by Louis Navellier
February 23, 2021
While China and emerging markets are leading worldwide economic growth, Europe is badly lagging as the Eurozone is in the midst of a “double dip” recession after posting negative fourth-quarter GDP growth. Mario Draghi, former head of the European Central Bank (ECB), is now Italy’s Prime Minister.
“Super Mario,” as he is known, introduced the world to Modern Monetary Theory (MMT), which is essentially unlimited quantitative easing (money printing), which has caused negative interest rates to dominate Europe since 2015. Draghi must have friends in high places, since the coalition he formed to become Prime Minister likely wants him to spend up a storm and violate all the EU budget constraints.
President Joe Biden is still in his honeymoon phase, as the news media is saving their major attacks for the governors of California and New York over their Covid-19 mistakes and restrictions. Italy is also ravaged badly by Covid-19. It will be interesting to see how long Joe Biden’s and Mario Draghi’s honeymoons will last. Italy is a country with a high median age, ravaged by Covid-19, so it will be hard for Italy to rebound strongly. An older population tends to hoard their money and spend less, so Italy’s demographics are naturally restricting its growth. I for one, will be carefully watching how “Super Mario” strives to stimulate Italy’s economic growth, which unquestionably will be very difficult to pull off.
One reason that the stock market continues to meander higher is that there is a lot of money sloshing around. After Draghi introduced MMT and negative interest rates when he was ECB President, other central bankers, like the Bank of England, and multiple Fed officials, have come around and accepted MMT as long as it does not create excessive inflation. My favorite economist, Ed Yardeni, talked about “MMT Madness” last week and wondered if “this will end badly.” Right now, all this money sloshing around is making the rich richer, as housing and stock prices rise. Furthermore, if inflation does show up, housing and stock market values are good inflation hedges, so perhaps we should not be too concerned.
Nonetheless, the stock market always seems to climb a “wall of worry,” and so the headlines always tell us about what is going wrong. California’s rolling electricity blackouts from last year have now spread to the center of the U.S., and Texas’ historic freeze stopped many wind turbines and caused widespread blackouts. At the same time, Europe is also very cold, so many of their wind turbines also froze up and many of their solar panels were covered by snow. Complicating matters further, the sun has had no sunspots for several months, so many observers worry about a new “Maunder Minimum,” a phenomenon which caused a mini-ice age in Europe between 1645 and 1715. In a series of warning signs, the Thames River has frozen for the first time in 60 years. Athens, Greece was covered by snow last week – so much so that they had to suspend Covid-19 vaccinations – and over 72% of the U.S. had snow on the ground.
Obviously, struggling economies must now deal with power outages, extreme winter weather and Covid-19 restrictions. Furthermore, green energy solutions can be impacted by extreme weather as California demonstrated last year and now Texas’ 23% dependence on wind power has proven to be problematic.
Booming Retail Sales are Pushing GDP Estimates Up!
Due to the record cold embracing much of the center of the U.S. and power outages, I had expected that first quarter GDP estimates might have to be revised lower by economists in both Europe and the U.S. However, the Atlanta Fed is now estimating annual first-quarter GDP growth at +9.5% (up from 4.5% in the previous week), even though Europe is slipping into a double-dip recession. How did this happen?
In This Brave New World, retail sales can rise dramatically, even in bad weather, through online sales. The Commerce Department announced last Wednesday that retail sales rose 5.3% in January after declining for three straight months. This was a huge surprise, since economists were expecting sales to rise just 1%. There is no doubt that the $600 debit cards the federal government sent out likely stimulated sales. As consumers continue to “nest,” spending on electronics and appliances rose 14.67%, furniture sales rose 11.97%, on-line sales rose 10.96%, and sporting goods (including gun sales) rose 8.03%.
Amazingly enough, sales at bars & restaurants rose 6.93% in January (over December). This bodes well for a faster recovery when Covid-19 restrictions are lifted. Excluding gas station and vehicle sales, retail sales rose 6.1% in January, which raises hope for an impressive rebound in the upcoming months!
Naturally, these weather disruptions also create energy inflation. The Labor Department reported on Wednesday that the Producer Price Index (PPI) surged 1.3% in January, led by a 5.1% increase in wholesale energy prices. This was a massive surprise, since economists were only expecting the PPI to rise 0.5%. Excluding food, energy and trade margins, the core PPI rose 0.8% in January. Interestingly, trade margins rose 1% in January. That was somewhat related to a weaker U.S. dollar, which naturally triggers commodity price inflation. In the past 12 months, the CPI and core CPI rose 1.7% and 2.0%, respectively. As long as the U.S. dollar remains weak, wholesale inflation will likely continue to grow.
The Labor Department also announced that new weekly unemployment claims rose to 861,100 in the latest week, up from a revised 848,000 (up from 793,000 previously reported) in the previous week. The continuing unemployment claims were 4.494 million, down from a revised 4.558 million in the previous week. Both numbers were disappointing, since economists were expecting new weekly unemployment claims to come in at only 773,000 and continuing unemployment claim at 4.425 million. Weekly unemployment claims are now running at their highest level in the past four weeks and are expected to continue to rise due to the severe winter weather that hit the center of the country last week.
Overall, despite a very encouraging retail sales report, the stock market likes to climb a “wall of worry,” which now includes fear of rising interest rates and inflation. The 10-year Treasury bond yield is now over 1.3%, which is spooking interest rate-sensitive stocks. Furthermore, the federal government is expected to run a $2.3 trillion deficit (10.6% of GDP) this year, so it will be interesting to see if the Fed and their quantitative easing plans can accommodate the massive Treasury auctions now anticipated.
The truth of the matter is that the stock market has been over-bought for over a month, so it may now be time for Wall Street to consolidate its recent gains. In a brewing inflationary environment, growth stocks have traditionally been a great inflation hedge, so the current consolidation could just be the “pause that refreshes” before the next surge as we await the first-quarter announcement season, beginning mid-April.