The Big Picture
“Every new beginning comes from some other beginning’s end…” -Dan Wilson, from the alternative rock band Semisonic
“Closing Time” is a catchy and timeless song written in 1998. Just another reminder that all parties come to an end.
Every market cycle has a few common themes or drivers that perpetuate the cycle. Perpetuate would be an understatement in this case! For my last post of the year and for the decade, I thought I would address and expand on what I believe to be the most prevalent theme of the longest bull run, Stimulus! A forewarning, I have ranted on this issue for many years! However, I think to wrap up the Teen’s decade, I would add some additional details and address some common beliefs on stimulus. There is considerable debate around this topic, and there likely will be for decades to come. Some believe stimulus is brilliant, and some believe it has the potential to bring down the system! (Recall where one opines on a subject depends greatly on their agenda or bias.)
Are you aware that stimulus has begun yet again in the United States? They, meaning the Federal Reserve (Fed), just aren’t calling it stimulus this time. It is apparently something else. Unfortunately, not a joke.
For the last time in 2019 and for the decade, remember to always…
Have a Plan and a Process!
From the Trenches
“You don’t have to go home but you can’t stay here…” – Dan Wilson
Due to the great financial crisis in 2008, the banking system would surely have collapsed without government intervention. A society without a banking system is not a popular option for politician’s and governments, nor anyone else for that matter. While controversial, there was support from all sides to prevent more carnage. The ultimate prescription has been broadly debated, however the efforts were successful at avoiding a depression.
“Never let a crisis go to waste.” – M.F. Weiner
It is amazing what a group may agree to under precarious circumstances. The aftermath of the great financial crisis was no exception.
The rules of the game have changed.
Stimulus from central banks and governments have been the predominate factor for this cycle. It has elevated the Fed’s power position substantially in the economy. The Fed was already controversial, now nearly no economic event comes to pass without a mention of the Fed. They are under a material amount of pressure to ensure the economy sails smoothly. The point, or issue here, is once the stimulus programs began they never ceased! Over ten years have passed and I would have never imagined that stimulus would have continued to this day (in one form or another). I would guess many share this opinion. Stimulus is and will continue to be an ongoing factor. How will stimulus end? The Fed… is in the corner.
What did stimulus accomplish?
- Intended Goal: Recapitalize the Banks.Banks were holding a lot of bad debt from the real estate bubble and the Fed took this off their hands. This left the banks with fresh capital to lend and stimulate the economy. Essentially erasing the burdens held by banks. However, the intended result on the broad economy was not to the Fed’s hopes. Hope is not a process…
- Unintended Goal?: Significant asset price increases! The stock market, real estate, even the bond market,have all participated in significant price gains that can be directly related to stimulus actions. Overall price appreciation is a positive, but not if it is an artificial increase. Which may lead to bubbles! This is why this cycle is “the most hated bull market.” The rules have changed, and that leaves many uneasy. What will the Piper’s price be?
I have discussed the “Fed premium” for many years which is simply an added sum to the price of financial assets as a result of Fed intervention. What evidence do we have to support this observation? Late last year, when the Fed was insistent on removing the last bastion of stimulus, low interest rates, we watched the stock market fall nearly 20% in weeks. So, we can propose that the Fed premium is at least that sum. Possibly more.
In conclusion, while stimulus was the primary economic theme during this cycle, the results of stimulus have been mixed at best. For some areas of the economy stimulus has been a boon. For others, much is found wanting.
Bottom Line: Stimulus was successful at recapitalizing the banks. Stimulus has not been so successful at accelerating growth. Growth over this cycle has been far below average. This is one reason we have such polarization in views on stimulus.
“Time for you to go out into the world…” – Dan Wilson
The last topic du jour has been the ever-elusive inflation. They called quantitative easing printing money. And this was to lead to high inflation, even hyper inflation according to some.
Money Printing: Is quantitative easing the same as printing money? Sort of… It is a bit more complicated. Not to dodge a direct answer but the Fed buying assets from banks is more of a purchase, or exchange, of an asset for capital. The bank then has the ability to lend said capital to the economy. It is not literal printed currency put into the system. If the money received from the Fed is not lent out to the economy, then its impact upon economic growth is nil. As well as its potential to increase inflation. Economic growth has been much slower in the Teen’s than prior decades. So we can conclude that stimulus was not as successful as hoped to generate real growth.
Ever-elusive inflation: We seem to have come to a point where many believe we will never see inflation pick up again. This is a dangerous assumption. The potential for inflation’s return is very present. To be fair, we have seen inflation in some areas of the economy, namely healthcare and education. However, in headline areas such as energy, we’ve seen declines. The primary concern on inflation resulting from stimulus is the effect on lowering the value of the dollar; given all the “money-printing”, or the increase in the money supply. However, as discussed, money-printing was a bit of a misnomer. While the supply of money has increased, this is just one part of the equation. All developed economies have been engaging in the same exercise. So the outcries of a collapsing dollar were unfounded. In fact, the dollar has risen in value over this cycle.
So I would guess most would like to know what is next with stimulus and where we may go from here? (For those who know me well, you know I am not a fan of forecasting, it is a fool’s errand. However I am still asked to provide thoughts from time to time!)
For starters, stimulus is likely to continue into the Twenties. Central banks have simply come to rely on this tool, as long as they can get away with it!
“I’m from the government and I’m here to help!”
Laugh.. Out… Loud! My last bit of humor for the decade.
What may change their minds?
Should we begin to see material inflation in the economy, or a material impact on the value of the dollar (downward). This would have the potential to stop the Fed in their tracks. At that point stimulus could do more harm than good. The nature of these grand ideas is they go on until there is clear evidence of more harm than good. The same thought process applies to “not fixing it until it’s broken!”Not the best approach, but very much a human approach.
Bottom Line: We move forward and we move on. This topic will stay with us for the foreseeable future. More to come as we welcome a new decade!
Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Adviser.
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