For all the speculation about the upcoming taper, which we now know will start in November at a pace of $15bn per month and conclude by July…
the main event this fall, if not this year, may be on the fiscal side, and specifically what is the final shape of the upcoming bipartisan + Build Back Better stimulus avalanche, which as BofA’s Michael Hartnett calculates will represent – at roughly $1 trillion in biparstian “infrastructure” spending plus some $3.5 trillion in Build Back Better reconciliation – some $4.5 trillion in “epic fiscal stimulus”, which at 20% of GDP will be more than double the size of the previous record stimulus and will represent the largest fiscal stimulus package of all time.
This stimulus, which will pass one way or another, would arrive at a time of 12% GDP growth (if plunging fast), 5% inflation, and 33% deficit.
Furthermore, the final size of the reconciliation package is, in BofA’s view, the driver for yields next 3-6 weeks – anything above $2 trillion = higher yields as stimulus shores up weakening US consumption & heightens inflation.
But stimulus or not – and for the sake of the economy and democrats there better be one – the macro backdrop is turning uglier by the day. As Hartnett notes, his macro backdrop for the second half is one of higher inflation, hawkish central banks, weaker growth, i.e. stagflation. At the same time, the investment backdrop is one of rising Rates, Regulation, Redistribution (3Rs).
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