The Blueprint

Putting Economic Intervention Into Perspective

Jul 2020

Understanding The Tools Of Economic Intervention

When you turn on the news you might hear the terms “Monetary Policy” and “Fiscal Policy” in regards to recent economic stimulus. Monetary Policy typically refers to actions taken by the Federal Reserve bank (in this case purchasing financial assets and printing money), while Fiscal Policy refers to actions taken by the U.S. government around its budget and spending (in this case stimulus checks). Together these policies make up the two levers that governments are using to aid economies during the recent economic crisis.

Getting economic intervention right is not simple, doing too much or too little can be equally damaging to the economy — making an appropriate and measured response critical. Given the large economic impact of COVID-19, both policy levers have been used to an extreme; significantly increasing the already large US budget deficit as well as the Federal Reserve’s balance sheet.

Currently, the US Dollar is the reserve currency of the world and our ability to simply print more money and buy assets seems like a win-win scenario. However, when it comes to assessing the cost of these actions, can we expect a “Free Lunch”?

The State of the Deficits

Source: Ycharts 1/1/2007-6/24/2020

13 Years of Stimulus in 3 Months

COVID-19 put the US economy under extreme pressure in very short period of time. The Federal Reserve’s balance sheet has ballooned, rising from about $870 billion in mid-2007 to a more than $4.1 trillion in early 2020 (About $3 Tr in 13 years) and it now stands at $7.02 trillion. (Adding about $3 tr in the last 3 months)1

Many economists suggest the Fed did what it had to do in order to keep the capital markets functioning efficiently. These deficits seem justified when the money borrowed is expected to result in stronger GDP and/or stronger employment. Despite this consensus, there is another side that suggests the Fed’s actions have led to a market that is now dependent on the Fed’s support, and is no longer trading on fundamentals.

Can the Market Stand on Its Own?

Source: Ycharts 1/1/2020-6/24/2020

What Does This Dependence Mean for Markets?

While the Federal Reserve has purchased financial assets and printed money in previous recessions, the speed and magnitude with which it has responded to COVID-19 is clearly unprecedented. In past recessions the Fed’s actions provided support to the markets — but never have they influenced the market to this degree.

There is continued discussion about further stimulus to the tune of trillions. (To put this amount into perspective, 1 trillion seconds is equal to 31,000 years). While the government can continue to inject trillions of dollars into the system — the question is, “at what cost?”

Carefully Returning to the “Old Normal”

In order for the markets to return to a healthy state, they will eventually have to wean off of government support. Similar to how “too much” or “too little” policy can have negative effects, this reconciliation occurring “too fast” or “too slow” can also end up undermining the potential benefits of the initial policy.

What makes the decisions about “how much” and “how fast” so difficult is that the cause of this recession is not rooted in economics, but rather a pandemic. A successful response from governments all over the world is one that is proportional to both the magnitude and duration of the pandemic’s economic impact, which has been a very hard thing to forecast.

You Deserve Less Volatility

Markets do not necessarily behave rationally and are almost impossible to predict. At Blue Square rather than trying to predict the future, we aim to prepare for it, regardless of its direction. Using our proprietary technology and rules-based approach to investing, our decisions are not swayed by predictions or emotions.

Our investment strategy has a risk management focus that aims to position portfolios defensively during significant market declines. By systematically raising cash during these periods and then investing it when markets are more accommodating, we aim to create a less volatile investment experience, and ultimately deliver better risk-adjusted returns over full market cycles.

1) Source: Ycharts, US Total Liabilities Held by All Federal Reserve Banks, 1/1/07-6/24/20

Blue Square Wealth is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochures can be found on the SEC’s IAPD site or may be requested at any time by contacting us. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Securities and Exchange Commission.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. Past performance is not indicative of future returns.

Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost. Past performance is not indicative of future results.

This blog is a publication of Blue Square Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Blue Square Wealth or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.