Dear Congress, Save Us $200 Billion
'Forget the long term'... The state of the Fed's balance sheet... Dear Congress, save us $200 billion... Why this matters... Take a look outside the U.S. for big upside...
You will never hear us say this, but it's exactly what the U.S. Treasury Secretary said today...
Forget the long term.
They're not even trying to hide it anymore...
U.S. Treasury Secretary Steve Mnuchin was sitting in a Washington, D.C. conference room today, testifying before the Senate Banking Committee and responding to a question from Democratic Sen. Mark Warner when he uttered those four words.
The topic of the minute was "more stimulus" to we, the American people... Warner asked if the longer-term risks to the economy were "greater or less" if "we under-stimulate or over-stimulate" today.
Mnuchin, the White House's lead stimulus negotiator with Congress, is pushing for more direct payments and more unemployment benefits. And during today's meeting, he told Warner and anyone else listening that, well, the future is somebody else's problem...
The issue is now. Some is better than none...
Sitting about six feet away, Federal Reserve Chair Jerome Powell at least looked a little bit into the 'long term'...
In response to a different question about whether raising taxes sometime soon would be a good idea to pay for all this government spending, Powell said...
There is a time coming when we're going to need to get back on a sustainable fiscal path, but I wouldn't prioritize that in the very near term when we're still in the middle of the pandemic.
Of course not.
Another senator asked about the "evolution" of the Fed's balance sheet from $700 billion before the 2008 financial crisis to $7 trillion today... and if, you know, it will ever go down. Powell responded...
After the financial crisis, we allowed assets to mature and run off on their own. We're a long way away from that at this point. We won't start doing that until way down the road, but then we will.
Oh, they will? Allow us to translate: That's far from a guarantee... The Fed is not a monolithic building filled with creatures whose memories last forever. Believe it or not, it's actually a group of people, and the roughly two dozen governors come and go.
But still, Powell went on...
The economy will grow and the size of the balance sheet relative to the economy is really the metric. We'll be able to get that down over time, but it's not something we'll be focused on in the near term.
Unless Powell has assurances that he'll be the Fed chair for a while, it's hard to take any stock in this statement. The last Great Balance Sheet Expansion was supposed to be temporary, too.
However, philosophies change... One group of Fed governors thinks one thing... Another wants something else... Sky-high interest rates are popular one decade... Rock-bottom interest rates are all the rage during the next.
A Fed chair doesn't face any term limits, but it's still rare to see runs of roughly 20 years in the job like Alan Greenspan (from 1987 to 2006). In other words, one man's $3 trillion deficit (U.S. budget) and bloated balance sheet today is another man's problem down the road.
And by then, whenever the next group of Fed leaders is ready to possibly shrink the balance sheet again, the crisis of tomorrow will be some new thing... The debt used to fund the temporary fix will be someone else's problem again... The price tag undoubtedly will be larger than it was before...
Meanwhile, today, maybe stocks will go up, but a dollar will almost certainly get cheaper... And on and on...
The thing is, the Fed doesn't need to create any more money to further help the economy...
As Powell and Mnuchin pointed out in front of the Senate Banking Committee today, about $200 billion in unused stimulus money from March's $2.3 trillion aid package remains sitting on the sidelines.
Created by the Fed from nothing back in March, this $200 billion is still yet to be allocated by the Treasury Department (via Congress) six months later. And as we pointed out last week, a lot of the money allocated to things like the Main Street Lending Program hasn't been used yet either.
Powell said the same thing during a different round of testimony earlier this week, as Stansberry NewsWire editor C. Scott Garliss wrote yesterday...
During his testimony before the House Financial Services Committee, Powell was asked multiple times why the Fed hasn't spent all of the money in the outstanding facilities. He basically told the Congress members that the Fed hasn't spent it because it doesn't need to right now.
Today, to be fair, Mnuchin was practically begging anyone who was watching, including Congress, to let him "reallocate" these unused billions... for more direct payments, to refill the Paycheck Protection Program ("PPP") fund, and to keep paying added unemployment benefits to 11 million people.
(Alternatively, they could just not spend anything at all.)
But this is the same guy who is working on an election deadline in his role as the Treasury Secretary, who would love to see the economy rebound even more before then, and who had also just said, "Forget the long term... Some is better than none."
It sure sounded like Mnuchin is willing to recklessly accept any more money that Congress may approve in the next month or two... no matter if it fits his wishes of "what's right" or not.
