More Confidence, Less Cash – Dispatches From Route 66
By Nick Gallus
Every week, the Federal Reserve releases detailed data about the country’s money supply – in the form of cash, savings deposits, checking deposits, and money market funds, among other things. This weekly information, collectively known as “M2,” can be found HERE.
As of September 21, M2 totaled $18.6 trillion. That’s right, trillion with a “T.” To put this in perspective, economic output (i.e. GDP) in the U.S. before COVID-19 hit was $21.4 trillion. Despite a once-in-a-generation economic shock ushered in by the worst global pandemic in 100 years, the amount of M2 circulating through the economy is up an astounding $3.6 trillion (or 24%) year-over-year!
This is remarkable considering the lost wages and economic activity during this recession. Of course, the approximately $5-6 trillion in total monetary (Fed) and fiscal (Congress) stimulus over the last several months may have something to do with it.
While we should be thankful that such stimulus arrived quickly, the economy has reached a conundrum. While everyone would like it to recover sooner, simply throwing a lot more cash at the problem doesn’t appear to be the best solution. Judging by that extra $3.6 trillion of cash sitting on the sidelines, much of the stimulus either went to people who do not need it or who aren’t willing to spend it at the moment.
Although Washington is currently in a stalemate regarding how many trillions more to spend on the next round of stimulus, the dollar amount is not the most important factor in the long run.
WHAT IS LACKING IS CONFIDENCE, NOT CASH
Many consumers are hunkered down due to reduced incomes or are simply not spending as much money on the things they normally enjoy, such as travel and eating out. Uncertainty over the impending presidential election, Congress, and/or Supreme Court nominee certainly isn’t helping business confidence, either. Our economy seems to be in a “holding pattern” until the virus is defeated, both medically and politically.
American confidence has been shaken. Blame it on COVID, Chinese and Russian hackers, police brutality, protests, sub-par political leadership (on both sides), or whatever else.
What we really need is to get our collective swagger back. The U.S. has a lot to be confident about. We have a resilient economy, a dynamic technology industry and a functioning Supreme Court.
Ashislepah. Source: iStock
We are lucky to have plenty of natural beauty, multiple late-stage COVID vaccine trials underway in record time, and a private company sending rockets to space. Oh yeah – and a ton of cash.
CLARITY ON ITS WAY
While no one can snap their fingers to collectively bring back consumer and business confidence, we do know that clarity on several significant issues will arrive soon. Top of mind – the election in November.
Typically, the stock market experiences volatility in the months leading up to the election, then tends to become more stable once clarity is established. Furthermore, with several potential COVID-19 vaccines mid-way through stage 3 (final) trials, we are in a window of “no news” regarding safety and effectiveness of those vaccines until later this fall.
SpaceX. Source: iStock
Uncertainty also remains regarding the timing of widespread vaccine distribution, but it is likely to be sometime in 2021.
While 2020 has been trying for many Americans, I look forward to the clarity that will arrive over the next six months. I’m hopeful that confidence will return will also return among consumers and businesses, and we will finally put some of those trillions of dollars lying around back to work.
Nick Gallus, CFA
Senior Vice President & Director of Investment Research