The markets versus the real world
If you're a bit confused while watching the stock market rebound while the economy is still sputtering, you're not alone! The simple explanation you'll get from stock market "experts" is that the market always looks toward the future. So, it is anticipating an economic rebound that will take place after the economy reopens.
The second half of that explanation is that "money moves the markets." And the Federal Reserve has certainly created more money, well into the trillions of dollars. Plus, the Fed has signaled that it will continue to create money to get the economy going again. The Fed does that by going into the open markets to purchase government securities, commercial paper, corporate bonds, and now even bond ETFs. And the Fed pays for those purchases with newly created money!
There's an old saying in the stock market: Don't fight the Fed! The Fed is "printing" money through these securities purchases. And a lot of that new money is going into the stock market.
But we don't necessarily see all that newly created liquidity moving into the "real economy" -- the economy that consists of small businesses that are still impacted by the economic shutdown. Some of those are businesses that might not survive to reopen along with the larger companies, like the auto industry. And those smaller businesses are the once that employ people who buy cars, take vacations, fly on planes and buy clothing.
The proof that the newly created money isn't getting down into the real economy is the money still left waiting to be claimed in the second round of the PPP program. After the first round, which was oversubscribed, the Fed released new rules, new demands for compliance. And since the money could only go into payroll and rent, many businesses didn't want to be burdened with paying back the loans if they couldn't reopen in eight weeks with all their employees.
For more proof, look at the backup of state unemployment claims as offices are closed and computer systems can't handle the influx of registrations. How ironic that states are allowing beauty salons and tattoo parlors to reopen -- but not yet recalling state workers to staff the unemployment offices!
The second round of proof that the money isn't dribbling down to the people who really need it is the slowness and errors and misdirection in the stimulus payments that were supposed to go directly to individuals who most need the cash to survive.
Instead the IRS went at it backwards -- easy for them, but tough on the millions of Americans who are increasingly desperate. They sent stimulus payments first to tax-filers who had direct deposit information on file for tax refunds. Next came stimulus payments mailed to tax filers. The government is just getting around to sending out money to seniors on Social Security and those on Social Security disability.
And who's last in line -- with payments just starting to dribble out? The millions of Americans who receive SSI -- supplemental security income -- on debit cards each month. These are the poorest of the poor. Initially, the government demanded they register online to get their stimulus payments. Then common sense prevailed. Many don't have access to computers or smartphones! So, they will get benefits on their cards -- but they still had to register their dependent children online! And they are still waiting for the promised money.
So, while money is flowing into the stock market, it is NOT, definitely not, flowing into the families who need help the most. What was a crack in our society is fast becoming a crevasse. And no one in Washington is paying attention because the financial markets "look like" the economy is on the road to recovery.
Only economic growth can create the real opportunities for those most impacted by the slowdown. Real jobs are the best form of economic opportunity. But in the meantime, let's not delude ourselves that the money we are throwing at the problem is reaching its target. It's not.
The stock market is not divorced from this reality. It's just reacting to the fuel being thrown on the pyre. And that's The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." Terry responds to questions on her blog at TerrySavage.com.)(c) 2020 TERRY SAVAGE DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC