On Friday, House Democrats passed a $3 trillion coronavirus relief package.
This bill includes a second round of $1,200 direct payments to individuals, up to $6,000 per household. Almost $1 trillion are for cash-strapped local and state governments while $200 billion for essential workers’ hazard pay.
It further involves $600 per week for federal unemployment insurance benefit, $175 billion in rent, mortgage and utility assistance, and $10 billion in emergency small business disaster assistance grants.
The repeal of the $10,000 cap on state and local tax deductions for tax years would be most beneficial to higher-income taxpayers.
Economy facing “significant” vulnerabilities
Elsewhere, the US Federal Reserve’s balance sheet has reached $7 trillion, growing by $213 billion in the week ended May 13 which equals a record 32.2% of US GDP.
Before the Fed started its bold emergency action on March 15, the assets stood at $4.31 trillion.
— Mati Greenspan (tweets are not trading advice) (@MatiGreenspan) May 15, 2020
The Fed also warned this week that the financial sector faces “significant” vulnerabilities due to this pandemic.
The coronavirus pandemic continues to wreck the country with the US having more than 1.48 million cases and more than 88,000 lost their lives to this virus.
Already, over 36 million people have filed for jobless claims since the crisis started.
Deflation not inflation the bigger risk
Fed and Congress injecting trillions of dollars into the economy might feel like preparing for inflation with easy money floating in the economy. But Bank of America is expecting deflation.
Core CPI prices that have historically fallen both during and after recession dropped 0.45% in April, the weakest point since first created in 1957.
A drop in producer prices, another indicator of near-term deflation has also fallen 1.5% over the last two months. BofA wrote,
“Items that are most in demand due to the shutdown – groceries, cleaning products, PPE etc. have risen in prices. Less visible [to consumers] are the numerous falling prices.”
As such, the COVID crisis and policy response to it are “deflationary” — a bigger risk in the next couple of years than inflation.
Social Capital CEO Chamath Palihapitiya shares the same opinion as he said, Fed’s stimulus policies risk “accelerate a really bad deflationary supercycle.”
Central-bank liquidity prime catalyst to relaunch bull markets
The risk of deflation is why the likes of macro investor Paul Tudor Jones are looking at bitcoin, which is an uncorrelated asset. Currently trading around $9,400, BTC has risen 144% since its bottom and is up over 28% YTD.
According to Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence bitcoin would also be the one to sustain its higher prices given that it has a supply shock recently while continuing to see an increase in demand.
Increasing demand vs. declining supply and volatility imply Bitcoin is more likely to sustain higher levels vs. the Nasdaq as a global recession approaches. Central-bank liquidity may restrict the equity bear, yet it's a prime catalyst to relaunch bull markets in quasi-currencies pic.twitter.com/c8GCqoBLNH
— Mike McGlone (@mikemcglone11) May 15, 2020
Meanwhile, the likes of Billionaire hedge fund investor David Tepper believes the stock market is overpriced, the most since 1999.
And although the bottom might be in, they can still “fall significantly” from their current levels.
“The market is too damn high,” tweeted Palihapitiya earlier this week. Since their bottom on March 23, both Dow Jones and S&P 500 are up nearly 28%.
Some meanwhile also believe stocks are “absolutely on the brink of an epic meltdown.”