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This week, a managing director at JPMorgan, Nicholas Panigirtzoglou, alerted investors to some troubling news regarding equities. The front end of the US treasury curve, which serves as an indicator of financial stress weighing on a country’s economy, inverted once again.
The same thing happened just two years ago, when overtightening by the Federal Reserve spooked investors and led to a sharp drop in the stock market for the fourth quarter of 2018.
So what does all this mean? According to analysts, it’s an issue with policy. Throughout the worst of the pandemic thus far, the Fed has been printing trillions of dollars in order to inject cash into the US economy and keep individuals and businesses afloat. With many aid programs and stimulus measures set to expire by the end of this month, experts worry that the market response will be severely negative, and drive us further into a depression.
Even though indicators remained positive in the early stages of the United States’ response to the health crisis, things have taken a turn in the last couple of months. After many states saw a resurgence in cases last week and reimposed at least partial lockdowns, the treasury curve dipped into the negative at the end of June.
In this video, we’re going to discuss the contradictory expert opinions and the constantly shifting indicators that make the economic dangers of the pandemic so difficult to keep up with. We’ll tell you where the Fed has fallen apart and why recovery is nowhere to be seen.
The solution to our economic woes is simple–additional fiscal policy that will add more stimulus to the economy. Without it, the inversion is at serious risk of worsening, which would tip the US into a complete stock market crash. Unfortunately, the US government has a history of bungling policy decisions, which is a large part of why we find ourselves in such a difficult situation now.
Over the last three months alone, the Fed has pushed more than $3 trillion in liquidity into the economy, but analysts at JPMorgan say that is not enough by a long shot. Goldman Sachs raised the same red flag back in May when the bank noted that the Fed was going to run into serious problems if they did not monetize much more debt than it was originally planning. Experts estimate that a further $1.6 trillion in stimulus packages will be necessary in order to prevent a dangerous surge in Treasury yields.
But it seems that JPMorgan, after realizing that their report scared clients and investors, had Nicholas Panigirtzoglou walk the warning right back. In an attempt to reverse the anxiety caused by his dire predictions, Panigirtzoglou published another piece in which he argued that there is too much debt and liquidity for the stock market to crash. Clearly, he was given a nudge in the right direction–which is to support the Fed regardless of their mismanaged policy decisions.
The International Monetary Fund reported that global fiscal support in response to the pandemic reached a total of approximately $9 trillion. That is a staggering 12 percent of the global GDP, which stood at $76 billion as of the end of last year.
Taking this into consideration, Panigirtzoglou pointed out that the government debt-to-GDP ratio could be expected to increase from near 88 percent at the end of 2019 to 105 percent by the end of 2020, especially given that experts anticipate global GDP to take a 5 percent hit as a result of the pandemic. But so far, there is no guarantee of any further stimulus checks for individuals, with ZeroHedge.com smartly warned could lead to a fiscal cliff. The expiration of extended unemployment insurance, the lack of support for stimulus checks within the federal government, and the end of the Paycheck Protection Program, Washington’s loan program for small businesses and nonprofits affected by the pandemic, in August, will all push the economy further into a depression.
Both Barraud and Panigirtzoglou shared these concerns that, when government aid drops off, the economy will tumble. August will be the first month over the cliff, and if the number of Americans claiming continued unemployment benefits remains steady at around 16 million, the disappearance of the extra $600 a week would translate into an approximate $36 billion plummet in personal income next month, or a 2.3 percent decline from July. This will drastically reduce consumer spending, as households won’t have much money left over after paying for basics like rent and grocery, if they can even afford those.
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