by Bryan Perry

June 9, 2020

The parade of stimulus packages brought forth by the Federal Reserve and Congress are on course to add as much as $10 trillion in debt when all is said and done. And I use the word “done” lightly. This $10 trillion would be stacked upon the current $25.7 trillion in existing debt. The latest bill being pushed through the Senate on Capitol Hill, namely the Monthly Economic Crisis Support Act, was introduced in May by Senators Kamala Harris (D-Calif.), Bernie Sanders (Ind-Vt.), and Ed Markey (D-Mass.)

We can modify the old budget saying, attributed to Illinois Senator Everett Dirksen about “billions” of dollars, to read: “A trillion here, a trillion there, and pretty soon we’re talking about real money.”

United States Federal Debt Bar Chart

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

The current stimulus package is a mindboggling proposal that could put as much as $10,000 per month into American families’ hands to help them weather the coronavirus pandemic. In some ways, it’s a nod to universal basic income, the concept of indefinitely providing people with a guaranteed amount of money per month, but the plan calls for providing financial relief for only as long as the pandemic lasts.

The bill calls for sending $2,000 per month to individuals and $4,000 to couples, as well as $2,000 per child for up to three children. Those earning under $120,000 would be eligible for support, though the payments would be reduced for income over $100,000. Hey, it’s an election year, so don’t be surprised if politicians also promise that Dr. Pepper will flow from public water fountains if they are elected.

But even more alarming to many economic forecasters is the rhetoric emanating from Federal Reserve Chairman Jerome Powell suggesting that the Fed has “a full range of tools,” adding comments like these: “When it comes to this lending, we’re not going to run out of ammunition, that doesn’t happen,” and “We still have policy room in other dimensions to support the economy” and “We will provide essentially unlimited lending to support the economy.” These types of comments, combined with generous income promises by Congress, have fueled a torrid market rally. I mean, who doesn’t love unlimited money?

As stocks of all 11 S&P market sectors have embraced the bullish uptrend, the U.S. Dollar Index (DXY) that measures the dollar against a basket of currencies (Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc) has seen its value decline by about 5.8% since peaking on March 20, the day before the stock market reached its panic lows.

To some, this would seem perfectly logical – and it could amount to a whole lot of nothing based on pure rotation out of safe haven assets and into risk-on assets. After trading near 103 on March 20, the DXY closed last week at 96.95, just above its 3-year moving average support. I would venture that if the DXY were to trade below 96 for any length of time, the Fed would step in to buy dollars to support the buck.

United States Dollar Index Chart

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

A technical breakdown of the dollar from current levels would call into question the Treasury’s ability to continue to print “all the money in the world,” and what that would imply for the future of U.S. interest rates. A look back to 2008 shows that the market had the least amount of faith in dollars since the DXY was tracked, but what it also shows is that the Fed’s intervention in 2008 caused a surge in confidence and a strong rally in the greenback. The Federal Reserve and other central banks reacted to the deepening crisis in the fall of 2008 not only by opening new emergency liquidity facilities, but also by reducing policy interest rates to close to zero and taking other steps to ease financial conditions. Sound familiar?

50 Years United States Dollar Index Chart

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

Back in 2008, federal debt stood at $10.7 trillion, which was considered out of control then, but in the span of just 12 years that debt level has already doubled and is about to triple in short order.

The Treasury recently floated their first 20-year bond since 1986, and it was well received. The new $20 billion issue went out with a 1.22% yield compared to 0.70% for the 10-year T-Note.

Treasury Secretary Steven Mnuchin said the U.S. plans to increase its issuance in the 10-year, 20-year, and 30-year bonds to extend the length of time the U.S. has to pay off its debt. He said the Treasury considered ultra-long 50- and 100-year bonds but ruled them out based on a lack of demand. At the current rate of stimulus growth, the federal debt as a percentage of GDP will soar past 200% much sooner than the 2050 date in the chart below, which was published January 2020 – before COVID-19 struck.

Federal Debt as Percentage of Gross Domestic Product Chart

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

I think the problem that currency traders are having by pushing down the value of the dollar is whether the Fed, Congress, and the Treasury will in fact take back the stimulus, be it by lack of intention, lack of ability, or both. I’m not calling for a crash in the dollar by any means, but another 5% to 10% decline in the DXY may put the rally on hold. This topic isn’t getting any press or mention in major financial media outlets, but it will gain traction if the dollar falters from here amid the cries for trillions of dollars of more stimulus. It’s so easy for the government to spend, and nearly impossible for it to save or reduce debt.

Until then, enjoy the ride, but keep a watchful eye on the dollar and bond yields. For now, a weaker dollar is good news for exports and the near-term growth that the markets are clearly embracing. How much future debt can the market handle? I don’t know. No one knows, but Japan’s debt-to-GDP is about 279% (source: businessleader.com) and their stock market is at the same level today as it was in 2010.

The U.S. debt-to-GDP ratio is about 111%, so it looks as if there is room for the market to extend its gains based on a variety of reasons outside of rapidly expanding debt levels. At the same time, getting to 200% of GDP in the U.S. at the rate of the current spending spree won’t take long and simply means we shouldn’t be surprised if one day the market pays more attention to this trend than it cares to at present.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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