In today’s Money Morning…will it really change anything?…borrowing their way out of a crisis…short-term sugar hit…and more…
Well, there you have it. Joe Biden is now officially the US President.
Sworn in with no drama, no clashing, and no counters from Trump. An unexpectedly quiet affair considering all the build-up the media was placing on it.
Ultimately though, will it really change anything?
The US still has a lot of problems on its hands. Both political and economic. And while the world is certainly hoping Biden will be able to remedy a lot of them, I wouldn’t count on a miracle. This election has shown just how divided the US really is…
But, let’s not get bogged down in the messy politics. Instead, you should focus on the markets for now, because they were certainly upbeat about the change in power.
The Dow Jones, S&P 500, and the NASDAQ all hit record highs overnight. Fuelled largely by investors’ hopes for the much talked about US$1.9 trillion COVID-19 relief package.
If it passes, that will obviously be a huge cash injection for the US economy. Which is precisely what Wall Street is counting on.
However, this stimulus proposal may just be the first of many.
At least, that seems to be the message from Biden’s incoming Treasury secretary: Janet Yellen. The ex-Federal Reserve chair who has now declared that the ‘world has changed’…
Borrowing their way out of a crisis
Now, I’ll be frank, I’m no fan of Janet Yellen.
Like most central bankers, she has helped usher in this new era of monetary policy. One that started with her predecessors and is still being followed by her successor (Jerome Powell).
Here is how Yellen herself described our ‘changed world’ in her own words:
‘In a very low interest-rate environment like we’re in, what we’re seeing is that even though the amount of debt relative to the economy has gone up, the interest burden hasn’t.’
In other words, despite taking on more and more debt, repayments aren’t out of hand…yet. Thanks largely to the fact that interest rates are stuck at perpetually low levels. With Powell committed to keeping them low for the foreseeable future.
Effectively, she’s trying to politely suggest that debt is like ‘free money’.
I’m sure I don’t need to tell you just how frightening that proposal is. Because most rational adults understand there is no such thing as free money.
And yet, this is coming from an ex-Fed chair, soon to be treasury secretary…
The long-term implications of this are a huge concern in my view. It is hard to imagine a way this doesn’t end up imploding the market in a similar fashion to 2008.
For assets outside the monetary bubble, such as gold and bitcoin, this is fantastic. After all, if the US economy does suffer a major correction, expect both of these assets to do well.
But, as for how and when this market collapse could happen, no one really knows. Because I can agree with Yellen on at least one point, the world has certainly changed.
We’re in uncharted territory when it comes to monetary policy, how it all ends though, is unclear.
Short-term sugar hit
Getting away from the doom and gloom, the markets are right about one thing: The short-term outlook for investors is incredible.
More importantly, if Yellen gets her way, and we see further debt-induced stimulus, the best may be yet to come. A situation that could lead to a proper melt-up.
We’re already seeing the signals from this new Biden administration. Proposing policies and agendas that will continue to push already hot sectors; such as renewables, electric cars, and broader tech.
Not to mention the fact that the US dollar’s decline will likely continue under a debt binge. Presenting further opportunities and challenges for local and international investors alike.
Again though, if this debt agenda goes ahead, I think it will likely be hard to lose. Even if you’re only comfortable investing in Aussie stocks.
As I’ve discussed at length lately, the lithium boom is showing no signs of stopping anytime soon. It may even kick into overdrive if Biden decides to support or subsidise EVs in some capacity. Whether he would do something like that though, we’ll have to wait and see.
My point is, it is time to make hay while the sun is shining. Because we may be about to see Biden open the floodgates to really let the bulls loose. Even if it comes at a far greater long-term cost.
As the old saying goes, make hay while the sun shines.
And if debt is going to define the early days of this US presidency, well, the sun may be shining very bright indeed.
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.