted Quantitative Easing would cause hyperinflation.

When the Fed boosted the Monetary Base by more than $3 trillion dollars during Quantitative Easing 1, 2 & 3, and the federal budget moved to a huge deficit, gold and silver commercials proliferated. So did predictions of a collapsing dollar.

But inflation never came. Since the end of the 2008-09 financial panic, the Consumer Price Index has increased by an average of just 1.7% per year, falling short of the Fed’s (conjectural) 2% target. So, what happened?

The answer: Boosting the monetary base is not the same as boosting the amount of money circulating in the economy. Milton Friedman taught us to watch the M2 measure of the money supply.

During the first period of QE, from 2008 to 2016, the Fed bought trillions of dollars of bonds, but also increased bank regulation and capital requirements. As a result, banks ended up holding excess reserves and the money supply remained calm, with M2 growing, on average, about 6% per year, similar to the growth rate in the 1990s.

During the 2020 COVID-induced round of Fed money printing, instead of using QE to put reserves in the banking system, the Fed financed government programs to fund loans to businesses and direct payments to individuals. As a result, M2 has grown 26.3% in the past year, the fastest annual growth we can find in US history, and roughly double the pace of M2 growth the US experienced during the 1970s.

According to those who believe in Modern Monetary Theory – which isn’t modern, and is just vaguely a theory - the US can increase real output enough to absorb it. In other words, they say that while inflation is “too much money chasing too few goods” – they expect the output of goods to increase enough to keep inflation low.

We find this impossible to believe. In fact, we think many are living in denial. Inflation is already on the rise. In the past six months, the Consumer Price Index is up 3.6% at an annual rate and if it rises a modest 0.2% per month between January and May, it will be up 3.4% over 12 months. Part of this is because COVID shutdowns led to weak inflation in early 2020, but we expect inflation to move higher in 2021.

But, in addition to M2 growth, incomes and savings have increased, while production has not. Demand is exceeding supply. All personal income combined – wages & salaries, employee benefits, small business income, rents, interest, dividends, and transfer payments – was up 6.3% in 2020 versus 2019. Total after-tax income was up 7.2% in 2020, the most for any year since 2000.

Combined, Americans saved about $2.9 trillion in 2020, more than doubling the previous record high of $1.2 trillion in 2018. As of the third quarter of 2020, the amount Americans held in checking accounts, savings accounts, time deposits, and money market funds was up $2.8 trillion from the year prior. Add another $1.9 trillion in federal government stimulus spending (borrowing from the future, to spend today) and the US is awash in cash, much of which is funded by Washington’s money printing.

Unfortunately, in spite of a strong recovery in output, industrial production is 3.3% below pre-COVID levels, while real GDP is 2.5% below. In other words, demand is OK, it’s supply that’s still hurting – a perfect recipe for inflation.

We can see the impact of this affecting markets. The 10- year Treasury yield has risen from roughly 0.6% in May 2020 to 1.2% today. The gap between the yield on the normal 10- year Treasury Note and the inflation-adjusted 10-year Treasury Note suggests investors expect an annual average increase of 2.2% in the consumer price index (CPI) in the next ten years, and those expectations are rising.

Bitcoin, while we doubt it will ever be real money, hit a record high today reflecting fears of lost dollar purchasing power. Commodity prices continue to surge.

All this money printing threatens to eventually create a sugar high in equities. We aren’t there yet, but markets are floating on a sea of new money. In fact, its more like a tsunami! Inflation hedges (real estate, commodities, materials companies) will do well. Traditional fixed income (long-term bonds) is at risk. The return of inflation because of misguided policy choices is a very real threat to the long-term health of the US economy.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

2-10 / 7:30 am CPI – Jan +0.3% +0.3% +0.4%

7:30 am “Core” CPI – Jan +0.2% +0.2% +0.1%

2-11 / 7:30 am Initial Claims – Feb 8 760K 803K 779K

2-12 / 9:00 am U. Mich Consumer Sentiment- Feb 80.9 79.5 79.0

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Important Information For Tax Season 2020

Dear Friends and Clients:

As you prepare for tax season, here is some information that you may find beneficial.

2020 Form 1099 mailing schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages

• February 15 – Mailing of original Form 1099s

• February 28 – Begin mailing delayed and amended Form 1099s

• March 15 – Final mailing of any remaining delayed original Form 1099s

Additional important information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows us to extend the mailing date until March 15, 2021, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts

• Processing of original issue discount and mortgage-backed bonds

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options

If you do have a delayed Form 1099, a preliminary statement will be generated and can be viewed in Client Access for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2020.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

You can find additional information at raymondjames.com/wealth-management/why-a-raymond-james-advisor/client-resources/tax-reporting.

I hope you find this additional information helpful. Please call me if you have any questions or concerns about the upcoming tax season.

Sincerely,

Matt Goodrich, Financial Advisor

President, Goodrich & Associates, LLC

Branch Manager, RJFS

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Material prepared by Raymond James for use by its advisors.

January Market Review

January Market Review

Dear Friends and Clients,

February begins with a stack of important economic scorecards. Among them are the last of the fourth-quarter corporate earnings reports, last week’s assessment of the 2020 gross domestic product (GDP), unemployment figures, consumer spending, as well as all the other regular reports that give us a snapshot of our recent economic history.

