The three-headed Hydra of low labor participation, increased debt levels and higher taxes will cripple U.S. long-term Real GDP growth for decades.
Labor participation is not going back to December 2019 levels. To believe that scenario is wishful thinking. For starters, 25% of restaurants and bars are permanently closed. Those jobs are not returning. Second, these “stimulus” transfer payments (two such tranches under Trump, a forthcoming $1.9 Trillion tranche under Biden), pay many people more money to stay home and not be productive than if they were working and being productive. This also exacerbates America’s fiscal and trade deficits. Not that the job market is rosy. Weekly unemployment claims remain elevated above the trough of the Great Recession (665,000 claims the week of March 28th 2009).
Record debt levels are a wet blanket on the economy. We have record corporate and government debt levels, both subsidized by the Federal Government. In the Technology space we saw CoStar Group (tkr: CSGP), abandon its deal for CoreLogic (tkr: CLGX), this week citing the upward yield trend of recent weeks. For a 1.5% 10-year Treasury yield to hamper M&A activity confirms that debt levels and resultant debt service costs are far too high across the system. This is in large part why we believe the Fed will step in and exercise yield curve control. The Federal Government nor corporate America can afford a spike in debt service expenses.
Higher taxes are coming. Biden wishes to take the corporate tax rate from 20% to 28%, a 40% increase. Biden ally Elizabeth Warren is pushing a wealth tax. We believe this will fail, that it is political theater and that a “plan B” income tax increase will be passed this year or early next at the latest so as to not hinder the Biden/Harris 2024 ticket while minimizing the risk of 2022 mid-term election fallout.