To that, we say...
Dear Congress, instead of creating more "fake money," take the chance to save us $200 billion and spend it on something else... or don't spend it at all. This is not an insignificant amount...
It's roughly equivalent to the annual gross domestic product ("GDP") of Greece or New Zealand. And it's about the same amount that China spent on its first round of emergency stimulus way back in February.
All in all, this is just another example of government mismanagement and waste... like the $1.4 billion in stimulus checks sent to dead people while unemployment benefits for the living expired this summer earlier than anyone thought they would.
Why does this all matter?
These are the two guys pulling the strings on the economy today... Powell himself said today that Fed stimulus has been the reason for the recovery of the economy.
And they have the ears of the short-minded politicians.
The value of the U.S. dollar, which has strengthened some in recent weeks in the absence of any new stimulus, wasn't part of the discussion... And neither was how folks could keep their money growing at a rate greater than inflation.
Mnuchin and Powell talked about getting more money to Main Street (money that already exists!)... But they didn't talk about how this created money is cheapened as soon as its printed, much like the value of a new car goes down as soon as it's driven out of the dealer's parking lot.
The mere fact that Warner, the senior senator from Virginia, even managed to ask a question about long-term "risk" was surprising. It was refreshing – for a second. Until we heard the answer. And we don't hold out hope that the conversation will continue in any more detail.
But enough about the U.S. already...
It should be clear by now that we have our eye on November's election... COVID-19 and the government's response... and all the other indicators our editors' typically watch.
But life goes on – and investments are made – elsewhere around the world, too. We don't want to fall victim to "home-country bias" and ignore what's going on outside our borders...
So we'll finish today's Digest with a report from our international editor, Kim Iskyan, who notes that – even as the U.S. economy appears to be rebounding from the depths of our springtime lockdowns – another longer-term trend, in addition to our debt, doesn't bode well for growth in the years ahead...
For years, the U.S. has been the world's biggest economy. It has also grown at a faster rate compared to other developed countries... Since 1990, American GDP has risen an average of 2.5% every year – while Western Europe's economies have grown by 1.7%.
But recently, one of the biggest drivers of American economic growth has turned negative... and another is weakening.
Kim believes that's bad news for the U.S. economy – and over the next several years, the stock markets as well. Here's Kim to take today's Digest from here...
When you sift through economists' doublespeak, I (Kim Iskyan) believe 'growth' boils down to two key factors...
- Change in the size of the working-age population
- The productivity of those working people
That means if more people in a country are doing economically productive things (like building houses, making cars, or selling insurance) – and they do it quicker (get more done in a workday)... the overall economy will grow.
In economics-speak, this is all about increasing "aggregate supply"... while the other main part of economic growth is "aggregate demand" – that is, consumer and government spending, investment, and exports.
For decades, the rising number of working-age folks in the U.S. (considered people aged 15 to 64) has been a big driver of the American economy.
From 1980 to 2020, that figure jumped by 45%, to nearly 206 million people.
But early last year, this figure went into reverse for the first time since being recorded. That's right... In 2019, the number of Americans of working age declined, by 0.11%.
That's a tiny drop. But as you can see in the chart below, the trend has been down since the start of the century. The available workforce grew by 2.19% in 2000... 1.26% in 2007... and 0.65% in 2015. And so far this year, it's falling more...
The number of people of working age is determined by the birth rate... and by immigration.
For centuries, the American brand of "the land of opportunity" has attracted the smartest and most motivated people from the rest of the world.
Since 2016, the number of legal immigrants entering the U.S. has fallen by an average of 43,000 annually, according to Foreign Affairs magazine.
The bigger driver of fewer workers – not today, but soon – is that women in the U.S. are having fewer children...
When the fertility rate in the U.S. hit a 35-year high in 2007, at 2.12 births per woman, even that was only just above the "replacement level" fertility rate of 2.1.
The replacement level is what it sounds like... the average number of children born per woman so that a population replaces itself from one generation to the next.
This rate has mostly declined since then, to 1.73 children per woman in 2018, according to the World Bank. That matched the all-time low from 1976. (As recently as 1960, the average American woman had 3.6 children.)
If "demography is destiny" – a quote attributed to 19th-century French sociologist Auguste Comte – then economic growth in the U.S. will suffer over the next decade.
As the number of new additions to the working population falls, unborn children can't join the workforce 15 years later.