We’ve also seen our first glimpses – and first tangible evidence – of the new administration’s priorities. And adding to the list is a new scorecard – a tally of the first full month of COVID-19 vaccinations.

It’s a new year, but the same drivers of volatility remain: COVID-19, vaccine progress and politics. The S&P 500 had been up approximately 2.5% before a pullback on the last day of the month sent it lower for January – the first negative month since October. The broad equity markets declined in January despite the S&P 500 setting five new record highs during the month, and volatility “woke up,” to some degree on short-sell activity, ending the month at 32.4, up approximately 37% since the end of December. Four out of the 11 S&P 500 sectors were positive for the month, including some (real estate, energy) that had been lagging due to COVID-19 lockdowns.

The pace of the economic recovery slowed in the final quarter of 2020, based on a smaller quarterly rise in GDP than we saw in the third quarter, ending the year 2.5% lower than the fourth quarter of 2019. Consumer spending growth was also up, but limited, constrained by the pandemic. Raymond James Chief Economist Scott Brown said he expects a sharp rebound in the latter part of the year as the distribution of vaccines continues.

The anticipation of another stimulus package is supportive of equity markets, noted Chief Investment Officer Larry Adam, with the expectation it will build a bridge to a more normal time by the second half of the year.

So again, we look to Washington. President Joe Biden has proposed a $1.9 trillion stimulus package, and while the administration seems to be seeking bipartisan support, the majority-rules budget reconciliation process could allow a unilateral approach in the end. The month to watch will be March, Washington Policy Analyst Ed Mills said, which is when many elements of the December stimulus package are set to expire. One thing to remember, Mills said, is that “significant action in D.C. is frequently impossible right before becoming inevitable.”

So, as we work our way through these extraordinary times toward a more ordinary future, let’s take a look at the numbers since the start of the year.

Performance reflects price returns as of market close on Jan. 29, 2021.

Other developments throughout the economy and the world follow similar contours.

The oil wait and see

The energy sector is closely watching the new administration’s changes in policy. While moves intended to address climate change are the largest catalyst for change, this is not the only factor. For example, relations with Iran could have significant effects on the oil market if the Biden administration seeks to change course by reengaging with the nuclear agreement and relaxing sanctions placed against the nation in 2018, which sharply decreased oil exports. Timing is a question mark. Though many expect quick action on this front, it could instead be a late-year priority, after Iran holds its presidential elections on June 18.

Pandemic environment drives international markets

British and European markets look similar to their counterparts in the U.S., with limited gains in January following strong showings in November and December. Many European countries have shifted back into lockdowns and only the U.K. has shown strong actions regarding COVID-19 vaccinations. The International Monetary Fund pulled back its 2021 growth estimates.

Asian markets had a much stronger month in comparison, with China reporting positive economic data. Dispelling rumors of a pullback on stimulus, China now appears to be continuing its push to maximize growth through the year. 

Late-year expectations raise bond yields

Fixed-income yield curves steepened as long-term rates went up while short-term rates stayed essentially flat. Demand for higher yields tightened high-yield corporate spreads, continuing a trend since September.

Fear of inflation is starting to percolate on assumptions made about individuals’ stimulus spending, but that is likely overstated, Senior Fixed Income Strategist Doug Drabik said. Pockets of inflation are possible, but “there is no mounting evidence to think inflation greater than 2.5% is around the corner.”

The bottom line

• The surge in COVID-19 cases and increased restrictions has moderated the pace of the economic recovery, but widespread vaccinations should help to propel a sharp rebound in consumer services (and the overall economy) in the second half.

• The market continues to be driven by positive sentiment about a return to normal by the middle of the year, assuming a strong vaccination rollout.

• The possibility of fiscal stimulus remains a powerful carrot to some of the positive investment sentiment. How it comes together may tell us a lot about how the new administration works and whether Congress has created a new dynamic with both houses controlled by one party.

I hope you and yours continue to remain safe and well as we cope with the difficulties affecting the world. Thank you for your continued trust as we navigate this complex era together. If you have any questions, please do not hesitate to reach out.

As a reminder, the U.S. markets and our office will be closed February 15th in observance of Presidents’ Day. 

Sincerely,

Matt Goodrich, Financial Advisor                

President, Goodrich & Associates, LLC      

Branch Manager, RJFS                                 

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Office and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges which would reduce an investor’s returns. Small cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

 Material prepared by Raymond James for use by its advisors.

AOC and Ted Cruz, Agree!

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

February 1, 2021

Yes, 2021 is starting off as crazy as 2020. They don’t agree on the Green New Deal, or Socialism, but Ted Cruz and AOC both agree that limiting investor access to markets is a mistake. In case you missed it, last week, Robinhood, a new online trading platform that marketed itself as democratizing investment, stopped investors from buying certain stocks.

They did this during a “short squeeze” that apparently pitted small investors who bought stocks that hedge funds had sold short. The result: these stock prices sky-rocketed. Billions were made and billions were lost. What actually happened: Who lost money and who made money is still being sorted out. What we do know is that some trading platforms locked investors out.

