‘I don’t think anyone gives a darn’: strategist on Trump stalling the new stimulus proposal

Frances Newton Stacy, Optimal Capital Dir. Julia La Roche and Adam Shapiro of Yahoo Finance will join Yahoo Finance to discuss their thoughts on the market and how it will continue to price in political and social concerns.
Video transcript
ADAM SHAPIRO: You know, it's Christmas Eve in the markets right now. There really isn't much volume in what we see. Does anyone today give a fuck what we were just talking about, Frances, about the President and the stalemate with Congress?
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FRANCES NEWTON STACY: I don't think so. I don't think anyone minds. And I don't think that will have any significant impact on the markets. I think the markets are basically about $ 2 trillion in incentive. And obviously we don't get the $ 900 billion auxiliary bill. But we know Janet Yellen and Joe Biden will take office. And we know there is even a possibility that the Democrats could take control of the Senate, which all points to more incentives, which all points to the downward dollar, which all points to a greater ability to raise asset prices. So the markets are literally shaking this off.
JULIA LA ROCHE: Let's talk a little more about it. They speak of a surge in markets in 2021 due to this confluence of factors. What about the Fed here and the nature of the market dependence on the Fed part of the equation?
FRANCES NEWTON STACY: Well, that definitely won't go away. I don't see any sensible adjustment in asset purchases as we need to keep the system liquid. And every time you have a record amount of debt in the system, you need to continually revise that debt. And they will keep buying assets because we cannot risk those returns getting too high given this debt service.
Even if the yields climb to an awkward point, you'll see a control of the yield curve, which is basically more asset purchases targeted along part of the curve. And that's exactly how we have to do it. The best scenario is to put it on paper. And that's the choice we have.
And so the Fed will take this into account for a very long time.
ADAM SHAPIRO: Let's move on because I'm looking at 10 years today. I mean the return is roughly 94 basis points. What should the average investor look out for when not delving into these things and the implications for the markets in general? Does it matter if the 10 year year return is over 100 basis points?
FRANCES NEWTON STACY: Well, I guess we don't know when the Fed will step in. And it will be based on debt servicing. So I think the leading indicators for me are the timeframe for change? So if it's only ticking above 1%, up to 1.25% over a really long period of time, I don't think the Fed will be that concerned because it will be able to oversee debt servicing on its own. But if it suddenly spikes you will see that the Fed is very interested in what happens because they don't have enough time to calculate the debt servicing risk.
And remember, the only thing that can reverse all of this is problems in the credit markets. We still have many mortgages and forbearance. And we still have a lot of credit problems that don't have a lot of data in the next year. That's the thing that they're going to watch very, very closely.
So I don't know if they actually targeted a number. But I think it will be about how fast it goes up and how much you can monitor.
ADAM SHAPIRO: If I'm an average investor and look at how fast this rate of return is increasing, what peak you're talking about - that could come. This is all a speculative discussion - what's the number I'm looking at? Are we talking about 1.5% within five months?
FRANCES NEWTON STACY: Well I think the markets are so forward-looking that I would love to see what happens to government bonds and traders when we cross that 1% mark. If we move to 1.1%, do we see interest in government bonds? And that will be the leading indicator that the Fed is likely to reenter those rates.
So I think I am actually going to look at trading volume. And I know it's not always that easy for the average investor, but I would definitely watch the long end of the curve. So this is the TLT ETF to see if there is any significant upward momentum. Because then it means that we expect everyone who has access to the calculators of events in the credit markets to check the yield curves.
JULIA LA ROCHE: You know, it's interesting that you just mentioned that as an indicator that you are looking at. And I like to ask people what indicators they are looking for and what changes they are making. And I think when you are talking about the economy what are the things that you are paying attention to that might be suggesting things are slowing down or we are not going back to growth levels here or things that might be worrying you are data rolling over , something like that. What will you see specifically?
FRANCES NEWTON STACY: Yes, so mainly the US dollar. The US dollar is not fully inversely correlated as it was earlier this year. But it's pretty negatively correlated with the markets and the inflationary trade and the commodities and things like that. So at the moment we only had a slight increase in the US dollar. It looks like it will continue its trend.
This makes perfect sense as the Fed is now aiming for an inflation average more than 2%. And it makes sense when the fiscal stimulus comes. All will devalue the dollar. It makes sense to make those dollars cheaper to pay off these debts. So it all makes sense.
So if we suddenly get a flight into the safety of the US dollar or suddenly see a massive surge in the US dollar, I expect other asset classes to trade lower than those that were successful when the US dollar fell.
ADAM SHAPIRO: Would that include - if we got a sudden spike in the dollar, would that include real estate devaluation? Because so many people are doing it right now.
FRANCES NEWTON STACY: Yes, it's hard to see the machinations. I think real estate is ultimately more about the yield curve and, going forward, more about the credit markets. But the thing about real estate that's unique this year, as we know, is that real estate in New York and San Francisco is really bad. And in some suburbs we see some kind of bubble. And I think this is how the virus and work from home will evolve.
You know, do they lower people's salaries when they're not ready to come into the office? Are Homer's work taxed differently? All these things that kind of floated around.
But suburban real estate is basically in a bit of a bubble. We can expect that to normalize. And then urban real estate is obviously at its lows. But I'm just watching these returns on these credit markets.
The credit markets are currently quite tight. Do you stay tight? Have they loosened up? How effectively we flow out of this situation will be such a precursor for real estate.
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