The story is similar in the rest of the developed world...
Many countries in Europe, along with China and Japan, have a fertility rate even further below replacement levels than the U.S. (South Korea is the least-procreative country in the world, with an average of just one child per woman.)
This isn't good for the American economy either... These are major trading partners.
That means one of the long-term structural advantages – and growth drivers – of the American economy is slowly vanishing. But what about productivity, the other part of the growth equation?
The news isn't a lot better when it comes to 'productivity'...
Growth in productivity – which is output per employed person – has been declining over the past few decades in the U.S. From 1990 to 2000, productivity was rising by an average of 2.3% every year.
But over the past 10 years, it has been increasing at only 1.3% per year. That's partly because the one-off jump thanks to the computer boom has long since worn off. And also, during times following eras of increased productivity, it's harder to get better from a higher base level.
Still, like the fertility rate, the American productivity improvement is better than other developed economies. For example, Germany – notwithstanding its historical reputation for efficiency – has become just 1% more productive per year since 1980, compared to 1.7% in the U.S. over that period.
Now, the figures we're talking about here might sound small...
After all, the difference between 1% growth and 2% growth sounds like statistical pocket change. But over time – this is where the power of compounding comes in – those seemingly small differences become tremendous.
An economy (or bank account, for that matter) that's growing by 1% will take nearly 70 years to double... while 2% growth will halve the time needed to double in value to 35 years. And at 3%, it's 23 years. Small numbers can have a super-sized impact over time.
But unless productivity growth improves – or there's a coronavirus-inspired baby boom – American GDP growth is going to be sailing into some stiff winds in coming years.
The same goes for most of the rest of the developed world – as well as in a lot of emerging markets, where the population is growing old before it's rich. One big exception is Africa...
My friend and longtime Africa watcher Tim Staermose recently told me that – in terms of positive working-age demographics – Africa is about where much of Asia was around 1970.
In other words, right before the so-called "Pacific Century" took off.
Other exceptions to the dilemma of ugly demographics combined with declining productivity are in some of what my friend and colleague Brian Tycangco calls the "next Chinas."
The confounding problem for investors...
It's an age-old tale... Economic growth and stock market performance can have little to do with each other in the short term.
A lot of other factors – like valuations, company performance, the regulatory environment, and the ease with which investors can buy stocks in a particular market – can trump GDP growth when it comes to influencing stock prices.
If it didn't, we'd all be investing in Bangladesh, where the economy has grown an average of 5.3% per year since 1980 – compared to a world average of 3.5%.
But over the long term, corporate earnings – which are ultimately driven by the economic, and oftentimes demographic, trends of a particular market – matter a lot.
And Brian, as he's written recently, has found those emerging markets where everything is coming together, particularly a growing middle class... which powered both the U.S. and China to their positions as the top two economies in the world.
For the next wave of explosive growth, investors would be wise to consider investments outside the U.S., where the ideal conditions are in place. Brian has identified several stocks in these markets that could return quadruple-digit gains in the next three to five years.
So if you haven't already checked out Brian's brand-new presentation about these exciting opportunities, be sure to catch it right here before it goes offline.
What the TikTok Deal Means to Investors
Our colleague Jessica Stone talks with Brian Tycangco of True Wealth Opportunities: China about why the Oracle-TikTok deal could set a precedent for future U.S.-China technology deals, and what investors should know about how to play it.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.
New 52-week highs (as of 9/23/20): none.
In today's mailbag, feedback on yesterday's Digest about preparing your portfolio for this November's election. Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.
"I prepared [my] asset allocation with 40% stock 25% gold 35% cash... 1% in cryptocurrency. Hell yeah, I'm ready for anything." – Paid-up subscriber Fredrik H.
Corey McLaughlin comment: You got us beat, Fredrik. That's a 101% portfolio. Where can we get one of those? Just kidding... We know what you mean and are happy to see you've prepared.
"Re: 'Because of social distancing, we're not even seeing in-person campaign rallies that could be used to gauge any kind of support for one candidate or the other.'
"Corey, there has been one candidate doing multiple rallies in the past weeks. It's not the one residing in his basement." – Paid-up subscriber Mike W.
McLaughlin comment: Right, my mistake. The point I wanted to make was that both candidates aren't holding in-person rallies. And because of that, it's hard to gauge if one candidate or another has more or less support based on rally-crowd size.
I appreciate you, and others, keeping us honest.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 24, 2020