On November 19, 2020, Treasury Secretary Steven Mnuchin sent a letter to Federal Reserve Board Chairman Jerome Powell reminding him that the “current [CARES Act] facilities are set to expire at year end.” He is recommending that the Board of Governors approve a 90-day extension of the Commercial Paper Lending Facility, the Money Market Mutual Fund Liquidity Facility, the Primary Dealer Credit Facility (banks) and the Paycheck Protection Program Liquidity Facility. That means the bond, bond fund and the Main Street Lending Programs will expire on Dec. 31, 2020.
This is problematic because more than 1000 bonds have been purchased, along with quite a lot of bond funds. Over the past few weeks, another 100 bonds were purchased. Every Dow component, including Microsoft and Apple, has received financial support. 58.8% of the S&P500 companies are at or near speculative status (source: S&P Global). 11.8% of the index is already in junk bond territory, including most of the airlines. A disturbing number of banks and financial services companies are in BBB territory. (AAA is the highest rating. BBB is the lowest investment grade rating, with BB in speculative territory.)
The liquidity facilities and purchasing programs have kept junk bonds and funds artificially high, and have also provided liquidity for everything from investment grade bonds, money markets and even Treasury Bills – all of which had a crisis in March of 2020. Jerome Powell confirmed the policy in a letter to Mnuchin on Nov. 20, 2020, writing, “You have indicated that the limits on your authority do not permit the CARES Act facilities to make new loans or purchase new assets after December 31, 2020, and you have requested that we return Treasury's excess capital in the CARES Act facilities. We will work out arrangements with you for returning the unused portions of the funds allocated to the CARES Act facilities in connection with their year-end termination.”
Can We Keep Printing Money Like There’s No Tomorrow?
Since the pandemic hit, we’ve added $4 trillion to the public debt, which now rings up to $27.254 trillion. (#45 started his Administration with $20 trillion in debt.) We can keep printing until the end of July 2021. However, on August 1, 2020, we’ll hit the Debt Ceiling again. You’ll start hearing more about this in late Spring of 2021. However, with the bond purchasing programs expiring at the end of this year, Congress will have to approve another bailout package to rescue those companies that are still distressed.
What Makes a Strong Economy?
It’s easier to understand what it takes to create a strong economy if you think about what it takes to build and maintain a thriving small business. Successful entrepreneurs create or build a product that people want to buy. They compete with others to make the best version of it, and then sell their wares for a price that people can afford to pay.
Selling oil and gas to the world made the Middle East and Russia rich. With the pandemic, these areas will suffer because travel and the personal commute are both down dramatically. Technology has become central to our lives, benefitting the U.S. and China.
So, what can we do to invent and build the products of tomorrow that the rest of the world needs? What will be useful in a post-pandemic world? Will the planet’s denizens focus on climate action? Will clean energy products fare well?
Is Borrowing the Right Answer?
Borrowing is always a temporary solution. If there are businesses that are not as relevant in a post-pandemic world, they need to right-size their operations. As Jerome Powell has stated repeatedly, “Many borrowers will benefit from these programs, as will the overall economy, but for others, a loan that could be difficult to repay might not be the answer. In these cases, direct fiscal support may be needed.” As taxpayers funding these programs, we also need to ask ourselves which products and services we want to invest in – the products of yesteryear or the products of tomorrow.
In 1992, during a period of very high debt, the Clinton Administration invested quite heavily in the Internet. History has rewarded our country for that policy. If we had not invested in the technology industry during that time, we’d be in a lot more trouble right now. Technology revenue has buoyed up the American economy through the 2020 pandemic. President Clinton presided over the best stock market in history. (Guess which President has the distinction for the second best.)
So, what is the Internet of tomorrow? That’s the question we want to ask going forward.
Don’t Fight the Fed
There definitely is a great deal of power in our U.S. Federal Reserve Board. However, it is our tax dollars that the Fed is using. The Fed’s Emergency Authority is intended to be temporary. There are deadlines, such as the programs that will expire at the end of 2020. The propping up of an ailing industry is not intended to be forever. At some point, the industry has to support itself, right-size to a new and lower demand, or become obsolete. It’s key to remember this when you think of the industries you want to support. You wouldn’t want your investing or tax dollars to support the typewriter or the horse and buggy, so apply the same logic to the products that are becoming less relevant in today’s world.
Be cautious right now. It’s very easy to be tempted into purchasing risky investment products at the top of the market because you see everybody else making money and you want to join the party. However, ignoring what happened in March could be a very expensive lesson.
Here are a few other deadlines to be aware of. Remember that investors and markets are forward-thinking. If you wait for the headlines, it will be too late to protect your wealth.
Debt Limit Must Be Raised Before August 1, 2021
The current debt ceiling has been suspended through July 31, 2021. It will have to be raised before then. You’ll start hearing about this in late Spring of 2021.
