As the COVID-19 pandemic grinds to some sort of closure, we as investors are faced with a landscape that is awash with liquidity. Our friend, Don Luskin at TrendMacro brought us this chart which speaks volumes:
The chart depicts the pile of cash before the latest stimulus bill which will put checks ranging up to $1,400 in the hands of roughly 150 million citizens according to one estimate. Regardless of the accuracy of the estimate, it is fair to say that there will be a lot of cash waiting to be spent.
The question is what is going to happen with this massive pile? In our opinion, investors have one of two choices: either spend it or invest (save) it. Clearly many of the stimulus checks will be spent, but oddly enough, polling shows that a significant number of recipients plan to either pay down debt or save their federal “gift.” It’s probably reasonable to assume that a similar attitude will apply to the remainder of that cash pile. Of course, a significant amount of the pile represents corporate cash, but management has to make similar decisions.
We believe both choices represent good outcomes for investors, at least in the short run. Spending the cash is clearly a boost to the economy. We expect a surge in deferred consumer activities such as eating out or travel. Corporations should feel more empowered to make investments to grow their businesses as the pathway beyond the pandemic becomes more clear. All this economic growth means more profits, which should be good for stocks.
In the alternative, the cash that isn’t spent on goods and services is going to go somewhere. The obvious options are for it to 1) remain in banks where it will earn zero or 2) be invested. Our bet is the latter, as we’ve seen with the burst of retail investment interest via Robinhood or other retail investment tools, which would support stock market gains. Of course, there are other investment options that are being kicked around such as gold or crypto currency. Gold is certainly a possibility as there is a tendency for investors to flee to the precious metal in difficult times, especially if we see inflation rise as we’ve previously discussed. Inflation – A Risk or Distraction Today?
Cryptocurrency (think bitcoin) is the modern-day gold and with its surge in value over the past few years, we expect that it will get attention, although not from CCM. While it has had a run, we question the true investment value of crypto as it produces nothing and is a poor store of value due to its volatility. Fluctuations in price are rooted only in investor sentiment, which is fine when everyone is bullish, but not so fun when the bears are growling. At least part of the reason for the growth in crypto valuations over the last year is the entry of several large hedge funds into the market and the realization that there is a limit on the number of bitcoins that can be mined. As more and more buyers chase a scarce resource, the price will go up. At least until the big buyers decide to take their profits and the run for the exit begins. In addition, there are other reasons to be fearful, not the least of which would be government intervention to preclude crypto as a means of value transfer due to its association with criminal activity.
So where does this leave us with the cash pile? Our view is that the next year or two will bring robust economic growth along with financial asset inflation. Hopefully the economic stimulus will stir John Maynard Keynes’s animal spirits and the recovery will become self-perpetuating. We further hope that economic growth will allow equity valuations to remain somewhat reasonable. Either way – economic growth or asset inflation – is good for investors. However, valuations are stretched so we remain watchful and cautious.