Once the coronavirus crisis comes to an end and the economy opens up again, we will have a “booming economy” to look forward to, thanks in large part to the money that consumers will be receiving from the U.S. government through the Coronavirus Aid, Relief and Economic Security (CARES) Act, according to Jeremy Siegel, professor of finance at Wharton and WisdomTree senior investment strategy advisor.
“We’re going to increase the national debt by a trillion dollars or more,” he said Monday during his latest weekly conference call on the state of the markets. “But more importantly, we’re putting that national debt not just into excessive reserves and some sort of” quantitative easing by the Federal Reserve. “No, we’re putting it right into American bank accounts like we’ve never done before,” he told listeners, pointing to the “direct deposits of money into the pockets of Americans” that the U.S. government is making through the various components of the CARES Act, including the relief and extended unemployment checks.
Now, Americans can’t spend most of that money yet because “we’re still under a shutdown,” he noted. However, assuming the coronavirus crisis can be solved no later than Dec. 31 and consumers once again have confidence “they can spend the way they were before this virus – wow, we have purchasing power like we’ve never had before,” he said, predicting: “We will have demand for goods and services as we have not had since [World War II]. We will have a booming economy.”
Inflation to Go With That Boom?
In fact, he predicted, we may even have “too much of a booming economy” in 2021 and “maybe for the first time in 10 to 15 years, inflation may in fact become an issue.” However, he was quick to add that he was not referring to the sort of “runaway inflation” we had in the 1970s that reached double digits, but instead maybe 4-5% inflation this time. That inflation can be dealt with via a tax increase (not likely because it would not be popular), by the Federal Reserve raising interest rates, or we could just live with it, he said. If the price level rises 10%, that could potentially pay for the stimulus program we are in the middle of now, he claimed.
If all that comes to pass next year, it will not be a good time for investing in bonds, but may be good for investing in gold and other precious metals, commodities in general or “real assets” including real estate, and also stocks, he said.
“It’s good to be on a call on a day when the Dow is up 1,600” points, he told listeners earlier on the call, noting he predicted earlier in the day there would be a rally after seeing reported infection rates were slowing in multiple European countries and in New York, according to data he saw throughout the day.
Revisiting the Four Steps Needed to Rescue the Economy
Siegel went on to remind listeners that, on the prior call, he said there were four measures that needed to be taken to rescue the economy from the coronavirus crisis. Those four steps were: massive fiscal and monetary support, “flattening the curve,” to slow the spread of the coronavirus, the arrival of vaccines and therapeutics, and the deployment of systems that accurately collect coronavirus outbreak data, make widely available reliable diagnostic tools to test people for the virus liberally, and test people on a wide basis to find out who has antibodies that fight off coronavirus and can go back to work.
Although he said Monday that some people told him he was being “premature” about the curve getting flatter, he told listeners: “We are getting good news” when it comes to flattening the curve, especially in Europe, but also in New York thanks to social distancing.
Vaccines and therapeutics “must be our focus” now because even if the curve is flattened, the virus will still be here and the crisis won’t be over, he noted. It is important to get people back to work and there are two ways to do that: the best way being a vaccine, but that might take a year or longer, and the other way being the development of effective therapeutics – medicines that won’t make people immune to the virus, but mitigate the coronavirus if one contracts it, he said. Siegel is “highly optimistic” that will happen, he said, predicting they “will be a game changer.”
Having a drug that can be given to people to significantly decrease the number of patients being treated in hospital intensive care units means that “we can definitively start opening our economy,” he said, noting “it is very hard to see how we reopen our economy in a full way… without” therapeutics.
To achieve that, we need a “concerted national effort” in which we set up testing sites for those medications and “marshal our resources completely against our enemy, the virus, and if we do so, we can restore the economy,” he said.
Without a vaccine or at least proven therapeutics to convince people that even if they get the virus it likely won’t be worse than a common cold, even if we reduce the virus rate by another 80%, most consumers will still likely avoid flying and going to restaurants and entertainment and sports events, he said.
During the Q&A, he predicted most company earnings are “going to be savaged this year,” but said that is “not the most important” issue. After all, “what’s important to realize is that over 90% of the value of stocks is dependent on its earnings more than 12 months in the future,” he said.
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