One explanation for keeping small investors from buying certain stocks was that their inexperience made them vulnerable to a big drop in the stock price.

To be clear, we have no idea what “fair value” is for the companies at issue. And, yes, there are very inexperienced “investors” in this market. However, both buyers and sellers influence market prices…and the result of those actions, no matter how much volatility must be allowed to play out.

Short-sellers sell shares of companies they don’t own, with a promise to buy the shares later so they can complete the transaction. In general, if the price of the stock goes down after they short it then they make money; if it goes up, they lose money. Sometimes shorting can overwhelm a security and send its price well below fair value.

At that point, investors who short a security become vulnerable. Remember, being short a stock means there will be future demand, so when buyers push up a stock price it can set off a stampede sending the price even higher. Shorts rush to unwind their positions while other investors, knowing the shorts are vulnerable, rush to bid the stock price up even higher.

Some say this “short squeeze” is bad because it can drive prices above fair value. But what this ignores is that a periodic squeeze is free-market medicine that prevents short sellers from getting to pick and choose which stocks they want to drive below fair value. Imagine a world in which a squeeze on the shorts were impossible, where they would never risk a major loss. That’s not a world that investors should want to live in.

We also can’t help but notice that some of those bashing the small investors who are making short sellers take a major loss, claiming it’s because some stock prices are now above fair value, were also on the side of the short sellers in 2008-09 when they drove the value of mortgage securities well below fair value. Back then, they supported mark-to-mark accounting because it was supposedly more transparent, even though it distorted prices for mortgage securities and led to a financial implosion that cost regular people millions of jobs.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

2-1 / 9:00 am ISM Index – Jan 60.0 59.9 58.7 60.5

9:00 am Construction Spending – Dec +0.8% +1.7% +1.0% +0.9%

2/2 / afternoon Total Car/Truck Sales – Jan 16.1 Mil 16.3 Mil 16.3 Mil

afternoon Domestic Car/Truck Sales – Jan 12.6 Mil 12.6 Mil 12.7 Mil

2-3 / 9:00 am ISM Non Mfg Index – Jan 56.7 57.2 57.7

2-4 / 7:30 am Initial Claims – Jan 30 830K 830K 847K

7:30 am Q4 Non-Farm Productivity -2.9% -4.7% +4.6%

7:30 am Q4 Unit Labor Costs +3.8% +5.7% -6.6%

9:00 am Factory Orders – Nov +0.7% +1.0% +1.0%

2-5 / 7:30 am Non-Farm Payrolls - Jan 50K 50K -140K

7:30 am Private Payrolls – Jan 35K 30K -95K

7:30 am Manufacturing Payrolls – Jan 30K 0 38K

7:30 am Unemployment Rate – Jan 6.7% 6.7% 6.7%

7:30 am Average Hourly Earnings – Jan +0.3% 0.0% +0.8%

7:30 am Average Weekly Hours - Jan 34.7 34.7 34.7

7:30 am Int’l Trade Balance – Nov -$65.7 Bil -$65.8 Bil -$68.1 Bil

2:00 pm Consumer Credit– Dec $12.0 Bil $15.0 Bil $15.3 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Weekly Economic Monitor -- GDP

Economic Commentary | Published by Raymond James & Associates

Scott J. Brown, Ph.D.

January 29, 2021

GDP – Real GDP rose at a 4.0% annual rate in the advance estimate for 4Q20, a much more moderate pace of recovery than was seen in the third quarter. Details were mixed, but consumer spending showed a significant loss of momentum and monthly figures reflected weakness in November and December. The surge in the pandemic and efforts to contain it dampened holiday sales and travel. This may, in turn, give way to seasonally adjusted strength in 1Q21, as there should be less of a fallback in the unadjusted data. However, as the Federal Open Market Committee noted in its January 27 policy statement, “the path of the economy will depend significantly on the course of the virus, including progress on vaccinations.”

This Week – There is more than the usual uncertainty in the Employment Report. Annual benchmark revisions to the establishment survey data (payrolls, hours, wages) are expected to be small, but seasonal adjustment could exaggerate the January figures. The January ISM surveys should reflect moderate strength, although the headline figures are likely to remain exaggerated by the pandemic’s impact on supplier delivery times.

To view the the entire report click on the link below!

VIEW FULL REPORT

IMPORTANT INVESTOR DISCLOSURES

This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members. This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.

10 Themes That Will Affect Your 2021 Investing

What can investors expect this year? Positive (but unsteady) economic growth, a powerful boost in earnings and continued success for information technology stocks, says Raymond James Chief Investment Officer Larry Adam.

The first-ever postponement of the Summer Olympics exemplifies the depths of disruption the pandemic has caused. However, the concept of the torch is associated with hope, light and strength, an excellent metaphor for the rescheduled start date – July 23, 2021 – likely coinciding with the sustainable reopening of many parts of the world.

As a salute to everyone that has done their part to make this happen – from scientists to frontline workers to the athletes themselves – and to set our sights on a more uplifting time period, we’ve chosen the Summer Games as the backdrop for our ten themes for 2021.

