Your New Employer: Government Stimulus
This time truly is different.
The macro backdrop we are experiencing today is without precedent. And it is resulting in truly insane moves in the financial markets.
Let me explain.
Never before has the US government decided to shut down its economy voluntarily.
Yes, the US economy has experienced recessions and depressions before. But never before has the economy gone from growing at a reasonable pace to completely stopping in the span of a few weeks.
As I write this, nearly 40 million Americans are out of work (more on this shortly).
Industrial production has dropped over 11% in April – its largest drop ever.
The latest retail data show an 83% collapse in clothing retail over the last two months.
Across the board, all retail sales including food and beverages has dropped 16%.
This is DEPRESSION-type stuff. And if this alone were the only issue investors had to deal with, things would be difficult enough.
However, it’s not.
To combat this economic shutdown, the U.S. government and the Federal Reserve have embarked on an unprecedented amount of fiscal and monetary stimulus. Between the two of them, the U.S. has spent over $4.8 TRILLION in the last eight weeks.
To put it into perspective, that’s roughly the GDP of Japan… the third largest economy in the world. And the US just spent it in a little over months’ time!
So, we’ve got an unprecedented economic shutdown AND an unprecedented fiscal and monetary policy response. Which one will win?
Will the economy continue to implode, eventually forcing stocks to crash again?
Or will the Fed and federal government succeed in “papering over” the economic decline until the economy reopens completely, allowing stocks to roar back to new all-time highs?
No one knows.
There is however, one clear theme for the markets today.
The Powers That Be are going to print trillions and trillions of dollars to fight this problem.
Unprecedented Monetary Policy
This is the single defining characteristic of the current investing climate: printing money. And from the look of things, it won’t be ending any time soon. If anything, it looks as though the US will be forced to spend trillions and trillions for unemployment payments in the coming months.
Indeed, during his recent interview on 60 Minutes, Fed Chair Jerome Powell suggested that there is “no limit” to what the Fed will do to support the economy.
The chairman of the Federal Reserve on Sunday said the central bank has not exhausted its power to help the economy get through the coronavirus pandemic.
“We’re not out of ammunition by a long shot,” Powell said in a transcript of his interview aired on the CBS news magazine “60 Minutes.”
The Fed chairman said there was “no limit” to what the Fed can do to lend money to financial markets.
“So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to,” Powell said. [Emphasis my own.]
Powell has also called on the government to INCREASE fiscal spending!
“This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible,” Powell said.
Powell also cautioned that the near-zero interest rates and trillions in emergency Fed loans deployed by the central bank would not likely be enough to repair the toll of the economic crisis, calling for action across “all levels of government.” [Emphasis my own.]
Source: The Hill
Bear in mind, this is AFTER the federal government has already committed to a $2 trillion stimulus program, resulting in the US running a deficit of $4 trillion this year.
Given that the Fed is spending $1 trillion+ per month buying every debt asset in existence… one can assume that Powell’s statements imply the Fed would start buying stocks outright if the economy were to continue to contract.
The Major Trends at Play Right Now
Again, we are living in truly unprecedented times both in terms of the economy and policymakers’ response to the crisis.
How this will play out is impossible to know. The only thing we DO know is that policymakers will be spending trillions of dollars going forward.
Here’s why they’ll need to. These are the major trends that have taken shape as a result of this crisis:
- The economic shutdown in the U.S. is forcing tens of millions of Americans to lose their jobs.
- Once they lose their jobs, the vast majority of Americans stay
- There is evidence that unemployment is actually paying Americans MORE money than they would earn by working.
- This means a significant portion of Americans will likely CHOOSE to remain unemployed even as the economy reopens.
- And this will mean even MORE stimulus/unemployment checks being spent.
I’ll outline how to profit from these trends on Monday. Until then…
Editor, Money & Crisis