{"id":52057,"date":"2020-05-07T13:00:45","date_gmt":"2020-05-07T17:00:45","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=52057"},"modified":"2020-05-07T13:37:15","modified_gmt":"2020-05-07T17:37:15","slug":"disconnect-what-disconnect","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2020\/05\/disconnect-what-disconnect\/","title":{"rendered":"Disconnect? What Disconnect?"},"content":{"rendered":"

Over the past few weeks, the financial news media has been marveling at what it calls the \u201cdisconnect\u201d between stock prices and the economy. Economic and health statistics are likely to go from bad \u2013 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in April, more reported coronavirus cases and deaths \u2013 to worse \u2013 a nearly 40% drop in GDP and around 15% unemployment in the second quarter, according to the Congressional Budget Office\u2019s latest projections. Yet the stock market has blissfully regained about half of the 34% drop it sustained between mid-February and mid-March.<\/p>\n

But is there really a disconnect? Does the economy \u2013 now largely controlled by the Federal Reserve and the U.S. Treasury Department \u2013 still have any correlation to what happens in the stock market anymore, and vice versa? Well, the answer is yes, but not in the way it used to. What\u2019s happening is that as the economy goes deeper into the red, the more it prompts the government to pump in more money and for the Fed to intervene more in the financial markets. That is unquestionably good for stocks.<\/p>\n

We have been in an environment since the 2008 financial crisis where the Fed has played an unprecedented activist role in the bond market and, indirectly, the stock market. That role has grown further under Chair Jerome Powell, who seems to believe it\u2019s the Fed\u2019s job to rescue equity investors any time stock prices correct, never mind what\u2019s going on in the economy. Now that we\u2019re in the middle of an economic downturn that makes 2008 look like a garden-variety recession, the Fed has put its monetary policy and quantitative-easing engines into overdrive, which may or may not stimulate the economy but have surely at least put a floor under stock prices, if not actually boosted their value.<\/p>\n

As I\u2019ve discussed in my past few columns<\/a><\/strong>, two of the prized economic ambitions of the political left \u2013 economic socialism and Modern Monetary Theory \u2013 have been fully embraced by the Trump Administration and the Fed to protect the American economy. That should make liberals happy \u2013 although as you\u2019ve probably noticed, very little makes them happy, even when they get everything they demand. That\u2019s probably because it usually backfires on them, like now. It must gall them that when put into action, these ideals have actually benefitted the people they despise, namely capitalists and investors. Not only have stock prices rebounded \u2013 although they\u2019re still down about 15% from the mid-February record peak \u2013 but the income and wealth gaps between the haves and have-nots have widened even more.<\/p>\n

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I\u2019m assuming that this is not what the Fed intended, but it is the practical reality.<\/p>\n

This reminds me a little of how the property insurance industry works. Have you ever noticed that after some \u201cact of God\u201d\u2013 a hurricane or an earthquake, for example \u2013 the prices of insurance company stocks usually rise, rather than falling as you might expect them to do? That\u2019s because disasters like that just give the insurance companies a reason to raise premiums, increasing their future revenue and profits. After all, they only have to pay claims once, but the higher premiums last indefinitely. It\u2019s good for business, not bad.<\/p>\n

That seems to be what\u2019s happening in the financial markets currently. As the economic figures get worse and worse, the Fed and the U.S. Treasury pump more and more money into the economy, which helps stocks. But there\u2019s one big difference between this and my insurance analogy. While insurance companies protect themselves by reinsuring their risks with other insurance companies, theoretically, at least, all of these companies could go bust if the catastrophe was big enough. But that could never happen with the U.S. government and the Fed since all they have to do is print more money when they run out, which is what they\u2019ve been doing. <\/p>\n

The Treasury recently announced that it plans to borrow $3 trillion this quarter \u2013 more than five times the amount it borrowed per quarter during the 2008 crisis \u2013 to cushion businesses, consumers, and state and local governments from the coronavirus. At the same time, the Fed\u2019s balance sheet \u2013 which now includes corporate bonds, not just Treasury and government-guaranteed mortgage-backed securities \u2013totals a record $6.5 trillion, up nearly $3 trillion, or 85%, just since last September. And it\u2019s going to get still larger, as it is promises to buy an \u201cunlimited\u201d amount of assets going forward, including a large share of whatever the Treasury has to sell.<\/p>\n

How long this state of affairs will last is hard to guess, because it\u2019s never been done before, not even during the Great Depression and World War 2. But right now, it\u2019s redounded to the benefit of investors, and it makes perfect sense, whether we like it or not.<\/p>\n

Visit back to read my next article! <\/p>\n

George Yacik<\/a>
\nINO.com Contributor - Fed & Interest Rates<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Over the past few weeks, the financial news media has been marveling at what it calls the \u201cdisconnect\u201d between stock prices and the economy. Economic and health statistics are likely to go from bad \u2013 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in […]<\/p>\n","protected":false},"author":16,"featured_media":52063,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[6191,9264,8524,6882,6824,511,6938,230,5383,23880],"class_list":["post-52057","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ino-com-contributors","tag-economic-growth","tag-fed-chair-jerome-powell","tag-fed-monetary-policy","tag-federal-balance-sheet","tag-federal-open-market-committee-fomc","tag-federal-reserve","tag-george-yacik","tag-interest-rates","tag-quantitative-easing-qe","tag-u-s-treasury-department"],"yoast_head":"\nDisconnect? 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