1. Global synchronized economic recovery: Rowing in the same direction

Nineteen of the twenty largest economies in the world experienced a contraction in growth in 2020, but we expect the entire crew to see positive growth in 2021. The coxswain of the recovery will be global central banks, led by the Federal Reserve (Fed), as its decisions to keep interest rates low and liquidity robust will ultimately dictate the power and pace of the global economic recovery.

2. U.S. economic recovery will take on a triathlon

The recovery will be defined by transitional periods with varying paces throughout the year. At the onset, worsening COVID trends and paused reopening processes will prove to be a challenge. Analogous to swimming, the first leg of the triathlon, the pace will be slower and the waters may be choppy. However, by the spring, economic growth will accelerate as the dissemination of vaccines push the pedal for more businesses to safely reopen. Toward the end of the year, we expect to reach a steadier stride, finishing at a slower but more sustainable pace.

3. Keeping portfolios en garde despite low yields

Fencing requires agility, coordination, balance, and timing – the same skill set global central banks displayed when adjusting interest rates in light of the COVID-19 pandemic. This year, acceleration in economic growth should thrust the yield back to the 1.50% level by year end, but low inflation, central bank buying, strong foreign demand and the growing economic sensitivity to higher yields will parry yields from returning to levels near 2% on a sustainable basis.

4. Earnings will do the heavy lifting

We remain positive on equities over the next 12 months, but it will be a powerful earnings rebound (20%+ earnings per share growth in 2021) that will raise the bar. Earnings are often revised higher in the period following a recession, so when combined with tailwinds such as multiple vaccines and additional fiscal stimulus, the S&P 500 will likely reach 4,025 by year end.

5. Info tech: Hitting the bullseye of our sector target

Archery incorporates both accuracy and precision, the same qualities we aim to possess as we determine our preferred sectors. Information technology has been the top-performing sector for three of the last four years, and we believe the rollout of 5G and the manner in which the pandemic altered the way companies conduct business will be additional arrows in the sector’s quiver. Given the tech-based adaptations in other industries, we believe investors can still score points with the healthcare, consumer discretionary, communication services and industrials sectors.

6. Wave of socially responsible investment not about to break

The sport of surfing began prior to 1770, but it will make its Olympic debut this year. Similarly, the principals of environmental, social, and corporate governance (ESG) investing have been practiced for decades, but between the Biden administration and the lingering impacts of the COVID-19 pandemic, the ESG wave is expected to grow.

7. Exposure abroad will be a balancing act

The uneven bars are one of the four events for female gymnasts, but they are also prevalent in our equity allocation preferences, as our bias toward U.S. equities remains intact. The broad-based global economic recovery would typically lead us to be more flexible with international exposure, but the sector allocation in Europe has garnered the region a few deductions. However, our preferred sectors, along with expectations for a weakening dollar and attractive valuations, present a favorable outlook for emerging market equities.

8. U.S. dollar will not have the inside track

The global economy’s recovery, ongoing aggressive fiscal and monetary policy action, a growing budget deficit, and – more likely than not – easing trading restrictions with China and our allies will all serve as hurdles in the dollar’s path, preventing it from moving higher. Ultimately, the weakening of the dollar may pass the baton to emerging market equities, emerging market bonds, commodities and U.S. multinational companies.

9. Oil demand to catch the crosswind of economic activity

2020 was anything but smooth sailing for the oil industry, as the Saudi-Russia oil price war and virus-induced lockdowns weighed heavily on oil prices. In 2021, a sustainable return to normality is expected to cause the best rebound in global oil demand since 1973. The gradual rise in oil prices (WTI Crude $60 per barrel year-end target) should put wind in the sails of the industry’s lagging recovery, but with the environment a top campaign issue for president-elect Biden, a renewable energy storm is on the horizon.

10. Keeping asset allocation parameters on the fairway

We expect overall market volatility to be more palatable in the year ahead, driven by the gradual reopening of the economy, more stable monetary policy and less political risk. But just because volatility won’t be on par with that of 2020 does not make adherence to asset allocation parameters any less important. With pullbacks still a natural occurrence for the equity market, it is critical that investors have a strategy in place for when the times get rough so that emotionally-driven investment decisions don’t lead portfolios into hazards.

All expressions of opinion reflect the judgment of Chief Investment Office and are subject to change. Investing involves risk including the possible loss of principal. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer’s credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. Investments & Wealth Institute™ (The Institute) is the owner of the certification marks “CIMA” and “Certified Investment Management Analyst.” Use of CIMA and/or Certified Investment Management Analyst signifies that the user has successfully completed The Institute’s initial and ongoing credentialing requirements for investment management professionals. © 2021 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

Can Massive Deficits Really Be Financed?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

January 25, 2021

The budget deficit for fiscal year 2020, which ended 9/30/2020, was $3.1 trillion, the highest ever on record in dollar terms, and the highest relative to GDP since World War II. This year the deficit will be even larger.

Before the bipartisan “stimulus” compromise passed in December, congressional budget scorekeepers estimated the fiscal year 2021 budget deficit at $1.8 trillion. Now, with that additional $900 billion in spending, and the Biden Administration promoting an additional $1.9 trillion stimulus early this year, we expect the budget deficit for FY21 to be at least $4.0 trillion.

Superficially, a $4.0 trillion budget gap doesn’t seem much different than last year’s deficit. But there is one key difference.

