by Gary Alexander

February 23, 2021

We’re approaching the key one-year anniversaries of the onset of the coronavirus pandemic. It’s a time when you and I and many of our friends will start sharing stories of where we were when it struck us that we will be locked up at home for a long, long time, and our fate and our fortunes may be in grave danger.

On February 8, my wife and I disembarked in Miami from our annual Jazz Cruise. We heard about the pandemic and knew that some cruise ships were infected, but after dining with Louis, we made it home by February 11 – and haven’t been off our island since then. In the next county, they held a choir rehearsal March 10. Of 60 singers, 45 caught Covid and two died. Our choir director wisely told us to stay home.

On Wednesday, February 19, 2020, the S&P 500 peaked at 3,386.15. The next morning, it inched up to 3,389, but then fell 35% to 2,192 within 23 trading days, 11 months ago today, on March 23, 2020.

The weekend of February 22-23, 2020 is when the coronavirus escaped China with a vengeance. On the 23rd, cases outside China topped 300 and on “Ash Wednesday,” February 26, cases topped 500.

New York City and New Orleans were especially hard hit due to celebrations for Chinese New Year and Mardi Gras. As a result, cases soared in March in New Orleans and New York City, leading the nation.

Growing Cases Outside of China Bar Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Two jazz giants in those cities – Ellis Marsalis and Bucky Pizzarelli – died of Covid-19 on the same day (April 1). They were fathers of great musicians, but their large and loving families were denied a funeral.

Two Jazz Giants Die of Covid on the Same Day Image

March 15, 2020 was originally Selection Sunday, the day the NCAA picked teams for the annual college basketball tournament, but that event was summarily cancelled. Instead, the Fed desperately cut short-term rates that night by a full 100 basis points, to zero, but that didn’t help. The Dow fell a record 3,000 points the next day on record-high volatility of 82.69 on the VIX. The S&P lost a record 12% that day.

Volatility Index (VIX) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last March was also when “Modern Monetary Theory” (MMT) was launched in Washington DC, as the Fed hatched a series of experiments that economist Ed Yardeni has dubbed “QE4ever.” By the end of that week, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided $2 trillion of financial aid. As a result, the U.S. budget deficit mushroomed to $3.5 trillion in Fiscal 2020 – triple the previous record – while the Fed’s holdings of U.S. Treasury securities soared by $2.4 trillion in the last year:

Modern Monetary Theory Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

On the positive side, the Fed’s quick action dodged a Greater Depression. Government stimulus packages kept many families afloat, while record-low mortgage rates pushed home sales to record highs and many companies boosted their productivity by sending employees home to work, as technology stocks soared.

Money pumping seemed to work. After multiple pundits predicted 40% unemployment rates, the jobless rate peaked at 14.6% and we enjoyed a rapid and unprecedented V-shaped recovery and a stock market boom. After a quick and painful second-quarter GDP drop (-31.4%), we saw a 33.4% third-quarter gain.

This paves the way for phenomenal year-over-year comparisons in the first half of 2021. By next quarter, we could reach the previous record high GDP as of the end of 2019 – and then full employment next year.

Real Gross Domestic Product Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

One year-over-year stock market comparison has already doubled. Since its March 23, 2020 bottom, NASDAQ is already up over 110% as of last Friday, but that’s less than half of its phenomenal gain of 256% in the 17 months after the Long-Term Capital Management hedge fund crisis of October 1998.

What About the Monetary “Morning After”?

Over the past 12 months, through January, the government’s net interest costs totaled $326 billion. That’s not too bad (it’s just 5% of the budget), since the interest rate on $21.6 trillion in debt averaged just 1.5%. But what if rates go up? The debt will certainly rise, but what if rates rise as well? The math isn’t hard.

At the current debt level, the cost of servicing the debt at 2% would be $433 billion, or $649 billion at 3%, $866 billion at 4% and so forth (see chart, below), but if we average $2.1 trillion deficits for the next four years under Biden (the CBO says the federal deficit will be $2.3 trillion, or 10.3% of GDP this year), and the federal deficit reaches $30 trillion, then the cost will be $900 billion at 3% or $1.5 trillion at 5%!

Net Interest Paid by the United States Federal Government Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In that regard, we have to ask – Why so much deficit spending? Yes, some people need relief, but the $1.9 trillion has too much pork and too many checks sent to employed people who don’t need the money.

Except for Europe, most economies are doing well, including ours. Purchasing Managers Indexes (PMIs) are a good indicator of current and future growth prospects. Most global PMIs reflect a sharp “V” shaped recovery over the last nine months. Here are the January 2020, April 2020 (low) and January 2021 PMIs.

Purchasing Managers Indexes Table

Notice the deep depression in India (to 7.2) vs. the slight dip in China (to 47.6). China is the only nation that grew its GDP in 2020 (+3%). Current PMIs put most nations in the position of posting superb year-over-year growth statistics in the second quarter and in each month therein – April, May and June.

Given all these facts about the relative health of the U.S. and global economies, we have serious questions about the need for President Biden’s $1.9 trillion additional spending plan. These spending plans assume there is no limit to what we can borrow. That’s Modern Monetary Theory in action, and it’s a big gamble.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
It’s Starting to Look a Lot Like 2003

Sector Spotlight by Jason Bodner
An Update on our Rapidly Growing Big Money Index

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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