If you're curious about the Post Election era, this article is just right for you. What will happen to the stock market, bonds, and real estate? What can happen with your 401(k) or your home equity?
But more importantly what will happen with us as a society? In this article, I explain the four possible outcomes depending on who wins the election.
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It's All About Stimulus
We have to understand it's all about one thing and one thing only, stimulus. It's just like Cowbell on Saturday Night Live, the Christopher Walken skit, all I need is more Cowbell.
All that markets need right now is more stimulus. To prove this point let's take a look at a chart of the S&P 500 going back to March 2020, all the way to November 2020 where we are today.
On the left, it goes from 2,250 up to 3,500. Although I was raising the red flag about the coronavirus way back in January, the markets definitely didn't listen to me.
They kept going higher and higher all the way to the end of February and then they really started to crash.
Then, on March 16th, the Fed finally stepped in with some unprecedented measures. To explore this further and go back in time, let's go straight to a Washington Post article.
The Fed was supposed to meet on a Wednesday but they had an emergency meeting that Sunday where Powell slashed interest rates to zero as a part of a wide-ranging emergency intervention.
So, on Sunday…
The Federal Reserve announced on Sunday it would drop interest rates to zero and buy at least $700 billion in government and mortgage-related bonds as part of a wide-ranging emergency action to protect the economy from the impact of the coronavirus outbreak.
The actions taken by the Fed were…
…The most dramatic by the U.S. central bank since the 2008 financial crisis…
And that is an understatement. To give you some context…
QE3 was $80 billion per month, QE infinity is now at a minimum of $700 billion.
That article didn't even mention the fact that the Fed committed to doing a trillion dollars a day in the repo market if necessary.
On the timeline, you would think that the S&P 500 would have launched higher to all-time highs, but what ended up happening?
The very next day, on Monday, the market continued to crash and it crashed the whole rest of the week until we got to the next Sunday and the government came in and started talking about a stimulus bill, and the CARES Act, but that Sunday it didn't pass.
When the market saw this, the Dow futures went down over 600 points.
If we move forward to that Monday, and it hits it's low for the entire cycle, dropping over 1000 points and just barely over, maybe three or four weeks, a huge crash in the market.
Bear in mind this is after the Fed came in with unprecedented action.
Then, on the 24th we got rumors that the stimulus deal was almost done and it was over $2.5 trillion.
What does the market do?
It soars higher, just like the market does when we get this type of news coming out of the Fed.
On the 25th, in the morning, there was some back and forth, and then, that evening, the deal finally got signed, it was official.
The market rose higher and it never looked back.
During that period we had the stimulus checks going out, all that demand increasing, and the income of the average American actually went up during 2020 as the economy was completely crashing.
How did this happen?
Because of the additional unemployment checks and the stimulus checks going to the average American.
There's always more Cowbell and there's always more stimulus. But around July and August, the markets started to level off because all of this stimulus spending was done.
The checks had been received and there was nothing left to put in your newly formed Robin Hood account, spend at Walmart, Target, or Home Depot.
The government came in and said, “Well, maybe we'll do another round of stimulus.”
The market continued to go up till the middle of August where they didn't agree to an additional stimulus package but both Democrats and Republicans thought it would be a good idea to issue another $1,200, and, of course, the market really liked that.
It kept going higher and then it came down because the stimulus talks really started to dissipate.
Were we going to get another stimulus package before the election?
This was the big unknown.
They tried to get it done, but there was a massive fail just after September, then the Democrats came in with a new bill called the HEROES bill.
Ironically enough, that sent the market a little higher, negotiations stalled out on that, everyone realized there was going to be no stimulus until the election, and the market crashed down.
I'm not saying every single one of these moves was directly correlated to the news about the stimulus package. But what I am saying is that the moves were definitely correlated to what was going on with the Fed and the government, that's for sure.
From July to November, obviously there were a lot of currents, but the main takeaway is we have to realize we've gone from a Fed put to a government put.
Now it's blatantly apparent the market doesn't care what the Fed does, all of the ammunition is gone.
Regardless of how much QE or repo or any of the special purpose vehicles the Fed sets up, the market doesn't care, it will continue to crash.
What the market has told us is that when the government comes in and spends like a drunken sailor and the Fed monetizes the debt, then asset prices will continue to rise.
But as soon as they get a whiff of no more stimulus, no more Cowbell, or no more heroin, the market, and asset prices start to go down.
And when I'm talking about assets I'm referring to risk assets in the broad S&P and stocks.
The Stimulus Is Taking Us Closer To Communism/Socialism
The more stimulus we do, the closer we are to a centrally planned economy.
Here's what I'm talking about. Look at my whiteboard chart going back to 1792.
You can accuse me of clickbait all you want but you can't accuse me of not having some fantastic charts and digging into the data.
This chart goes all the way to 2018 but I've extended it to 2020 using some basic numbers that I'll review.
