The economy at present is performing as well as could be expected under the circumstances. Housing is booming given the lowest mortgage interest rates in a century. The main factor holding back the economy is not a lack of disposable income; indeed areas where people are free to spend are also doing quite well. Rather, the curtailed growth is heavily concentrated in services where social distancing is a problem. The Fed continues to be as accommodative as possible and recognizing its own constraints to stimulate growth, is literally begging Congress for more fiscal stimulus and is encouraging even more than that which Congress is presently considering. The Fed, after trying and failing for a decade to get inflation to rise enough to meet a meager target of 2%, and now in the midst of a pandemic, has virtually abandoned any inflation concerns it may have had.

Congress at present is trying to agree on

the content and size of an upcoming fiscal stimulus. The 2018 tax cuts based on old “trickle-down” economic theory, while high on promise failed to deliver as the economy began to decelerate even before the pandemic arrived. The conclusion drawn is that capital investors were already flush with cash, and apparently in hindsight, were not willing to invest in new plant capacity or additional hiring until they could see rising demand for additional product. They aren’t now, and never were, going to produce goods to sit in warehouses. The occurrence of the pandemic was fortunate in that it forced policy makers to test new theories previously regarded as economic heresy, namely, “trickle-up” economics by giving cash directly to consumers to sustain growth and to stimulate aggregate demand. The theory now is that increasing consumer demand will automatically cause capital investors to invest in new plant capacity and to increase hiring to meet the new demand. Going forward, we expect to see ongoing monetary stimulus from the Fed and fiscal stimulus from Congress in the form of a combination of both business and consumer relief to meet both consumer and capital needs. The path of the pandemic or of new strains of the virus now entering the population are the largest variables in determining the longer-term direction of the economy, the markets, and other policy initiatives that may be forthcoming.

As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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