U.S. Sovereign Rating Has a Negative Outlook from Fitch Ratings
The U.S. has the highest government debt of any AAA-rated country. Fitch has us on a negative outlook, which gives up to 12-18 months to fix the issue. That means that anytime between now and the end of 2021, we could start hearing signs that we’ll lose our AAA rating with Fitch. Canada was downgraded to AA+ on June 24, 2020.
What’s Your Best Strategy?
The right answer is not sitting on the sidelines, and it is not buying high. In fact, our easy-as-a-pie-chart system with annual rebalancing is a buy low, sell high plan on auto-pilot. It:
* Protects you from the downturns
* Profits from bull markets
* Prompts you to buy more when the markets drop (at a lower price)
* Reminds you to sell high when the party rages (to capture gains)
In the 21st Century, you’re riding a Wall Street rollercoaster with a Buy & Hope plan. As Jerome Powell warned on August 27, 2020, expansions now end with “episodes of financial instability.” Those episodes have cost investors more than half of their wealth in the two last major recessions, and up to -35% in March. This crisis is not over, even though stock and real estate prices are higher than ever.
The pie chart plan with annual rebalancing is time-proven. It’s time to replace blind faith and last-century strategies that don’t work with financial wisdom. Learning the ABCs of Money that we all should have received in high school is vital to your fiscal health.
Now is the right time to make sure that you have battened down the hatches on your wealth. Call 310-430-2397 or email info@NataliePace.com to learn about our Jan. 16-18, 2021 Online Investor Educational Retreat, or to receive information on my unbiased 2nd opinion of your financial plan. Register for the Jan. 2021 retreat by November 30, 2020 to receive the best price. Register with a group of friends and family to save hundreds per person!
Other Blogs of Interest
Money Stress Killed My Friend
Real Estate and Housing 2021. Challenges & Opportunities
Real Estate in a Pandemic. Interview with Mike Fratantoni, the Chief Economist of the Mortgage Bankers Association.
Bonds are Illiquid & Negative-Yielding.
Annual Rebalancing is a Buy Low, Sell High Plan on Auto-Pilot.
5 Red Flags of a Financial Implosion
Will Regeneron Be Approved Before the Election?
Tesla Will Have an Outstanding Earnings Report
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The October Surprise
Is Your Bank a Junk Bond
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Put Your Money Where Your Heart Is.
Crystal Ball for the Remainder of 2020 (Including the Election).
Microcap Gaming Company Doubles 2Q 2020 Revenue.
Apple & Tesla Stock Splits.
Schwab's Chief Fixed Income Strategist on What's Safe.
China's Tesla (Nio). 2Q Sales Soar.
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Airline Revenue Plunges 86%.
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Bank Earnings Season. Crimes. Cronyism. Speculation.
Real Estate Solutions for a Post-Pandemic World.
Copper and Chile Update.
Gold Soars. Some Gold Funds Tank.
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Why Did My Cannabis Stock Go Down?
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Is Your Financial Advisor Good at Navigating Stormy Seas?
$10 Avocados, Lies, Damn Lies, Statistics & Wall Street Secrets.
It's Never a Crash.
Work From Home and Intergenerational Housing.
Biotech Races for a Coronavirus Cure.
Are You Worried About Money?
May is a Good Time for Rebalancing.
Is FDIC-Insured Cash at Risk of a Bank Bail-in Plan?
Why Did my Bonds Lose Money?
Recession Proof Your Life. Free Videocon Monday, May 10, 2020.
The Recession will be Announced on July 30, 2020.
Apple Reports Terrible Earnings.
We Are in a Recession.
Unemployment, Rising Stocks. What's Going On?
8 Money Myths, Money Pits, Scams and Conspiracy Theories.
21st Century Solutions for Protecting Your Home, Nest Egg & Job.
Wall Street Insiders are Selling Like There is No Tomorrow.
Why Are My Bonds Losing Money?
Tomorrow is Going to be Another Tough Day.
Price Matters. Stock Prices are Still Too High.
Should You Ride Things Out?
7 Recession Indicators
Corona Virus Update.
The Bank Bail-in Plan on Your Dime.
NASDAQ is Up 6X.
CoronaVirus: Which Companies and Countries Will be Most Impacted.
Is Tesla Worth GM and Ford Combined.
Artificial Intelligence is on Fire. Is it Time to Buy S'More?
Take the Retirement Challenge.
2020 Investor IQ Test.
Answers to the 2020 Investor IQ Test.
The Cannabis Capital Crunch and Stock Meltdown.
Does Your Commute Pollute More Than Planes?
Are Health Care Costs Killing Your Budget?
2020 Crystal Ball.
The Benefits of Living Green. Featuring H.R.H. The Prince of Wales' Twin Eco Communities.
What Love, Time and Charity Have to do with our Commonwealth. Interview with MacArthur Genius Award Winner Kevin Murphy.
Unicorns Yesterday. Fairy Tales Today. IPO Losses Top $100 Billion.
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 4th edition of The ABCs of Money was released on October 17, 2020.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.