More Stimulus Coming
On Wednesday, I had a conversation with someone who had lost their same job twice in the last 4 months. He had lost his job back in April and was put back on the payroll after his company received PPP money. He was let go again maybe for good this time. He is now receiving the extra $600 in his unemployment check until the end of the month. This extra unemployment money was actually allowing him to pay down his credit card debt.
JPMorgan’s CEO Jamie Dimon summed it up best when he said on this weeks quarterly call, “It’s just very peculiar times. In the normal recession, unemployment goes up, delinquencies go up, charges go up, home prices go down. None of that’s true here.” Instead, he said, “savings are up, incomes are up, home prices are up.”
I would add that people also are paying down their credit cards while unemployed! Citigroup CEO Michael Corbat told analyst that we are in a completely unpredictable environment for which there are no models, no cycles to point to. Bank of America CEO Brian Moynihan said on a call with analysts, “Right now we are seeing nothing that is consistent with an 11% unemployment rate.” JPMorgan CFO Jennifer Piepszak said that even if the government curtails aid, it may take at least several months for banks to get a sense of how many consumers and businesses will fail to repay debts. “I mean, first, we have to start seeing delinquencies.”
I listened to all of the bank earnings calls and reviewed their results. The one thing that is being missed by the financial press is how much deposits have grown. All of the major banks have seen an increase of over 30% on their balance sheets in the last 6 months. The trillions of dollars printed has increased the M1 money supply by over 35%. The chart below is a good visional why markets have rebounded.
The financial consequence from all of this money being printed, will likely be asset inflation. You ask yourself – do deficits even matter anymore? At a rally yesterday, Vice President Mike Pence argued Democrats were turning the country toward socialism. You also have to wonder, isn’t all this stimulus the largest giveaway in history? I’d like to tell the VP that when the government started buying junk bonds and giving away money to people and businesses that didn’t need it, he crossed the line towards socialism. The government is picking the winners and losers and would have bought stocks if the market fell low enough. Many people did need the extra money like the person I met with, but millions more didn’t need it.
With interest rates at 0%, there are trillions of dollars that have been slowly moving into investments that pay a higher dividend. Corporate bonds seem to go up every day as more and more buyers capitulate and take on more risk for a higher yield. The chart below shows the record cash on the sidelines. You can make a good case that this money is helping to support bond markets and investors are now placing a premium on owning equities.
Housing has benefited the most from low rates and stimulus checks. This week the 30-year fixed mortgage rate fell below 3 percent to the lowest level in history. Mortgage rates have fallen to a new low for the fourth time in the past five weeks. I expect housing to remain hot as long as the stimulus benefits continue. This has become both a buyers and seller market. For buyers, interest rates are at an all-time low and there will be opportunities in housing because of more people on the move. For sellers, you need to thank the Fed for the increase in demand from lower interest rates.
I’m hopeful that there will be a vaccine in early to mid 2021 and that the government will extend unemployment benefits to only the people that need the money. If you are employed, I don’t think you need another $1,200 check in the mail to spend at Home Depot or pay off your credit cards. Some Home Depots can’t even keep up with the increased demand for lumber and concrete. With inventories low and demand so high, lumber prices increased over 60% in the past few months. This is a sign to me that inflation has returned. By the looks of the charts above, there already seems to be enough money floating in the system. At some point, when this pandemic ends, tax rates will go higher to pay for all of this. Once talk of higher taxes is on the table, it will be a discussion worth having to covert your IRA into a Roth.
I expect markets to become even more volatile (if that’s even possible) as the next stimulus package is debated in the next few weeks. I’ll leave you with an amazing statistic. This year has had more 5% moves in the S&P 500 than all of 2008. That’s volatility none of us want to relive, but here we are. I expect a few more of those 5% moves up and down before this year is over. Hold on and stay safe!
