We’re back this week with our recommended reading list after taking a break last week to conduct an interview with Patrick O’Shaughnessy. If you haven’t watched that interview, you can do so by clicking here.
Unemployment numbers continue to increase, albeit at a slowing rate. Much of the decrease can be attributable to the Congressional relief package offered to individuals and businesses. We have been asked by several clients how that relief package, as well as the Federal Reserves actions, will impact our economy in the future. Ultimately, unprecedented measures have unknowable outcomes. However, we can do our best to observe the historical data to draw reasonable conclusions. This weekend’s reading will focus on that topic.
Below is this weekend’s recommended reading:
Fidelity’s director of global macro, Jurrien Timmer, reviews the current state of the economy and markets in an attempt to estimate what the market is expecting from a recovery standpoint. He also reviews the potential costs of Congress and the Federal Reserve’s actions on future growth.
The question going forward is twofold – (1) has the federal government’s measures reduced downside risk in the markets and economy and (2) has the potential reduction in downside risk also resulted in a capped recovery?
The answers to these questions are unclear; however, Timmer makes his best effort to estimate fair market valuations under varying economic circumstances (V-shaped, U-shaped, and L-shaped recoveries).
One of the consequences of the federal government’s intervention over the last month is the astounding levels of debt required to fund the rescue packages. On an inflation-adjusted basis, this is the largest stimulus bill in American history. The obvious question is “Who is going to pay for this?”
One silver lining to the absolute levels of government debt is that borrowing costs have never been lower, while inflation is currently subdued as measured by CPI. As Carlson notes, for every $1 trillion borrowed at prevailing 30-year interest rates, the interest expense is just $11.7 billion annually – a rounding error in an economy this large.
Two ways to reduce the impact of rising debt? Inflation and GDP growth. Time will tell if this package has an impact on either measure.
Along with the relief programs funded by Congress, the Federal Reserve has been vigilant to ensure liquidity in markets is preserved. A potential consequence of more dollars in circulation is a decrease in the value of the dollar and an increase in inflation as a result. This is a similar argument posed after the 2008-2009 financial crisis in which the Federal Reserve first introduced quantitative easing.
What resulted in the decade after the financial crisis was one of the most tepid inflationary periods on record. It’s unclear the true causes of inflation (although we know it’s more than just the money supply). Inflation is always a potential threat, especially for bond investors who are locked into fixed coupon payments. Our clients’ portfolios are generally designed to account for varying risks, including inflation.
We hope everyone has a happy and safe weekend. Please give us a call if you have any questions.
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