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Frankenstein Economics


"Nothing is so painful to the human mind as a great and sudden change.”
 -Mary Wollstonecraft Shelley, Frankenstein

 I am very bullish regarding the outlook for the US economy in spite of Coronavirus shutting down commerce.

All of you who read my ramblings on the subject of investment and the markets know that I am a dedicated long term investor.  I see no reason to repeat the errors recorded in history for surrendering to the rationale for selling because: “It is different this time.”

Of course it is different this time.  It is always different this time.  Yes, the exact circumstances are predictably different but the outcome is always the same.  There is always a recovery.  

For those who are thinking this time it is so very much different that there is not likely to be a recovery, think about this.   It is what I would call Frankenstein economics.

You recall Doctor Vincent Frankenstein created a monster from an inanimate body.  Exactly how he brought life to the creature remains a “secret” not revealed in the book.  But in the movie starring Boris Karloff, there were electrodes and electricity pumped through the creature’s body until he moved and “came to life”.

“Beware; for I am fearless, and therefore powerful.”
 ― Mary Shelley, Frankenstein

In terms of fiscal stimulus, think of money and lots of it, being pumped into the economy.  Envision an economy that is declining with little hope of recovery.   But then Congress came to the rescue with more money than we have ever seen injected into the economy.  Even before the economy was measurably in decline, we witnessed stimulus packages that are the largest in our history. 

When considering the four phases passed by Congress for Coronavirus fiscal stimulus, keep in mind the largest of the fiscal stimulus bills in the Financial Crisis was $831 billion.  Congress has already passed $3.8 trillion in stimulus bills to offset Coronavirus shutdowns. 

What is the likely impact from Congress passing four phases of fiscal stimulus with more likely to follow?

  •  Phase 1: $8.3 billion [the Coronavirus Preparedness and Response Act] March 6, 2020
  •  Phase 2: $104 billion [the Families First Coronavirus Response Act] March 18, 2020
  •  Phase 3: $2 trillion [the Coronavirus Aid, Relief, and Economic Security Act also known  as The CARES Act] March 26, 2020
  •  Phase 4: $484 billion [Coronavirus Relief Bill] March 24, 2020

The total is about $3.8 trillion dollars.

What is the magnitude of $3.8 trillion?

If you were to add up outstanding debt owed by all state and local governments it would be about $3.8 trillion dollars.

$4.9 trillion dollars is approximately the size of the United States budget.  Of course revenues will be less with the economy locked down. The budget passed last year called for about $1 trillion to be borrowed to meet budget expenditures in 2020.  How many trillion more will the deficit be?  Your guess is as good as any.

Consensus estimates indicate at least another 2-3 trillion dollars will be passed by Congress to stimulate the economy before year end.

In addition to fiscal stimulus there is quantitative easing being engineered by the Federal Reserve. Quantitative easing is a big word used in place of “printing money”.

The increase in the Federal Reserve’s quantitative easing since January is $3-4 trillion and is expected to be as much as $7 trillion.   The Federal Reserve's year- end balance sheet showed less than $4 trillion. 

The US Government was expecting to collect about $3.8 - $4 trillion dollars this year from income taxes, payroll taxes and assorted fees.  Between Congress and the Federal Reserve we estimate fiscal stimulus and quantitative easing will add two-three fold more dollars than the treasury collects in an entire year.  As I write this, Congress is considering still more spending to be as much as another $3 trillion for infrastructure.

When you place that much money into the economy and banking system we would expect the market to rise.  Why wouldn’t it?

Dr. Frankenstein “breathed” life into the monster using electricity. Congress and the Federal Reserve are doing the same with money.  The Fed “prints” it and Congress borrows it. 

Either way it is a mountain of money. 

For now we expect the stock market to continue to recover.  It could make this bear market one of the shortest ever recorded.

Last week Kevin wrote about the market’s rise as new Covid-19 confirmed cases flatten and decline.

Declining increases in Coronavirus cases combined with reopening the economy should prove to be a powerful force driving the economy higher as we enter the summer months.  And do not forget the mountain of money being injected into the “creature”.   We are calling it Frankenstein economics.

Sincerely,

https://static.twentyoverten.com/5a4258bbacdea1742455dc1d/sXRCTu6pZ/1582133139858.png

Thomas J. Curran                 Kevin T. Curran, CFA
Chief Executive Officer &     President, CIO & Portfolio Manager
 Founder

Please check with your Curran Wealth relationship manager, or contact Curran Wealth Management if you have any questions. 518.391.4200 • info@curranllc.com

The material contained in this article is for educational and informational purposes only. The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. This article is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security. The information contained in this article may not apply to your personal circumstances. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Information on taxes is based on the tax laws existing at the time of publication. Tax laws are subject to continual change. In addition, tax laws vary by state. This article is not, and should not be regarded as tax or legal advice. We cannot ensure tax consequences of any transaction. If you would like a detailed analysis of your tax situation, with specific tax recommendations, you can discuss the possibility of pursuing a formal relationship with Hippo Tax Services, LLC.