Taps Coogan – June 10th, 2020

Enjoy The Sounding Line? Click here to subscribe.

Luke Gromen, founder and president of Forest for the Trees, recently spoke with MACRO Voices’ Erik Townstead to deliver a message: “There effectively is no US economy without the stock market consistently setting new highs” and that as a result, the US is headed for ‘war time financing’ policies. In other words, the stock market has become so large relative to the economy that without perpetual new highs, current consumption levels can not be sustained. For that reason, he expects that the Fed will continue to do whatever it takes to keep financial markets afloat, regardless of the moral hazards involved in doing so.

 

Some Excerpts from Luke Gromen:

“This crisis started with equity markets at 160% of GDP. We’ve cited IRS data noting that net capital gains plus taxable IRA distributions are around 200% of annual personal consumption expenditures, which is about 65% of GDP. What all this means in plain English is that the stock market effectively is the economy. So, if the Fed just lets stocks just fall toward cash, the economy falls towards cash, and the economy backs the Treasury market and by extension the dollar. So the punchline is that there is essentially no US economy without the stock market consistently setting new highs. This also ties into my last point of context… We are in the first global sovereign debt bubble in nearly 100 years and there are only two ways out: default or inflation. So if stocks go to cash, global sovereigns will begin nominally defaulting on their treasury debt… if the Fed doesn’t print every dollar that’s needed…”

“If we look back towards World War II, the US banking system’s holdings of US treasuries represented over 50% of the banking system’s total assets… Today treasuries represent just about 5% of total assets. This is why calculating the impact of the Fed tapering its (treasury) purchases is a bit tricky. If the Fed stopped buying as many treasuries, but the banking system, which is backed by the Fed, can now buy treasuries with essentially unlimited leverage thanks to the Fed SLR rule change… we could still see a net gain in dollar liquidity…”

“As we’ve noted over and over and over, foreigners are not buying nearly enough treasuries to finance this great power competition (between the US and China). So either the Fed or US banks buy whatever treasuries are needed, or the US loses this great power competition before it even really gets going, and our view is that the US is not going to lose the competition for a lack of dollars. So essentially what’s been accelerating… is war time finance. We’ve long told clients that we thought that… the US is going to be forced to finance itself like it did during World War II, which was the Fed and the US banks buy every treasury that’s needed… at negative real rates… until the US government’s great power competition versus China and… it’s war versus Covid are over.”

There is much more to the interview, so I strongly encourage that you enjoy it above.

Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free.