Quote of the Week
“There is no limit to what a man can do or where he can go if he does not mind who gets the credit.” Ronald Reagan
Remember the Dot Com boom of 1999 and the subsequent bust of 2000-2002 when the markets were down 50% from the top. As Yogi Berra would say, “This is “Deja Vu all over again.” Except it is on steroids.
A good friend of mine recently bought a Tesla. He thinks it is the greatest car ever produced. Okay, but check out the price increases in Tesla. Is it really that great to cause the stock price to jump 12% today? Is it that great for Tesla stock to rise by 83.6% since August 11th? Is it that great for Tesla stock to rise 495.6% since the beginning of 2020?
By comparison, the equal-weighted S&P 500 is up 3.9% year-to-date. The equal-weighted S&P 500 assumes that an equal dollar amount is invested in each of the stocks in the index.
An ETF (exchange-traded fund) that follows that shorts stocks (rises when stocks go down) is up 4.9% since August 11th while the equal-weighted S&P 500 is up only 0.003% since August 11th.
You judge, is it “Deja Vu all over again”?
A massive welfare package (CARES Act) via a huge federal aid package was signed on March 27th, 2020. It has prevented a steep GDP collapse. The US economy’s record contraction in the second quarter would have been a lot worse if Washington hadn’t stepped up with trillions of dollars of emergency spending.
The weak recovery won’t be nearly as strong unless Washington comes through with another rescue package, economists say. Democrats and Republicans are divided over the next relief bill with emergency unemployment and other benefits expiring.
Gross domestic product (GDP), the official scorecard of the economy, shrank by an inflation-adjusted 32.9% annualized pace from April through June. That’s three times larger than the previous record decline in 1958.
The Current Negotiations for the HEROES Act
What kept the economy from plunging even further due to the virus and the lockdown was the lifeline thrown to tens of millions of suffering Americans by the federal government. Lawmakers spent trillions of dollars on stimulus checks for families, more generous unemployment benefits, and massive loans to struggling businesses.
Federal spending jumped by more than 17%.
As a result, disposable incomes soared in the second quarter even as the coronavirus pandemic triggered a record collapse in the economy. Incomes shot up an annualized rate of 45%. That helped financially struggling Americans to pay the rent, buy groceries, and make other needed purchases.
“The only way you have personal income rising in a collapsing economy is if you turn to a massive welfare economy,” said Joel Naroff of Naroff Economic Advisors. “That was absolutely necessary, and if it did not happen, the decline might have been 50% or more.”
Now we sit here on September 1st, and there is no “Cavalry” riding to the rescue. The Democrats and the Republicans are miles apart on a new relief package. The Republicans want a $1 trillion package, and the Democrats want a $2 trillion package. Plus, the Senate doesn’t return until after Labor Day.
I read an interesting article in the New York Times today about the negotiations for the prior relief package. According to the article, Steven Mnuchin, the Treasury Secretary, and Nancy Pelosi negotiated the prior package and basically got along. However, the right-wing of the Republican Party was furious with Mr. Mnuchin, especially about the $600 per week unemployment benefit. President Trump has apparently given the negotiating lead to Jim Meadows, the current chief of staff, and the talks have fallen apart. Jim Meadows and Nancy Pelosi don’t get along at all, so who knows how this will work out.
I am not a Socialist, but if something isn’t done to help the people and the economy stay afloat, we will be digging a deeper hole to climb out of. Remember the first Rule of Holes, “If you are in one, quit digging.”
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These are the opinions of Larry Lof and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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