This gets into what I call America’s “manufactured economy/markets”.
The USG borrowing, and giving to corporations as increased profits, doesn’t actually touch real output. It’s pure finance games, unless they invest those profits in an output-increasing manner. But if the S&P500 had wanted to do that, wouldn’t they have done that already? There might be some impact, 1 in 5 dollars? Who knows, but surely not 4 of 5 dollars, mostly dividends/buybacks.
It increases debt, which increases risk and the magnitude of downside moves.
Listening to earnings calls at year end, most basic / industrial names are allocating the majority to internal CAPEX and wage hikes. The rise in equity values and lack of CAPEX during the 2015/16 downturn plus geosynchronous growth left them in a position of catchup. Big names such as Apple have made similar announcements. The reason the S&P hasn’t necessarily spent at these levels in the past was partially that global demand wasn’t there, partially because equity valuations were lower and partially because the output gap was still negative. JPM did a piece breaking out the stated uses of the repatriated cash from surveying their investment universe and found by order it was CAPEX, Debt Paydown, M&A then lastly cash to shareholders. Particularly with the five year period of fully expensible CAPEX and lower tax rate, the IRR on CAPEX right now is just very hard to beat.
As an anecdote, Waste Management had a few comments discussing the economics of wage hikes and how they have 20% turnover of drivers at an average cost to replace an employee of at least $12,000. They added that that fails to account for the fact that on any productivity or performance metric the 3-5 year experienced drivers just kill it compared to rookies, so they are taking that into account in rolling out wage hikes. Given things like dense and often complicated routes with things like gates that need unlocked and obstacles means they believe driverless tech will hit them last.
It’s an interesting time to roll out a stimulus measure, typically these things are done in down cycles. Obviously the stimulus will further stretch the output gap but again, these things can extend for a long time as I noted. Then again, they may not, I don’t have the answer for that. McKinsey had a piece referenced in Bloomberg that was interesting (and very bullish) if you buy it. Personally, I’d like to see some Federal deleveraging, but apparently the ship has sailed on that, although to be fair it was relatively clear that no matter which candidate got elected they had no intention of deleveraging.