Last year, while the budget deficit was $3.1 trillion, the amount of debt held by the public increased $4.2 trillion, due to the effects of federal lending programs for students and small businesses.

But the Federal Reserve increased it holdings of Treasury securities by $2.3 trillion. As a result, buyers outside the Fed had to purchase $1.9 trillion in federal debt, which wasn’t substantially higher than $1.6 trillion they had to absorb back in 2009.

This year, with the Fed scheduled, according to its announcements, to buy $1.0 trillion in Treasury debt – the current pace is $80 billion a month – private buyers will have to absorb about $3.0 trillion in federal debt. This is substantially greater than last year and double the amount in 2009.

We are not trying to say the sky is about to fall. The world is awash in liquidity, much sovereign debt has negative yields, and the Fed may just increase its purchases of US Treasury debt.

Looking back over the past 20 years, there is no consistent relationship between a higher amount of debt issuance and higher interest rates. In addition, the interest cost of the federal debt is still very low by historical standards and private companies may dial back borrowing as many of them have plenty of cash already after a year of extremely low interest rates.

But…and this is a big but…the US is moving into uncharted territory by increasing debt this rapidly. Last year, the Fed absorbed a large part of the increase in debt. This year, it looks like the Fed will absorb a much smaller share, which means the Treasury has to find many more buyers.

This attempt at following Modern Monetary Theory – a belief that a country can print and spend at will – has never worked before. It always ends up with significantly bad outcomes, which include devaluation and inflation.

However, these are likely longer-term problems. In the short-term this second year of fiscal profligacy will not cause serious problems for the economy. Moreover, we hope that the surge in deficits is followed by some measures that control spending growth beyond the COVID19 emergency and the immediate economic recovery.

We do expect the 10-year Treasury yield to rise to around 1.5% by year end and then expect it to rise more in future years as inflation picks up. It is spending, not deficits themselves, that truly impact the economy. However, the idea that we can spend and borrow like this indefinitely, with no consequences, will only lead to ruin.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

1-27 / 7:30 am Durable Goods – Dec +1.0% +1.0% +1.0%

7:30 am Durable Goods (Ex-Trans) – Dec +0.5% +0.3% +0.4%

1-28 / 7:30 am Initial Claims – Jan 25 880K 870K 900K

7:30 am Q4 GDP Advance Report 4.2% 5.2% 33.4%

7:30 am Q4 GDP Chain Price Index 2.2% 1.9% 3.5%

9:00 am New Home Sales – Dec 0.860 Mil 0.941 Mil 0.841 Mil

1-29 / 7:30 am Personal Income – Dec +0.1% +0.1% -1.1%

7:30 am Personal Spending – Dec -0.4% -0.3% -0.4%

8:45 am Chicago PMI – Jan 58.0 60.1 58.7

9:00 am U. Mich Consumer Sentiment- Jan 79.2 80.0 79.2

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Growth Continued in Q4

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/19/2021

The double-dip recession so many feared didn't arrive in the fourth quarter of 2020, and it certainly doesn't look like it will happen in early 2021, either.

It's true that renewed shutdowns starting last November finally hit retail sales and employment, especially at restaurants and bars. But much of the economy, like manufacturing output and housing, kept growing in the fourth quarter. As a result, even though the latest "stimulus" bill didn't pass until December, that "stimulus" will now lift the economy in the first quarter when it really needs it.

But don't let that fool you, this growth is "borrowed" from the future. The underlying economy – the part not lifted by deficit spending, is hurting. Nonetheless, and regardless of our view of long-term economic issues because of this massive spending, Congress and President Biden are likely to pass even more spending in the months ahead.

When we combine even more spending with vaccines and warmer weather, the US economy should keep growing. We expect real GDP to grow 4.0% in 2021 (Q4/Q4) while payrolls expand by six million. Whether that much growth in jobs is good or not depends on the eye of the beholder. It would be the largest single calendar-year increase ever in the number of jobs and the fastest percentage gain since the 1970s. But it would also leave us more than two million payrolls short of where we were prior to COVID-19. Progress, yes; a complete recovery, no.

For the actual numbers, we estimate that real GDP grew at a 5.2% annual rate in the fourth quarter, which may change slightly based on reports during the next two weeks, but probably not much. That's a great number, but please remember that it still leaves real GDP 2.2% below where it was a year ago. The damage to small businesses is real and will take years to heal. Here's how we calculate the 5.2% growth in real GDP for Q4:

Consumption: Car and light truck sales rose at a 20.9% annual rate in Q4, while "real" (inflation-adjusted) retail sales outside the auto sector declined at a 2.6% annual rate. We only have reports on spending on services through November, not December, but it looks like real services spending should be up for the quarter. As a result, we estimate that real consumer spending on goods and services, combined, increased at a 3.2% annual rate, adding 2.2 points to the real GDP growth rate (3.2 times the consumption share of GDP, which is 68%, equals 2.2).

