The U.S. economic recovery has been propped up by historic amount of stimulus. But will the economy be able to keep growing under its own power? Kim Parlee speaks with Phil Davis, founder of philstockworld.com, about the threats to the economy and to equity markets in 2022.
- Hi, Kim.
- Nice to have you here. Listen, everyone's in for a special treat today because we're going to spend the first part of our conversation-- big picture. And then we got-- actually, this year we have runners up for the trade of the year. And at the end, we're going to get to the final trade of the year. So whole lot of value for people who are watching right now.
So let's start with the big picture, Phil. For anybody who goes to your blog, philstockworld.com, I should mention, they can subscribe to it, but there's a special free section in it where they can see the MoneyTalk portfolio, which I think is the second anniversary, is coming up really soon. So I'll let people kind of know about that if they want to get more details on the trades we're talking about today.
But let's just start with the big picture, and you've been writing about in your blog about inflation. Got a quote we'll bring up from here where we talk about the US Fed Chair, Jerome Powell, he says, "It now appears that factors pushing inflation upward will linger well into next year. We're going to use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched." So the Fed is taking action, and it seems to have spooked a lot of people.
- Oh, yeah, well, look, I've been making fun of Powell for a year now because every time he said inflation was transitory, we all had to take a drink, and we ran out of liquor. Yesterday, he finally admitted that inflation was not transitory-- big surprise-- and that the Fed will actually have to start doing their job and begin to cycle the rates back up and get inflation under control if it's not already too late.
Who knows? Because it's a bit late. They're super late in the cycle to be worried about inflation all of a sudden. But the problem is that the US hitting a $32 trillion debt level in 2022. The Fed is on very thin ice and they can't afford-- we can't afford to service $32 trillion of debt at 3%. That's a trillion dollars a year in interest. That would be an insane number.
We're still running a trillion dollar annual deficit, and even without stimulus, if we don't address these issues, the rates are going to go up anyway, because people are going to start losing confidence in our ability to pay the debts.
Japan, for example, though, is running a 300% debt level to their GDP, and we are only at 160%. So we have a long way to go before you're at a crisis, crisis.
But there's a certain point of no return, and Japan is clearly past it. And we are maybe at a point where we could do something about this, but we're rapidly approaching a point of our own return that just can't be fixed. You can't stop it anymore.
- So thus, I'm going to say that's the fiscally responsible kind of take on on what people have to think about. But maybe take me through what you expect to happen in terms of rates going up a bit. What happens to the market? Because for the longest time, I think it was the only place to put your money, because you weren't making any money anywhere else.
- Right, well, look, that's really what's been driving the market, is where else you put the money. So all this money that comes in, all the money the Fed's been printing-- people aren't buying houses with it. People aren't investing in the bonds. Bonds are terrible this year. So the money finally gets forced into the market and that's inflating the equity prices.
There's a difference between paying inflated equity price and having an equity price grow based on the earnings. We're not doing that. We're in very dangerous waters as far as the valuations are concerned. It's a very tricky market to get through like this and we're dangerously overvalued. I've been saying that for a while, though.
- I know, and we'll talk a bit about that. But I was going to say the Russell 2000, I know you've been watching this one closely, it's had quite the dip. I think it's 10% off its highs right now. Do you think, is that an indicator of the companies themself? Or is that more just fund flow? It's a risk-off trade and people are getting out.
- Now that's interesting because I was just saying today. I was warning my guys. We do a webinar on Wednesdays, and I was just warning my people that you've got to look at Apple. Apple has been up 5% in the last two days. And Apple affects the Dow, and the NASDAQ, and the S&P 500 heavily. It's a major component in all three indexes. And a lot of times they manipulate Apple higher in order to mask the selling of the stocks underneath in the main index.
The Russell doesn't have Apple in it, and also doesn't have-- there's no small group of stocks that you can trade on the Russell to manipulate the index. So it tends to give you a more honest reading. Also, the companies are the smaller caps. They're not going to be buffered by international trade because the S&P, like, 60% of their revenue is from overseas.
So the Russell gives you the best idea of what's really happening in America. And what's really happening in America is the Russell has dropped 10% in the last month and that's getting into correction territory.
- Can I ask? And I'm going to ask a double-barreled question. I've only got about a minute here. But two things, I think, to watch as we go ahead-- Omicron. What do you expect for that to happen there? Are we going to see another wavelet? What does that mean for markets and then also fiscal stimulus? We talk about monetary, but what happens when fiscal pulls back?
- Well, let's skip Omicron because we don't have that enough information to really make guesses on what's going to happen. But I think it's just another variant, not the biggest deal. But the bigger deal, though, is we are putting $2 trillion a year from the government directly. Forget the Fed. But the government directly is putting $2 trillion a year into this economy.
It's a $20-trillion economy. That's 10% of the economy is stimulus. Yet, the economy only grows 6%. That means, without the stimulus, we'd be negative 4%. And that's what people need to keep in mind. The real economy is not strong at all. We're more or less in a recession in the real economy. So once that stimulus winds down, we're not in particularly good shape. And that's what we've got to watch out for.