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Executive Summary

On the one hand the public is told Congress must pass a massive stimulus bill providing cash to individuals, or businesses and the economy will fail.  On the other hand, pundits state the economy is strongly rebounding based on the soaring stock market. Which story is correct? Between both stimulus packages, Congress has passed almost $4 trillion in aid much of which has made its way into the stock market. And like all bubbles, the end is filled with retail speculators (Robinhood traders) and margin-debt boosted stock purchases.  The first two graphs below illustrate the significant increase in margin debt, and the corresponding increase in the S&P 500 index. Similar margin-debt activity took place in March 2000 and June 2007. 

Please proceed to The Details.

“I simply cannot accept that there are on every story two equal and logical sides to an argument.”
–Edward R. Murrow

The Details

On the one hand, the public is told if Congress does not pass a massive stimulus bill providing funds, grants and loans to individuals and businesses, the economy will plunge, companies will go bankrupt and families will starve. On the other hand, when justifying the record-setting overvaluation in the stock market, pundits state the economy is strongly rebounding, jobs are being restored and the future looks bright. So, which is it?

Last week President Trump stated he would not sign the huge $900 billion COVID-19 relief bill passed by Congress because it was attached to a $1.4 trillion spending bill chock-full of wasteful spending. Then on Sunday, despite the current debt balance of $27.5 trillion, the bill was signed, wasteful spending and all. And on top of that, the President is calling on Congress to increase the relief payments for individuals to $2,000 from the $600 included in the bill. He also wants Congress to go back and remove some of the pork spending. I am sure Congress will jump all over that spending reduction!

The amount of relief adds to the almost $3 trillion signed into law earlier this year. Therefore, total coronavirus relief packages of almost $4 trillion have been approved or almost four times more than what was put forth during the worst recession (2007-2009) since the Great Depression.

Of course, the “V-shaped” bounce in the economy touted by stock market cheerleaders was merely a response to the earlier record stimulus package. This package has effectively worn-off, and the numbers are reflecting a slowing economy and higher unemployment claims. The only numbers that might lead one to believe the V-shaped ruse are the stimulus provoked bubble in asset prices. Like all bubbles, the end is filled with retail speculators (Robinhood traders) and margin-debt boosted stock sales pushing prices to extremes that would make Benjamin Graham rollover in his grave.

Let’s take a brief look at the extent of debt-fueled stock purchases by examining margin debt. The graph below, from Advisor Perspectives, illustrates real (inflation adjusted) margin debt growth (through November) compared to the S&P 500.

The growth of margin debt has rapidly increased, leaving the November numbers above already out of date.  The following is via Lance Roberts’ blog:

“Per Troy Bombardia @bullmarketsco – ‘Something to watch out for in 2021: Margin Debt soared 50% in the past 8 months. In the past 30+ years, such investor euphoria happened exactly twice:

  • March 2000
  • June 2007
  • Now’”

And finally, a graph illustrating margin debt as a percentage of disposable personal income (green bars in graph) from

All three of these graphs illustrate the same point: margin levels have reached the point where stock market bubbles have peaked, right before significant market corrections ensued.  Will the $900 billion stimulus package be enough to delay the next downturn?  Are investors willing to bet their savings that the plunge will not start tomorrow?  Based upon historical research from economist John Hussman, among others, the S&P 500 would now have to fall close to 60-65% merely to bring valuations back to the long-term average.  Any further stimulus-enticed rise in valuations only adds to those percentages upon the ultimate arrival of the next bear market.

Can the economy be in such bad shape as to warrant another $900 billion stimulus on top of the previous almost $3 trillion?  Or is the economic bounce in the third quarter, combined with soaring stock prices, an indication that the recovery is already here?  You can’t have it both ways.

The S&P 500 Index closed at 3,703, down 0.2% for the week.  The yield on the 10-year Treasury Note fell to 0.93%.  Oil prices decreased to $48 per barrel, and the national average price of gasoline according to AAA rose to $2.25 per gallon.


© 2020. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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