As the second quarter of 2020 unfolded, it felt akin to a raging wildfire sweeping through California. The economic havoc wreaked by government-imposed lockdowns was rapid, extensive, and, unfortunately, long-lasting. Despite this, major U.S. stock market indices recorded astonishing rebounds, reaching unprecedented heights.
The Dow Jones Industrial Average notched its strongest quarterly performance in 33 years, while the S&P 500 achieved its best results since 1998. The NASDAQ soared with a remarkable 38.85 percent increase over just three months, marking its largest jump since 1999.
Contrastingly, the economy bore the brunt of devastation. Years of mounting debt lay like an underbrush ready to ignite. At the most inopportune moment, the government’s lockdown orders struck a match that set it ablaze.
The consequences were evident to everyone except the so-called experts. A sequence of events unfolded: supply chain disruptions led to retail interruptions, declining sales followed, cash flow dwindled, layoffs ensued, businesses shuttered, tax revenues plummeted, public and private debts became unsustainable, mass bankruptcies emerged, riots erupted, leading to an eventual breakdown of society. The economic wildfire spread so swiftly that many people struggle to grasp its magnitude. Continue reading
[Editor’s Note: This edition of the Economic Prism was originally published on July 4, 2019, as Independence Day in America Circa 2019. The themes discussed remain even more pertinent today. We’ve refreshed it and are republishing for your enjoyment!]
Not Welcome
The Northern Hemisphere’s days are long and sweltering, especially when true American patriots roll up their sleeves and raise the Stars and Stripes. On July 4th, the courageous and free gather, accepting federal holiday pay but steadfastly committed to standing on their own two feet. Their identity is steeped in rugged individualism and unwavering independence.
With determination, they congregate as jubilant crowds along coastlines to honor American Independence. These freedom aficionados, offspring of Buffalo Bill, feast on hotdogs, toss horseshoes, and enjoy refreshments made from corn syrup and fermented grains. As twilight descends and stars emerge in the sky, they cheer and celebrate the dazzling displays of fireworks and sparkling pyrotechnics. Continue reading
The government’s lockdown of the economy is proving to be an unprecedented misstep. Although the coronavirus still poses a threat, the damage inflicted on the economy is staggering.
Take, for instance, the housing market. A report by Black Knight revealed that 4.3 million borrowers in the U.S. were over 30 days late on their mortgage payments in May. Furthermore, more than 8 percent of all U.S. mortgages were either overdue or facing foreclosure.
The sequence is straightforward. Initially, the government ordered an economic shutdown. Next, approximately 47 million individuals filed for unemployment claims within a span of 14 weeks. Lastly, people began to neglect their mortgage payments.
In California, this trend is also alarming. As of May, an estimated 6.85 percent of mortgages were categorized as “non-current,” which includes loans with missed payments and those that are formally in foreclosure. Continue reading
One significant consequence of expansionary monetary policies is the distortion they cause between financial markets and the real economy. Stimulus measures aimed at invigorating the economy often result in inflated financial markets instead. In certain cases—like now—these inflationary practices entirely sever the connection between the stock market and the broader economy.
Investment icon Jeremy Grantham expressed his astonishment regarding the current stock market bubble, stating that investing in U.S. stocks is akin to “playing with fire,” and he’s absolutely correct.
Digging deeper, one finds the hazardous influences of the Federal Reserve. This bubble is a product of the Fed’s prolonged intervention efforts, carefully nurtured over decades.
For instance, when Alan Greenspan initiated the “Greenspan put” in response to the 1987 Black Monday crash, the financial markets were primed for such overt central bank intervention. At the time, interest rates had peaked in 1981, yet were still relatively high. Continue reading
