While there were plenty of fireworks in the market today, mostly launched by the reddit/WSB/robinhood daytrading crowd who successfully sparked a historic short squeeze and ramped the most shorted stocks on Monday to the point that they brought a respected hedge fund, Melvin Capital (run by a former SAC portfolio manager) to the verge of collapse and only a $2.75 billion bailout from Ken Griffin and Steve Cohen avoided the biggest hedge fund margin call since LTCM, a more sinister risk-off undertone emerged early on following overnight reports that the Biden stimulus was facing major headwinds of opposition, on Monday Senate Majority Leader Chuck Schumer said the next round of Covid-19 relief was unlikely before mid-March, futher cementing the reality that Joe Biden’s nearly $2 trillion stimulus proposal to pass in Congress.
To be sure, while we will likely see rolling short squeeze among small and medium (and eventually, large cap) stocks, the question is whether the market is getting cold feet about the reflation trade (as Rabobank warned last week) if indeed "Biden's trillions" appear to be headed for a major delay, or haircut.
What is concerning for bulls - especially now that virtually every major bank has warned of record euphoria spiking the risk of a sharp market drop in the very near future - as Biden gets ever growing pushback on his proposal, is that the probability of a $1.9 trillion plan diminishes with each passing day. In fact, whereas Goldman recently slashed its estimate of the final size of the realistic Biden stimulus to just $1.1 trillion from $1.9 trillion, JPMorgan has gone even further and as the following summary of "what happens next" from JPMorgan's Andrew Tyler show, JPM now expects a mere $900 billion to pass, or a carbon copy of the bipartisan December stimulus (and it will be quite delayed at that as well).
The question is whether Wall Street has priced in such a material decline and delay, and if not, just how (even more) adversely will this impact the reflation trade.
So without further ado, here is the excerpt from Andrew Taylor's "Market Summary" section published after the close:
EQUITY AND MACRO NARRATIVE: Today, I received a lot of questions on the fiscal stimulus. Timing, size, and composition matter. Here are some thoughts:
TIMING – Schumer told us it would be 4 – 6 weeks before the matter was taken up. Why?Trump’s first impeachment trial took 3 weeks. This trial is set to begin on Feb 8 and if we use prior impeachment for guidance then the trial concludes in that 4 – 6 week time frame.
SIZE – given the push back from the GOP on doing another stimulus bill in this close proximity of the December $900bn package may mean that the pathway forward is via Reconciliation. This would be that a final bill would like be materially smaller than the proposed $1.9T. JPM current estimate is $900bn.
COMPOSITION – one critical aspect of the US economy is the volume of people at/near financial distress.
- Consider renters, where ~20% of all renters are behind on payments. The average renters owes $5,600 (CNBC). For reference, US median household income is~$63k and with a 25% withholding means ~$2k per pay period in take home pay. Combined, there is about $57bn in back rent owned by more than 10mm renters.
- Consider homeowners, where about 2.7mm homeowners, or ~5.5% of all mortgages, have their mortgage payment in forbearance (WSJ).
- The federal eviction moratorium was extended to March 31 by Biden’s Executive Order. An eviction ban does not create jobs nor clear that backlog of debt. If we have millions of people put through an eviction process, it is unlikely that states have the funds to service the increase homelessness.
WHAT HAPPENS? At this time, it appears most likely that fiscal bill passes that is closer to$1T than to $2T, with a targeted focus on the most devastated Consumers and small businesses, sometime in late March or early April.