Bob Michele, the global Chief Investment Officer of Global Fixed Income, Currency & Commodities group, discusses the extraordinary monetary and fiscal response to COVID-19 across the world. With a tremendous amounts of cash and liquidity building across bank accounts for households and financial markets alike, we find further upside for asset prices regardless of valuations. With inspiration from Bob’s recent stay-at-home viewing of the film American Made starring Tom Cruise, we watch with interest as cash searches for a home in financial markets and social media fueled investments while Cruise’s character chooses to stash his cash pile in suitcases in the backyard.
It’s Monday morning, January 25, and GameStop is rocketing over USD 100/share. A stock that had traded for long stretches at around USD 5/share, except during bouts of short covering, was about to leave the gravitational pull of reality and head to its ultimate peak of USD 483/share three days later. I was neither surprised nor impressed … been there, done that with Bitcoin just a couple weeks earlier. The underpinnings supporting both GameStop and Bitcoin’s stratospheric rise were predictably constructed. Meanwhile, the general equity market was still elevated, large parts of the bond markets were still generating negative real yields, and money market assets were still pretty close to their risk-off peak. The only thing that made sense to me was a Tom Cruise movie from 2017 titled American Made. This is the type of film one would only stumble upon during nearly a year of stay-at-home. Long story short: The character played by Cruise starts generating so much cash from drugs and arms dealing that he runs out of places to stash it and literally starts burying it in suitcases in the backyard. I believe we are witnessing something similar. There is so much cash being printed and distributed through coordinated monetary and fiscal policies that people are simply trying to find places to stash it.
Let’s do a tally of some of the cash out there, starting with the U.S. and the Federal Reserve (Fed). The Fed’s balance sheet, which pre-global financial crisis used to run at about USD 700 billion, has now bloated to about USD 7 trillion. Between the first CARES Act (USD 2.2 trillion), the follow-up stimulus package at year-end (USD 0.9 billion) and the current stimulus being proposed by the administration (USD 1.9 trillion), the U.S. will have created USD 5 trillion in spending and support. When looking at the other major central banks, they have also generated enormous amounts of quantitative easing. Central bank balance sheet expansion outside the U.S. has reached nearly USD 6 trillion for a total global expansion of around USD 9 trillion since the start of the COVID-19 crisis. We estimate that 48 central banks cut rates by about 8,000 basis points net during 2020.
We have entered an era when during a crisis governments accept that their role is to issue debt and spend it, while central banks accept that their role is to print money, buy the debt and ensure that the cost of the recovery is affordable. This is Modern Monetary Theory (MMT) on steroids. We estimate that the aggregate combined monetary and fiscal response to COVID-19 globally has exceeded USD 20 trillion, or greater than 20% of world GDP using end of 2019 (USD 88 trillion). When is it all too much? How does it end? These are good questions, but not for today. This is about understanding where the cash is winding up, how committed policymakers are to keeping liquidity plentiful and how to invest through this period.
Perhaps the surprising thing about GameStop and Bitcoin is how involved the retail investor has become. It would appear that the social media army is flush with cash and has the benefit of time in a remote working environment to try to find places to stash the cash while generating some meaningful profits. We had a look at the Fed’s Flow of Funds data, which showed household checkable bank deposits at a record high in Q3 of USD 2 trillion, up 100% from a year earlier! A more current look at our internal window into Chase banking data at the end of January confirmed that deposits are near their highest levels and up 40% from February 2020. Importantly, the high levels of deposits are consistent across all income groups. Lastly, when we look at money market funds, there is over USD 4.3 trillion sitting there earning almost no yield. Money market funds crested in May, with cash approaching USD 4.8 trillion, but the current level of USD 4.3 trillion is still USD 700 billion above the pre-pandemic level and USD 1.5 trillion above levels from three years ago. There is still an awful lot of cash sitting in deposit accounts and money market funds that can find its way into asset prices.
None of this is going to change anytime soon. Central banks have made it clear that they don’t intend to tighten monetary conditions for the foreseeable future, and governments are focused on spending to try to contain the pandemic and create a bridge to the other side for the economy. The next round of stimulus and another year of quantitative easing will surely continue to inflate asset prices. Regardless of valuations, it’s not something to fight. Cash will pile up, and the search will continue for places to stash it. I wonder if there’s a Tom Cruise movie in the offing on Modern Monetary Theory …