June 29, 2021

The consensus appears to be that the US inflation rate is on the rise. That the Biden administration intention is to raise tax rates. That absent the ability to raise tax rates, it will implement its agenda through regulations. In the past we have stated that rising tax rates, regulation and inflation favor the nimble and smaller capitalization stocks. This line of reasoning points to an increased exposure to the smaller capitalization stocks. We are of the opinion that the recovery is mostly a vaccine recovery. It allowed for the reopening of the economy and given no permanent damage was done to the economic structure, the vaccine and the economy’s self-equilibrating mechanism would return to trend line. This line of reasoning leads one to argue for a V shaped recovery. How quickly and whether the unemployment rate will return to the pre-pandemic level? The answer depends in part on the effectiveness of the policies of the Biden administration. There is no question that the administration did a great job with the vaccine rollout that allowed for the reopening of the economy. But regarding the issue of whether the policies of the Biden administration would return the economy back to normal, we disagree with the official forecasts. Many of the programs proposed and adopted These programs create a disincentive to return to work and as such they will delay the full recovery. Add to this the proposed increases regulations and tax rates and we conclude that the economy will not reach the pre-pandemic unemployment rate levels anytime soon. If no disincentive effects are built into the Administration and fed forecasting models, then the official forecasts will be overly optimistic. The forecast errors will be directly proportional to the ignored substitution effects. Although we are also calling for a strong recovery, we happen to believe that rather than enhancing and accelerating the recovery, the administration policies will slow down the speed and magnitude of the recovery. Simply put, the administration forecast will overstate the recovery. Our framework suggests that the increased tax rates and regulations will be a drag on the recovery. That the administration and fed forecast are overly optimistic. We expect the economy to expand at a healthy pace, albeit slower than the administration and fed predict. This discussion also dovetails with our inflation forecast. Given the Fed belief in the Phillips Curve, we expect the fed to tighten a bit and as a result the inflation rate will come in below the fed forecast.

You must have an active account to view these reports. You may register for a trial here

Download Complete Report in PDF Format

Download Complete Report in Word Format