Harrison: U.S. Headed For The Fiscal Cliff In September

Your Real Vision Daily Briefing for August 26, 2020

Senior editor, Ash Bennington, joins managing editor, Ed Harrison, to discuss risk assets, credit markets, and the fiscal cliff.

  • If interest rates back up it will have a negative impact on bonds and possibly equities as well because they are a play on duration.
  • Overall credit tightening in the financials sector and the velocity of M2 money plummeting will have pernicious effects on growth.
  • The fiscal cliff could mean a reweighting of assets in your portfolio or a wholesale selloff in risk assets as people flee to treasuries.

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The real economy is showing signs of rolling over and September and October will be pivotal as we see what impact it will have on asset markets, specifically bond and equity prices, Ed Harrison told Real Vision during today’s Daily Briefing.

Harrison discussed how the lower interest rates are, the longer duration assets become, and longer duration assets are more volatile relative to changes in interest rates, so the longest duration assets offer investors the most upside but take the longest to mature.

He said that people are moving out the risk curve because rates are going low and duration is getting longer, but questioned how low rates can go. Harrison said he is not sure you can go negative rates in the U.S., so he believes rates will back up and it will have a negative impact on bonds and possibly equities as well because they are basically a play on duration.

Harrison also discussed credit tightening in the financials sector and said we’ll see if secular stagflation comes to the fore because of it. He noted that when business lending standards were tightened, loan demand dropped for nearly all types of loans.

“In a world of secular stagnation when you’re also going over the fiscal cliff, which is where we potentially are in September/October, what does that mean in the real economy and what is the knock-on effect into asset prices in this K situation?” he said.

Harrison also looked at M2 money growth over time within the context of the conversation about the real economy versus the financial economy. While it had been at 10% or less, it shot up to 25% as the Fed was injecting money like crazy – but Harrison argued that we’re not getting inflation and not getting a spike in nominal GDP because money velocity is plummeting.

“If you look at the Velocity of M2 Money Stock (M2V), it has plummeted during the pandemic,” he said, “which tells you on a broader scale that this whole thing about banks tightening lending and falling off of the fiscal cliff will have very pernicious effect on economy unless we deal with it soon.”

Harrison said the September/October fiscal cliff will be a huge impulse if it is not fixed, which could mean a transition from the K-shaped economy that either looks like a reweighting of assets in your portfolio or a wholesale selloff in risk assets as people flee to treasuries.

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