Business Investment: Business investment in equipment continued to rebound sharply in Q4, while investment in intellectual property likely grew at a more moderate pace. However, commercial construction likely continued to shrink in Q4, although at a slower pace than earlier in 2020. Commercial construction is often a lagging indicator of economic performance, and so it shouldn't be a surprise that this sector continues to be under pressure, particularly given the devastation wrought by COVID-19 on office space, retail businesses, movie theaters, and hotels. Combined, business investment looks like it grew at a 15.2% annual rate, which would add 2.0 points to real GDP growth. (15.2 times the 13% business investment share of GDP equals 2.0).

Home Building: Residential construction continued to grow rapidly in Q4, likely hitting the highest level since 2007. We believe home building has much further to grow given the shortage of homes in many places around the country and the higher appetite for houses with more space in the suburbs. We estimate growth at a 32% annual rate in Q4, which would add 1.3 points to the real GDP growth. (32 times the 4% residential construction share of GDP equals 1.3).

Government: It's hard to translate growth in overall government spending into a GDP effect because when calculating GDP only direct government purchases of goods and services counts, not transfer payments like extra unemployment insurance benefits. We estimate federal purchases grew at a 1.0% annual rate in Q4, which would add 0.2 points to real GDP growth. (1 times the 18% government purchase share of GDP equals 0.2).

Trade: More economic growth in the fourth quarter brought a larger trade deficit (at least through November) as well, as imports and exports both grew, but imports grew faster. At present, we're projecting that net exports will subtract 1.3 points from real GDP growth in Q4.

Inventories: Inventories look like they grew in Q4 for the first time since 2019. And, given the prolonged contraction in inventories, they are poised to make a notable contribution to economic growth in 2021, as businesses have plenty of room to restock shelves and showrooms. We are estimating that inventories add 0.8 points to the real GDP growth rate for Q4.

Add it all up, and we get 5.2% annualized real GDP growth for the fourth quarter. That's very high by historical standards, but the economy has much further to go to reach a full recovery.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Keeping Good State Policies

First Trust Monday Morning Outlook
Brian S. Wesbury, Chief Economist
January 4, 2021

When it comes to attracting people, jobs, and businesses, some states are just better than others. While the total US population increased 6.5% from 2010 to 2020, it increased 17.1% in Utah, 16.3% in Texas, 16.3% in Idaho, 16.1% in Nevada, 15.8% in Arizona, and 15.3% in Florida. Meanwhile, state populations declined in West Virginia, Illinois, New York, Connecticut, and Vermont, with very slow population growth elsewhere in the Northeast and Midwest.

At least three major tech companies are in the process of moving their headquarters from California to Texas; financial firms are moving operations from New York to Tennessee and Florida. Workers and businesses are voting with their feet.

This migration towards greener pastures has some worried. Why? The concern is that people leaving high-tax, less competitive states with the kinds of anti-growth government policies that have already driven businesses and workers away will bring to their new states the attitudes and voting habits that made their old states worse for business in the first place. Bad policy is bad policy, regardless of the zip code, let's not make the same mistakes in a new place.

Here's a game plan for states that have attracted so many newcomers to stave off the importation of bad policy. Ideas to keep these vibrant states vibrant.

First, states should refrain from adopting new tax systems layered on top of old ones, in particular introducing an income tax. It's simple, really: the more ways a state has to raise revenue, the larger the share of the state's economy the government will take. If a state doesn't yet have an income tax, the best option is to enshrine that status in the state Constitution.

Second, states should replace any defined-benefit plans for government workers with defined-contribution plans (401Ks). Traditional defined benefit plans provide disproportionate benefits to workers who remain at the same job the longest, even if they're no more productive than younger workers (and often less). A defined contribution system would incentivize less tenure with the government, which would help prevent the government from having workers with a built-in interest in simply growing the size of government.

Third, replace as much of the public school system as possible with a broad system of education vouchers, which families can use to choose schools for their children. Putting families, not government, in control of education tax dollars will reduce the impact of the education system on future voters and help realign power from bureaucrats to citizens.

Fourth, states should make it easy to build more single-family detached housing in the suburbs and elsewhere. Keeping housing costs down for parents will help families grow and prevent incumbent homeowners from squeezing newcomers and the next generation into family-unfriendly living quarters.

Last, make sure elections get held in November of congressional election years. In many places around the country, local elections are held on "off" years or earlier in the year, which enables politically-active interest groups to overly influence low-turnout elections. Having elections when more people show up reduces the power of these special-interest groups.

We're sure there are other good ideas out there, too. Hopefully, states with smaller governments and larger private sectors will use these ideas to help themselves stay that way. Let's not retry the same old failed policies.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

1-4 / 9:00 am Construction Spending – Nov +1.0% +1.2% +0.9% +1.3%

1-5 / 9:00 am ISM Index – Dec 56.7 57.0 57.5

afternoon Total Car/Truck Sales – Nov 15.7 Mil 16.1 Mil 15.6 Mil

afternoon Domestic Car/Truck Sales – Nov 12.4 Mil 12.4 Mil 12.0 Mil

1-6 / 9:00 am Factory Orders – Nov +0.7% +0.7% +1.2%

1-7 / 7:30 am Initial Claims – Jan 4 803K 800K 787K

7:30 am Trade Balance - Nov -$67.0 Bil -$67.7 Bil -$63.1 Bil

9:00 am ISM Non Mfg Index – Dec 54.5 54.6 55.9

1-8 / 7:30 am Non-Farm Payrolls – Dec 62K 82K 245K

7:30 am Private Payrolls – Dec 50K 77K 344K

7:30 am Manufacturing Payrolls – Dec 16K 10K 27K

7:30 am Unemployment Rate – Dec 6.8% 6.7% 6.7%

7:30 am Average Hourly Earnings – Dec +0.2% +0.3% +0.3%

7:30 am Average Weekly Hours – Dec 34.8 34.8 34.8

7:30 am Consumer Credit– Nov $9.0 Bil $5.9 Bil $7.2 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

