Government Largesse Out of Control?

Despite downward pressure at the end of this week, the markets were off to the races yet again.  All three major indices are up between 2-3% with the Federal Reserve’s announcement that they would not be raising interest rates this week.  The enthusiasm for artificial intelligence continues unabated, as companies even AI adjacent are getting a bump.

The big news this week is that the Federal Reserve chose to keep the Fed Funds rate between 5.25-5.50% as was widely expected.  While the FOMC meets again in May, it is the June meeting that analysts think may see the first rate cut.  I am still undecided, as is the Federal Reserve, given that economic data remains hot.  Fortunately, there are two months of economic data ahead of us that will give us an indication of whether inflation resumes a downward trajectory or remains sticky at these levels.

In company news, we learned that starting last week Target implemented modifications to its self-checkout kiosks, imposing limits of 10 items or less at most of its 2,000 stores.  This bucks the trend of retailers moving toward reducing the number of cashiers to cut costs.  It seems someone at headquarters did a cost-benefit analysis and discovered that there has been an increase in thefts through self-checkout kiosks.  With many retailers lamenting the rise in thefts which impacted their financial results last year, it is interesting that the pendulum may swing back in the other direction.  I’ll be keen to see if other retailers follow suit. As for the economy, it remains stronger than anyone expected.  With mortgage rates hovering around 7% it would be assumed that buyers, feeling strapped by higher home prices and interest rates, might just bow out of the market.  They did not in February.  Housing starts jumped 10.7% month-over-month to 1.521 million in February, which comes after a 14.8% slump in January.  The expectation that the Federal Reserve is likely to cut rates later this year likely makes homebuilders optimistic that mortgage rates, too, will decline and bring buyers to the markets in large numbers.

Regarding the next topic, I know that it may touch a few nerves.  This week the federal government announced it awarded Intel $20 billion in grants and loans to boost semiconductor production in the United States.  This happened after Intel announced a few weeks ago that its construction on a new semiconductor facility in Columbus Ohio was being halted.  This isn’t the first grant of its kind, nor will it be the last. The CHIPS Act, passed in August 2022, allows for billions of dollars to be granted to corporations that boost the production of nationally important products in the United States.  Other companies receiving funding include GlobalFoundries, Microchip, and BAE Systems.  Taiwan Semiconductor is expected to receive billions for a fab currently under construction in Arizona.  Unfortunately, this creates a perverse incentive for companies to hold off capital projects with the hope that they too will receive such billion-dollar grants.  I am sure this is not what was intended by the legislation.  An example of this phenomenon is Exxon Mobil which announced this week that a major hydrogen project in Texas may be at risk without IRA (Inflation Reduction Act 2022) tax credits.  It is hard to blame corporations for holding out when they see billions of dollars being given to so many companies.  I am not saying these projects aren’t important, I just question whether it is the taxpayers’ job to fund projects that will reap billions in profits in the years to come.  And lastly, just today the Biden administration proposed $6.3 billion in grants to help “decarbonize” U.S. heavy industries.  With a national debt exceeding $34T and growing by more than $1T every 100 days, where does this government largesse end?

In closing, I turn to what is quickly becoming a problem in its own right.  The rate of obesity around the world has exploded in recent decades.  According to the World Health Organization, in 2022, 2.5 billion adults aged 18 years and older were overweight, including almost 1 billion adults who are living with obesity.  This week Medicare expanded coverage for weight loss drugs including the popular semaglutide products marketed as Wegovy and Ozempic.  Previously, these drugs were only approved for type 2 diabetes.  While this is certainly good news for people struggling with weight, it does have one big downside.  The Congressional Budget Office (CBO) expects that at their current prices, anti-obesity medications would cost the federal government more than it would save from reducing healthcare spending, which will lead to an overall increase in the deficit over the next ten years.  Now you know. 

Bruce J. Mason, MBA