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Market Update 8.17.2020

Market Update 8.17.2020

August 17, 2020

Today is  Monday August 17 and it is 6 am.

 All major averages remain above their respective short, intermediate and long term trend lines. From a trend analysis standpoint, all lights are flashing green.

I have gotten several questions lately on what will be the consequences of all the Federal Reserve Stimulus going into the economy. In the short run, the consequences have been steadily rising asset prices, in particular the stock market. But what will be the long term consequences? This my friends is the million dollar question.

As you all know, I never like making predictions. Early on in my career, I used to think I could predict the market with the best of them. It was only over time that I realized predicting the market is a fools game as the market is designed to humble all of us. With this in mind, I will attempt to give you my best guess.

In order to gather some clues as to what our future might hold, lets take a look at what Japan has been doing for the past 10 years. Here is the Bank of Japan’s  balance sheet relative to GDP

Here is our Fed Balance sheet relative to our GDP.

So Japan’s Central Bank sits at roughly 120% of GDP while the US sits at around 41% of GDP.  So compared to Japan, maybe we don’t look so bad. Now let’s look further at Japan for additional clues.

Japan has been mired with very sluggish economic growth during their entire Bank of Japan balance sheet expansion. Over the past 10 years Japan has experienced GDP growth of 4% only once with the remaining years all below or well below 2%. In fact, it has driven rates there into negative territory. The Japanese are now concluding that this negative interest rate experiment has proven ineffective as a tool to stimulate GDP growth. They have come out and admitted that NIRP was a mistake. It seems they were rapidly running out of debt and ETF’s to monetize.

Now the BOJ has decided to pay Japanese banks hundreds of millions of dollars (.1% on all loans) in bonuses to boost lending and thereby stimulate the economy. The old saying, ”If at first you don’t succeed, try, try again” seems to apply here.  Naturally banks are ecstatic about this latest development. With the Japanese 10 year government bond yielding .04%, the .1% bonus has the Japanese bankers salivating. If you have surmised that this is essentially a direct money transfer from the BOJ to the Japanese Banks, then you are absolutely correct. This scheme serves two purposes, 1. It will stimulate lending which should stimulate the economy and 2. It helps a hurting banking system suffering under the financial duress of negative interest rates.

As a final step, should this policy prescription fail, my guess is that the BOJ will develop a similar scheme to give money directly to Japanese citizens as a final last resort to stimulate the economy. Not unlike Andrew Yang’s prescription of universal basic income. In fact, Mark Zuckerberg, Elon Musk, and Joe Biden are on record as being supportive to a UBI type program. Also, Warren Buffett is on record as saying that because our per capita GDP is running around $60000 per citizen, there should be a way to do more for those that don’t have the market skills that are rewarded in the current economy. Billionaires making policy suggestions to reduce income inequality reminds of Kings lording over the peasants and offering to reduce their taxes to avoid an insurrection. It will act to protect the King/Billionaire class position but what will be the consequences to the dollar and the economy.

Additionally, one could argue that the PPP program designed to provide cash flow for small business so they wouldn’t have to do layoffs during the pandemic, is a form of a direct payment scheme.

So to sum it up, my guess is that our Fed can manage through this most recent balance sheet expansion, as long as they can slow the growth of the debt and as long as the economy continues to grow. The preference would be to have the economy grow at a much more significant rate so that the ratio of GDP/Fed debt starts to come down.  As always, I hope I have given you some things to think about. And thanks again for all your support. We are very pleased to be able to continue to deliver you excellent results.