End-of-Year Market Review

End-of-Year Market Review

January 4, 2021

Dear Friends and Clients,

While we know the turning of the digit from 0 to 1 didn’t change the alignment of the universe, December’s developments make it easier to approach the new year with a feeling of new possibilities. Vaccines are being distributed, the major market indices show between modest and stellar growth and some of the sectors of the economy most diminished by the pandemic are demonstrating strength.

As Raymond James Chief Investment Officer Larry Adam put it, “December punctuated a surprisingly strong market year with an exclamation point.”

For much of the year, the story in equities has been about big technology stocks and then everything else – the tech-focused NASDAQ closed the year up 43%. Over the last couple of months market strength has broadened, and December continued this trend with small-cap stocks, international equities and lagging sectors like Energy and Financials outperforming the average.

The ongoing pandemic is expected to dominate the economic outlook in the first part of the year, according to Chief Economist Scott Brown, with continued restraint on consumer services. As vaccines are distributed, people should become more comfortable going out again. Activity in face-to-face industries, such as travel, hotels, restaurants and in-person entertainment, should pick up substantially in the second half of the year.

The Federal Reserve is expected to remain accommodative, with short-term interest rates remaining low through 2023. The recent fiscal aid package will provide important support in the near term. All the good news, of course, comes as COVID-19 continues to hold record high rates of cases and vaccinations are expected to continue into the middle part of the year. Though we may be at the beginning of the end, it’s still not the end.

Let’s now look at the tale of the tape between the closing bells of 2019 and 2020.

Performance reflects price returns as of market close on Dec. 31, 2020.

And here’s a look at some of the details:

Washington settles its “will they or won’t they”

The $900 billion support package passed by Congress and approved by the White House will provide support through the spring for small businesses, state-run unemployment insurance, the vaccine rollout, and direct cash to many Americans. We’re now looking at further actions, possibly in March, Washington Policy Analyst Ed Mills said, which is when many of these supports will sunset. The shape and scope of a next stimulus package likely depend on the outcome of the two Senate runoff elections in Georgia, and how the economy weathers its entry into spring.

The global picture

Global equity markets are riding near all-time highs despite the pandemic’s backdrop as governments and central banks sustained support through the year. The narrative through the year was similar to the U.S. As European Strategist Jeremy Batstone-Carr said, “New-economy digital and environmental transformation sectors, supported by healthcare, performed strongly. In contrast, ‘old economy’ value sectors such as banks, airlines, energy and leisure performed poorly.” And also, as in the U.S., there appear to be opportunities here to capitalize on the return of strength across a broader market. With a Brexit deal, Europe-wide fiscal supports and stimulus around the world, “economic prospects for the next 12 months and beyond feel considerably brighter.”

The bottom line

We’re not out of the weeds yet, but there seems to be real momentum behind the market and an opportunity to potentially pick-up value from stocks most tied to an economic recovery, as well as some possible stability from 2020’s top performers. Still, there is a good chance we’re going to see bumps in the road.

I am wishing you the best for this new year and, as always, thank you for your continued trust in me as we work toward your goals through 2021 and beyond.

Sincerely,

Matt Goodrich, Financial Advisor                 

President, Goodrich & Associates, LLC       

Branch Manager, RJFS                                   

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Office and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges which would reduce an investor’s returns. Small cap securities generally involve greater risks.  International investing is subject to additional risks such as currency fluctuations, different financial accounting standards by country, and possible political and economic risks. These risks may be greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Raymond James does not provide tax services. Please discuss these matters with the appropriate professional.

Material prepared by Raymond James for use by its advisors.

Inflation, Debt, MMT, and Bitcoin

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

December 28, 2020

We can’t possibly exhaust our thoughts on all these topics in one Monday Morning Outlook, but we thought we’d give it the old college try.

This year, 2020, has been exceptionally interesting for investors. Not only have stocks soared to new highs and mortgage rates fallen to new lows, but Bitcoin, after languishing since 2017, has surged. Since bottoming near $5,000 in mid-March, when COVID shutdowns started, it has more than quintupled to above $27,000. By the time you read that last sentence, who knows?

Bitcoin backers view it as protection against fiscal ineptitude and policy mistakes, which could lead to the devaluation of sovereign currencies. In other words, inflation! And if you followed government policies this year, you understand where they are coming from. But, it’s not just crypto-currency investors that fret about inflation.

Gold bottomed at $1,471 in March and is now hovering near $1,900. Copper, silver, lumber, wheat, and soybeans have all soared this year, many to more than 5-year highs.

