The punch bowl has been spiked. The stock market has been given cases of Red Bull, the real estate industry is on a sugar high, and Uncle Sam has artificially inflated consumer spending. The barrage of economic data in recent months are inevitably going to pad the gross domestic product in the third quarter, but will the metrics present a genuine and accurate portrayal of the world's largest economy? Training wheels have prevented the nation from skinning its knees, but what happens when that support goes away? Either the economy will head off a cliff, or it will be bam, zoom, right to the moon.
Nothing Is What It Seems?
The recovery in the equities arena is officially complete. The Dow Jones Industrial Average is poised to reclaim 28,000, and the S&P 500 and Nasdaq Composite Index have both hit record highs. While better-than-expected corporate earnings have contributed to the impressive gains, you cannot help but wonder if the Federal Reserve's multi-trillion-dollar Powell Putsch has helped stocks since the bloodshed in March. There is a lot of evidence to support this notion. If the central bank sat on the sidelines during the mayhem, would the New York Stock Exchange have recovered as quickly as it did? That is something we will never find out because the Fed refused to let it happen, as it did in 2008-2009.
Liberty Nation reported that a lot of Americans had spent their $1,200 stimulus check on the stock market, using the trading platform Robinhood to execute these trades. Some analysts think retail investor volumes have facilitated such growth in stock valuations. But would these armchair day traders be involved in the market if they never received $1,200, or were able to borrow on margin in a ZIRP environment?
Corporations and governments have embarked upon a borrowing binge in the aftermath of the COVID-19 public health crisis. Central banks have directly monetized the debt sold by both the state and the private sector. Many of the corporate bond exchange-traded funds (ETFs) are popping because of the Fed's interventions, but it is unclear if there would be enough demand if it were not for the central bank scooping up corporate bonds. We might never know if there would indeed be a market for the $2.5 trillion of bond issuance this year.
The U.S. labor market is doing better than a lot of the experts anticipated. But is this because of the Paycheck Protection Program (PPP)? The federal government launched the PPP to help small businesses maintain their staffing levels. But now that this pandemic benefit has expired, analysts are warning that companies could start trimming payrolls. The latest initial jobless claims topped one million, and many investors are keeping an eye on the number of Americans filing for first-time unemployment benefits over the next couple of weeks. If the reading perpetually remains above one million, the labor crisis is real.
Recently, the Bureau of Economic Analysis (BEA) estimated that special federal payments to individuals and small business owners in the second quarter raised personal income by an annualized $3.2 trillion. This consisted of direct stimulus payments, small business loan forgiveness, unemployment benefits, and a myriad of other stimulus and relief measures. When you factor in pent-up demand, you could see how retail sales have surged on the other side of the lockdown, soaring 18.3% in May. With federal aid beginning to wind down, the U.S. is starting to see falling momentum in retail receipts. Walmart even conceded that it received a pop in sales as Americans spent their Coronavirus checks, and then spending fell when the direct payments ran out.
The fixed 30-year mortgage rate is around 3%, according to the Mortgage Bankers Association (MBA). It is so low because of cheap money, caused by the U.S. central bank slashing interest rates to historic lows. As a result, existing-home sales spiked 20.7% in June and 24.7% in July. Once again, would there be enormous demand in the real estate sector if the Fed refrained from manipulating credit markets?
A Bad Case of Indigestion
The consensus is that the third-quarter GDP, which is not a great barometer to measure the economy, is going to be huge. That said, even if it were the gold standard of data, who can trust it under these conditions? Everything has been manipulated and distorted through Fed stimulus and congressional relief. Nothing is what it seems. The real measurement of how strong the U.S. economy is might never be revealed until the punch bowl has been emptied, the training wheels have been unscrewed, and everyone has had a sugar detox. Policy tightening may not be in the cards for a while, especially if the U.S. endures a second wave of the Coronavirus in autumn. But Americans may need to cleanse their bodies of the Red Bulls and acquire a lifetime supply of Pepto Bismol to endure what lies ahead.
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Read more from Andrew Moran.
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