by Ivan Martchev

July 14, 2020

The Federal Reserve’s balance sheet has shrunk for four weeks in a row. The rate of shrinkage is about $200 billion during those four weeks, which is significantly higher than the highest rate of shrinkage in December 2018 – to the tune of 4X. On the other hand, the rate of growth of the Fed balance sheet this year has never been higher, as the central bank added nearly $3 trillion from March to June.

The cause could be some emergency measures aimed at unfreezing the credit markets, but a smaller balance sheet means less electronic dollars in the financial system.

These are unprecedented times. With this type of credit support, it would be unlikely for stocks to retest their March lows, as the balance sheet is likely to grow more this year, based on what the Fed has announced. Still, the present shrinkage may rub off negatively on financial markets enough to cause a correction, which would be healthy. That is, if the balance sheet keeps shrinking.

United States Central Bank Balance Sheet versus Dow Jones Industrial Average Chart

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

One thing that bothers me about the present situation is that we have a super concentration of performance in trillion-dollar market cap stocks. A normal correction of 10% can push the averages lower because Apple’s market cap on Friday was $1.66 trillion, while Amazon’s was $1.59 trillion. There’s Microsoft’s $1.62 trillion and Alphabet’s $1.05 trillion. That’s $5.92 trillion for four companies.

Apple Inc. Stock Price Index Chart

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

The argument is that they have real sales and earnings and that it’s not like the year 2000 when that was clearly not the case. With sales and earnings less affected by the coronavirus recession, in some cases turbocharging them – like with Microsoft and Amazon – fund managers are hiding in these mega-caps.

I like all four as businesses, but if you ask me if one should be buying them at the present prices, my take is that there will be a better opportunity in the next three months at prices below the present levels.

I don’t think the coming correction will be any more than an overdue correction, but the sheer size of those market caps can move the S&P 500 index a lot, as the S&P 500 is market-capitalization weighted.

Navellier & Associates does not hold Alphabet in managed accounts but does own some Apple Computer, Amazon, and Microsoft.  Ivan Martchev does not own Amazon Microsoft, Apple Computer, or Alphabet in private account.

TIPS Should Work, Along with Gold Bullion, if Inflation Returns

If the Federal Reserve is trying to create inflation to reduce the real value of the COVID-amassed debts, then Treasury Inflation Protected Securities (TIPS) may work well here, in addition to gold bullion.

Fed Chairman Powell has already said that they are looking at yield curve control, which is what they did during and after World War II. At that time, they managed to control the postwar headline inflation rate to stop rising a touch below 20%, while the 10-year yield was less than 2.5% at that time.

Treasury Inflation Protected Securities Bond ETF Chart

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

There weren’t any TIPS in the 1940s but if there were, they would have done very well. In the 1940s the price of gold bullion was pegged at $35 per ounce, so one could not use precious metals as an inflation hedge. Now we have both freely-trading gold bullion as well as TIPS, so both should be used if the Fed gets into the yield curve control business, where it surely looks to be headed.

It is important to remember that coupon rates may be low, but it is the principal of the securities that gets indexed for inflation, so the payments are actually rising despite the fixed low coupon rate.

It does not look smart to be buying something that’s at an all-time high, but the inflation that may be coming is not here yet, so any pullbacks will look like good buying opportunities.

If one needs a regular income stream, this is not a good vehicle without rising inflation, which is a year or two away, but this is a heckuva lot better than holding regular Treasuries if inflation begins to rise.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Fed is Moving in Mysterious Ways

Sector Spotlight by Jason Bodner
The Proven Path to Super Riches

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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