United States President Joe Biden attends an event at the South Court Auditorium in the White House, Washington, on March 10, 2021, announcing government plans to double the order of the Johnson & Johnson Coronavirus single-shot vaccine and add an additional 100 To procure millions of cans.
Tom Brenner | Reuters
The change in the focus on fiscal stimulus in the US under President Joe Biden has effectively signaled the “end of Reaganomics,” according to Peter Toogood, CIO of the Embark Group.
The government and the Federal Reserve have deployed unprecedented support over the past year to help guide the economy out of the coronavirus crisis.
Last week, Biden signed a $ 1.9 trillion aid bill that gave $ 1,400 of stimulus checks to individuals in approximately 159 million households. In the meantime, the Fed has committed to maintaining its loose monetary policy and signaling a readiness to exceed its inflation target of 2% if necessary.
Equity markets have been volatile in the past few weeks as bond yields rose alongside expectations for higher inflation, raising concerns that central banks may begin to reverse some of the current stimulus measures.
Equity investors have turned towards more cyclical stocks, which are likely to benefit from the economic recovery, while pandemic winners like tech have lagged.
Toogood told CNBC’s “Squawk Box Europe” on Monday that the market is reacting logically by anticipating “the big underlying change” in US spending.
“We have achieved massive pent-up savings, we have given away and, especially in the US, but also elsewhere, developed the most amazing fiscal and monetary stimuli – unprecedented – and then for the first time we have had a 25% growth in the money supply since it really is the 80s, “said Toogood.
The expectation that the speed of money will increase in the US after Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen promise “make it big” means markets are moving towards the new goal of “massive nominal GDP growth.” adapt, he suggested.
Toogood said Powell’s focus on using the “poorest person in the poorest state” as the benchmark for defining full employment has fundamentally shifted the focus of monetary policy.
“We took the corona war and we are turning into a war on inequality. It’s being waged by Biden and it’s a massive change in emphasis and I don’t think it’s really understood,” he said.
“It’s almost the end of Reaganomics, and I’d go that far. These are unprecedented editions in the United States.”
“Reaganomics” refers to a set of economic policies promoted by former President Ronald Reagan in the 1980s that aimed to cut government spending, income taxes and regulations, and slow the money supply to curb inflation.
She also advocates a trickle-down economic theory that suggests that lowering taxes on businesses and the rich stimulates short-term business investment that has longer-term effects on the economic ladder.
Toogood noted that the US and other major economies could sink into the sort of long-term economic stagnation in Japan if the current diversion fails. If this succeeds, however, a significant increase in inflation rates can be expected.
“The market is rational. It sells the things that have produced long-term returns,” he said.
“They want shorter duration when bond yields rise, and especially when it gets steeper as aggressive as it is. So far the market is logical.”
The yield curve shows the yields on bonds with the same credit rating over a series of maturity dates. Typically, long-term bonds have higher interest rates than shorter-term bonds, which means that the curve is sloping up over time. If the spread between them widens, the yield curve steepens.