On the left, it goes from 10% to 50%. This is a chart of government spending as a percentage of GDP. Back in 1792, it was right around 3%.
Said another way, 97% of GDP was coming from the private sector.
Around the Civil War the government spending went up and it skyrocketed just over 10%. When it came back down, it was at a level higher than where it began.
This is something you'll notice. Government spending is very consistent every single time you see the spikes. At that time, we were on the gold and we didn't have the Federal Reserve, so it stayed rather consistent.
But then, in 1913 Jekyll Island and the Fed were set in, and you know what happened then.
Oddly enough we got World War I about four years later, so the government spending did the exact same thing, it went up to 30% of GDP. You'll notice it comes down to a level far greater than where it began.
When the Depression came, government spending went up. But, I'd also like to point out that we had a depression in 1917 as well, and statistically it was just as bad if not worse when you look at the drop of GDP and the unemployment rate.
What did the government do?
Nothing. The depression lasted about a year. Then, the government stepped in and threw everything out at the kitchen sink and it lasted 10 years.
I'll let you draw your own conclusions there.
Government spending plateaued until we got to World War II, and then it really went parabolic up to 50%. But once again, it came down to a much higher level than where it started.
Since the end of World War II, the government has just gotten bigger and bigger. Government spending as a percentage of GDP has continued to go up and up. And I think it is very suspicious that this started happening when we inserted the Fed into the equation.
We basically went from Uncle Sam looking like the guy I drew in red on the middle of the board, ripped Jack, to our drunk insolvent Uncle Sam on the right. He's always cross-eyed like a drunken sailor and just spending that money into the economy.
He hasn't been to the gym in years, that's for sure. Only Curls, he's been doing most likely 12 ounce Curls.
But, as I mentioned before, the chart ends in 2018.
So what does government spending as a percentage of GDP look like now with the surveys of sickness and stimulus infinity?
I did some back of the napkin math to figure this out.
Keep in mind I almost flunked out of high school, so I probably didn't get above a third grade level in mathematics, but we can kind of put pieces of the puzzle together, it's not that difficult.
GDP in 2019 was right around $21 trillion, nominal GDP, and at that time government spending was about 40% of GDP, so we'll call it roughly $8 trillion.
Back in 2019, the deficit was about a trillion, now, it's almost a $4 trillion to $5 trillion difference.
What that means is government spending this year, 2020, is about $4 trillion higher than it was in 2019.
But let's think this through.
Let's just assume for the moment that GDP doesn't go down in 2020, which it most likely will dramatically, but let's just give the government the benefit of the doubt and say that GDP is still $21 trillion, the same as it was in 2019.
The government is spending an additional $4 trillion, and if they're spending an additional $4 trillion which is accounted for in GDP, and the GDP numbers are the exact same, the private sector went all the way down to $9 trillion.
That means that the private sector was only 43% of GDP and the government climbed up to a whopping 57% of GDP.
To put that into context, think about if we were an economy that had 100% of GDP as a result of government spending. First, that would put us in the category of communism and at the very least a centrally-planned economy.
We have to look at it this way. The closer we get to 100% the closer we get to a centrally-planned economy.
The closer we get to 0% the closer we are to a completely free-market economy. Unfortunately, we're going in the wrong direction.
Keep in mind, we might be at 57% now, but every single time we've had the spike, it goes down to a higher level and continues to go up and up and up closer to 100%.
As we get more stimulus, more deficit spending, GDP doesn't go up. That means the private sector output goes down, we get closer to communism, socialism, central planning, and whatever you want to call it.
Stocks, Bonds, And Real Estate
I think you have now realized how important stimulus is to the economy and the stock market.
I hope you have also understood that the more stimulus we have, the more the government spends as a percentage of GDP, and that the closer we get to a 100% centrally-planned economy, the further we get away from free market capitalism.
Now let's answer this question…
How will the result of the election most likely affect your financial future?
We have four different options.
The top line is the president, bottom line the Congress.
Red-blue would mean Trump wins the election but the majority of the Congress is Democrat. If this happens I think that we will move closer to central planning, I don't think there's any going back.
Once it spikes, government spending as a percentage of GDP will always come down to a higher level than where it started.
Because it's spiked with the coronavirus so dramatically I think if, with a big if, we come down, it's going to come down to much higher than 40%, where we started back in 2019.
Let's say our starting point is 57%, again that's the number I mentioned before.
If Trump wins but they have this combative nature, meaning he can't really pass anything because the Congress is mostly Democrat I think we move closer to central planning but it's just in first gear.
This really goes back to how much stimulus I think they'll be able to pass.
The more stimulus, the more government spending, and the higher government spending is as a percentage of GDP. And if nominal GDP stays the same because we're in a recession that means lower economic output from the private sector.
If Biden wins, we have a Republican Congress, then I think we're moving closer to it but still maybe in second gear.
If we have Trump and a Republican Congress I think we really start to move towards it because we'll get a lot of stimulus.