A Federal Reserve calculation of future inflation expectations, which is teased out of a comparison between regular Treasury securities and inflation-indexed securities, projects CPI inflation to be 2.0% annualized in the five-year period starting five years from now (so, roughly, 2026 – 2030). That’s an increase from the 1.8% expected a year ago, and much higher than the 0.8% projected back in mid-March.

This is all understandable. The monetary base has expanded by $1.6 trillion since February, the M2 measure of money has grown 25% in the past year, and the Fed says it doesn’t plan on lifting interest rates until at least 2024.

Meanwhile, the federal budget deficit soared last year, hitting $3.1 trillion in the Fiscal Year 2020, which ended in September, and looks likely to remain very large in FY 2021, as well. The United States, and other governments around the world, face huge fiscal issues in the years ahead.

It’s more than just deficits and debt. Every penny of government spending is taxed or borrowed from the private sector. And these transfers of wealth and income from current and future taxpayers to the government distort the economy in massive ways.

Some think that Modern Monetary Theory (MMT) allows the Fed to print money to finance this debt with no consequences. This is delusional, and we agree with Mervyn King, the former head of the Bank of England who says MMT is neither modern, monetary, or a theory. It’s been tried before, by the Romans, the Weimar Republic, Zimbabwe, Venezuela…all with disastrous results.

The question is timing. In the mid-2000s, people bought homes they couldn’t afford with interest rates that were artificially low. Now, the government is doing this.

For the time being this is manageable. This past fiscal year, net interest on the US federal debt was 1.6% of GDP versus 1.7% in 2019 and about 3.0% in the 1980s and 1990s. Yes, you got that right: in spite of soaring national debt in 2020, as well as a plunge in GDP, the interest burden was smaller as a share of GDP than it was the year before, and roughly half of where it was 30-years ago.

As a result, although the yawning budget deficit is not good and not sustainable in the long-term, the US is not Argentina, yet. Just because the doctor tells you the problem with your thyroid isn’t fatal, doesn’t mean you wouldn’t be better off without that problem.

For the record, even though we are upbeat on the economy and US equity markets for 2021, we don’t support any part of MMT. What we are is realistic and pragmatic. We can’t stop it, you can’t either. The narrative of COVID and shutdowns, the denial of fiscal reality and the power of politicians and media mean for the time being this is our path.

However, eventually math wins. New York, Illinois, California and other states, are watching people vote with their feet. We will see how they respond. It may surprise all of us. After all, politics is often backward. Richard Nixon went to China. Bill Clinton reformed welfare. With massive current deficits, and future growing deficits due to entitlement programs, the stars may be starting to align for some historic and long-awaited reforms.

Imagine the very possible scenario where Republicans take the House and keep the Senate in 2022. Then imagine a President Biden deciding not to run for re-election in 2024 and seeking a legacy. Reforming entitlement programs could be his legacy, with a bipartisan compromise facilitated by a solid working relationship between Biden and Senator Mitch McConnell.

We hear every day about the breakdown of America…with both sides telling us “this is the end.” As students of history, we don’t buy it. The US has been in pickles before, but we always “work the problem.”

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

12-30 / 8:45 am Chicago PMI – Dec 56.5 58.9 58.2

12-31 / 7:30 am Initial Claims – Dec 26 830K 805K 803K

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Larry is retiring after 52 years in the business.

December 29, 2020

Dear Clients and Friends,

I have reached a difficult decision this past month. I have decided after 52 years, since 1968, to retire my security licenses and from my position as Branch Manager for RJFS.

Family health issues were a large factor in this decision, but not the only one.

My son Matt, the current RJFS Branch Manager, has been with our practice since 1998 and purchased Goodrich & Associates, Inc. in 2014. He will continue to run the practice with the same guideline and principle as in the past.

You, our clients and friends, are the most important part of our practice. Therefore, it is my hope in the years to come that he and our excellent staff will continue to earn your business, trust and confidence.

For the foreseeable future I will still be associated with the office as a Non-Registered Employee and Certified Financial Planner professional (CFP). In this role I will continue to be available to discuss financial issues you may be faced with.

Over the next couple of months, I will try to call as many of you as possible to personally thank you for the years of confidence and business you have shared with me.

During this difficult year with the COVID-19 virus, may we all still manage to have a Merry Christmas and a better New Year.

Sincerely,

Larry Goodrich, CFP ®

How Much You Need to Invest Every Month to Retire With $1 Million to $3 Million, Broken Down By Age

The coronavirus crisis may be pushing back a lot of retirement plans.

Nearly 30% of Americans say they have decreased or even stopped saving in 2020.

Unfortunately, those missed contributions can equal a lot of money decades into the future.

If you begin now, you can save $1 million, $2 million or $3 million — with the right amount of time and dedication. How much you’ll need to save every month will depend on how old you are when you start and how much money you want for retirement.

Personal finance site NerdWallet crunched the numbers, broken down by age group, to show how much you’ll have to stash away every month.

First, let’s go over how we got there. The math assumes you have no money in savings, that your investments will earn 6% annually and that you retire at 67.

Check out this video below to see how you can make it happen.

https://www.cnbc.com/2020/10/15/how-much-you-need-to-invest-a-month-to-retire-with-over-1-million.html