August 3, 2020 BARRON’S 7
UP & DOWN WALL STREET
“Never before has fiscal and monetary stimulus
matched the nation’s nominal output in a single
quarter,”wrote economist Joseph Carson.
Dismal First: Uncle Sam’s Aid
To U.S. Tops Quarterly GDP
Clearly, the second quarter was the
best of times for these behemoths,
while the worst of times for the econ-
omy in the U.S. and abroad. Yet the
situation could have been vastly worse
without the unprecedentedly large and
prompt response by the U.S. fiscal and
monetary authorities.
Joseph Carson, the former chief
economist for AllianceBernstein who
warned of a record second-quarter
GDP drop in this space ahead of his
former Wall Street peers last March,
estimates that the Federal Reserve and
federal government pumped about $
trillion into the U.S. economy in the
three months ended in June, which
compared to nominal GDP of $4.
trillion, measured on a quarterly,
rather than annual, basis. “Never be-
fore has the scale of fiscal and mone-
tary stimulus matched the nation’s
nominal output in a single quarter,”
Carson wrote on his LinkedIn blog.
As the nation’s output suffered
a record decline in the second
quarter—some $500 billion in
current-dollar terms—he calculates
that the market value of domestic
companies increased by $7 trillion.
And the stock market’s capitalization
hit two times nominal GDP, eclipsing
the previous record of 1.87 times at
the peak of the dot-com bubble in
2000’s first quarter. “In other words,
the 2020 equity market is the most
expensive (or overvalued) in our
lifetime,” Carson concluded.
David Rosenberg, who heads Rosen-
berg Research, further points out the
key role that Uncle Sam has played in
supporting American households.
While wages and salaries plunged at a
$680 billion annual rate, personal in-
come soared by $1.386 trillion in the
quarter, owing to $2.419 trillion in
transfer payments. But the 32.6% an-
nual rate of increase in personal in-
come was met with a 34.6% rate of
decline of spending, as households
boosted their savings rate to a record
25.7% from 9.5% in the first quarter.
Some of those stimulus checks
evidently found their way into stock
speculation, especially among bored
sports gamblers who didn’t have
games to bet on, as noted here a
couple of months ago.
The latest darling of Robinhood’s
merry band of day traders isEast-
man Kodak(KODK), which bears
little resemblance to the former pho-
tography giant that once was among
the 30 august Dow Jones industrials.
News of a $765 million government
loan to help the company start mak-
ing generic-drug ingredients sent
Kodak shares soaring over 1,000%
this past week, despite their 20%
drop on Friday.
Kodak was the most popular stock
on Robinhood this past week, our
colleague Al Root says, based on
tracking by Robintrack.net. Curiously,
daily volume in Kodak shares surged
above one million shares—10 times
the usual total—on Monday, the day
before the news of the loan that
excited traders became public.
So, instead of bread and circuses, we
have the stock market to deflect from
the ongoing pandemic, social unrest,
and steep unemployment. The July jobs
report, due out on Friday, should show
another increase in nonfarm payrolls,
which will be bolstered by seasonal
adjustments that will add one million
to the tally, according to RBC Capital
Markets economists.
What remains key is the ongoing
support from fiscal policy, not just the
$600 weekly payments to those out of
work, but also aid to state and local
governments that, Rosenberg points
out, account for 10% of GDP.
So far, Uncle Sam has provided that
support by borrowing at record-low
interest rates. But late on Friday, Fitch
Ratings revised its outlook for the na-
tion’s credit to negative, owing to the
deterioration in its finances evident
before the coronavirus shock. However,
America retained its top AAA credit
rating from Fitch because of the bene-
fits it gets from issuing the world’s pre-
eminent reserve currency. A credit
By Randall W.
Forsyth
Treasury Secretary
Steve Mnuchin has
helped craft the huge
reession-aid bills.
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