We would be moving towards central planning in overdrive.
If we have Biden and a Democratic Congress I think we move towards central planning at warp speed.
I think they are going to unleash a massive amount of stimulus over the next four years, and possibly set policies in place that will be with us forever, such as universal basic income.
Looking at this just through the lens of stimulus this is how these four different outcomes will potentially affect stocks, bonds, and real estate:
Red presidency, blue congress
If the presidency is red and the Congress is blue it's going to be tough for them to pass more and more stimulus, therefore, I think there will be downward pressure on the stock market.
Bonds will most likely flat. I don't think anything's really going to change there. Even if interest rates went up, meaning bond prices went down, the Fed would step in and peg the yield curve.
The only thing that's going to stop that is going to be future inflation and it depends on how much MMT we get.
Real estate I think will remain pretty flat. I don't know what a dry would be, pretty much the same there. Although there's a very low supply, people's stimulus checks will be running out and all that additional income they had will be running dry.
I think a lot of those unemployment checks or stimulus checks went into a down payment to purchase a home.
Blue presidency, Red Congress
If we have a Biden win and a red Congress, I think the stock market is going way down, because then it's going to be tough to get stimulus but we might have additional corporate taxes.
Bond prices can go flat or up meaning interest rates down. The reason I see this potentially happening is because if the market's crashing the Fed's going to do anything they possibly can, and that's going to be buying bonds, getting interest rates as low as they can get them in the real economy.
Real estate would have more tailwind because mortgage rates are going down, and because the Fed is trying to get those rates in the overall economy as low as possible.
Red presidency, Red congress
The stock market would go up because we're going to get that stimulus package passed, bonds will pretty much stay flat until we get some inflation, and real estate would go up because we're going to have a lot more stimulus.
Blue presidency, Blue Congress
If we have blue and blue I think the market goes way up. Believe it or not, even though we have that headwind with corporate taxes I think we're going to have so much stimulus.
Going back to that S&P 500, in the chart I showed before, you can see stimulus now really matters, it's all about the government.
Inflation expectations in the marketplace would probably increase because of all this additional government spending in stimulus, therefore, bond prices would probably come down meaning interest rates going up slightly.
But, I think the Fed eventually would come in and peg the yield curve, so not down too much as far as the prices.
I think real estate could see a lot of tailwinds there with the reduced supply because of higher and higher regulations.
And if we combine that with additional stimulus and more money for down payments means higher demand, but lower supply.
I want to be very clear, these are not predictions. I'm just looking at headwinds and tailwinds through the lens of stimulus based on how much stimulus I think we'll get with each one of the different scenarios.
Honestly, I think if we just focus on asset prices, whether or not your 401(k) is going higher, and what's happening with your home equity, we're missing the bigger picture.
Whether we like it or not we have to be cognizant of the fact that the United States and most of the Western developed economies are moving closer and closer to a centrally-planned economy and further away from free market capitalism.
Even if your 401(k) goes up or your home price goes up in value, you might feel great because you have more purchasing power, but what does the country you live in look like now compared to 10 years ago, 20 years ago, 30 years ago?
What I'm saying is how much does it really matter if you get richer while society is deteriorating?
Most of you know I spend a lot of time outside the United States, I don't see it day after day. A lot of times it can be a year or two before I'll come back.
And I can tell you this. The last time I came back to Phoenix, a place where I've spent a lot of years over my life, I've never seen more homeless people.
The divide between the haves and the have-nots is getting more and more extreme.
It's not because we have more free market capitalism, it's because we have less free-market capitalism and more central planning.
You have to remember if you are going long on the stock market, the S&P 500, if you have one of these typical 60/40 portfolios, you're not long the stock market, you're long stimulus.
If you're long stimulus, you're long central planning.
How many of you reading this article right now say to yourself, “I think the more central planning we have in the United States, the better that should be for the stock market. Therefore, the more central planning we have, the more I want to buy stocks.”
Of course, none of us would say that. We know what happened in Russia, we know what happened in China. We've seen it play out all over the world. Central planning never works, it always ends badly.
Regardless of who wins the election we're rapidly transitioning into a society and an economy where the only way to get ahead is not through your labor, it's not through producing goods and services, it's through political pull and political favors.
Here's one of my favorite quotes from a book going all the way back to 1957 that describes what's happening in the United States today far better than I can say.
Watch money, money is the barometer of society's virtue. When you see that trading is done, not by consent, but by compulsion, when you see that in order to produce you need to obtain permission from men who produce nothing. When you see that money is flowing to those who deal, not in goods, but in favors. When you see that men get richer by graft and pull than by work and your laws don't protect you against them, but protect them against you. When you see corruption being rewarded and honesty becoming a self-sacrifice, you may know that your society is doomed.
― Ayn Rand, Atlas Shrugged
In my opinion, the question we should be asking ourselves on this election day is not if we get to Atlas Shrugged but more so when do we get to Atlas Shrugged.