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Market Update August 12: Loanable Funds

Market Update August 12: Loanable Funds

August 25, 2020
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Daily deaths due to COVID-19 continue to show a slight rise. We expect it to decline in the next couple weeks. As of now, we are above 1000 on a 7-day average. However, yesterday’s numbers had deaths from unspecified days added to the daily count. We are seeing change in hotspots as well. 

The 2020 election is going to start to dominate headlines over the corona virus. It is only about 90 days out and it will become more present in our market update in the following weeks.

The outcome of this election will impact the market in some type of way. 

The number of people employed has increased by 1.8 million people in July which is lower than the previous 2 months. This means the unemployment rate has dropped and we hope it continues to decline. The economy is slowing recovering as well as the society adapting to new standards

Trump recently signed executive orders regarding $400 in unemployment benefits, payroll tax holiday, student loan relief, and eviction moratorium. White House Economic Adviser Larry Kudlow said on Tuesday the U.S. government will borrow funds to cover any Social Security and Medicare shortfalls that may arise under President Donald Trump’s executive order. “We will bond out any additional money as we always do. The Treasury - we work through general revenues and issued nonmarketable securities to this even with forgiveness,” he said, adding that “it’s a very manageable number” and at this point time “we’re not ending the tax.”

Loanable Funds & Interest

Let’s go back to our fish example. The fisherman needs to fish more which will ultimately lower his consumption. But let’s say he finds a boat builder where he can borrow more fish from without putting the work in to collect his fish. This leads into the loanable funds market. So why would he borrow fish from the boat builder? Because there is the possibility of gain and a high interest rate. The higher the interest rate the more likely the fisherman will not consume everything, but rather set things aside as excess resources and later loan them out. Therefore, if the interest rate is low the fisherman would be less likely to loan the fish out and more likely to consume them.

Increase in Excess Resources

We have our stages of production; we have our consumption vs. investments (setting resources aside) and we have the loanable funds market. We are going to assume that people are going to consume less therefore late stage economy will start to drop down (our consumption vs. investment moves towards excess resources).  If there are excess resources than the supply of loanable funds has increased ultimately making the interest rate lower.

So, what is the point of this? Well because we must turn two fish into four fish the production must increase for the economy. Therefore, we get higher amounts of production through capital goods and the mix of labor. This means our production possibility frontier (the seven fish) now appear when there is a tradeoff. Then, there will be some type of new equilibrium where you are able to set a particular amount of resources aside and consume more while the economy continues to grow.

Now how does this all come together? We have all the tools in our box, so next week we can discuss what happens when those goldsmiths become bankers and start to realize they are able to expand their money supply. What is it going to say in this model? You will start to understand our theme: why the inflation risk as this time is high and why we favor equities over fixed income.

Asset Class Weighting & Strategies

Our concern regarding the dollar continues to grow. We are now moving into a downward trend. This is NOT the time to have high cash balances beyond your cash hub or take big bets on dollar denominated bonds. Because of our concerns for the dollar and views on inflation risks of bonds and cash, we added exposure to Gold Miners to qualified accounts last week.

Large Cap Growth slowed last week, but Mid and Smalls rallied our other overweight. In addition, Gold is once again reasserting itself and made new all-time highs. Because our overweigh to technology is still greater than the Mid and Small cap weightings, we did lose some to the benchmark, but we still maintain very high spreads as well as significant outperformance relative to the benchmark for the year. Our technical are slowing changing the make-up of our portfolios.

There are no changes to our themes; however, we did make some trades last week. I also hope the last few weeks material is demonstrating why we believe inflation risk is high. We have a couple more concepts to review and then we can begin to apply them to investment selection.

Follow GWS on YouTube

For the full video recap of the webinar on which this blog post is based, follow GWS on YouTube. (If a recent episode isn’t posted there yet, it’s still in compliance review). And be sure to tune in to our weekly Gatewood Wealth Solutions Market Webinar to hear updates on the current state of the market and economy. As always, we welcome you to share our broadcast links on social media or with your friends and family. They are more than welcome to listen in and learn our perspective on the market and the economy.

If you have any questions, please contact your Lead Advisor or any other member of our team.  We are here for you.

Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

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