Summary
-U.S. budget deficit tripled to a record $3.1 trillion, which is over 100% of GDP
-Consumer spending picked up last month
-Unemployment numbers aren’t getting better
-Banks painted a bleak picture even though they had high trading profits

Hi there—here is this week's update!

U.S. Budget Deficit

The budget deficit has tripled to a record $3.1 trillion.

No matter how you view it, this doesn’t look good. As a percentage of economic output, this is the largest budget gap since 1945, which was when the U.S. was financing military operations to finish WWII.

We’re hearing similar statements coming from prominent leaders and economists:
-Economists and Fed officials believe that spurring growth should be the priority, and focusing on the deficit can come later.
-The International Monetary Fund said that global public debt would most likely approach 100% of output but recommend maintaining spending to promote recovery efforts.
-The World Bank says that the pandemic is turning into an economic crisis and that there are now risks of a possible financial crisis emerging.

Simply put, governments are spending record amounts, but if they stop now, the results could become catastrophic.

Consumer Spending

Monthly data on retail spending, which serves as a good barometer for consumer sentiment and spending, is up significantly.

Big-ticket purchases, like the 3.6% bump in spending on motor vehicles and parts, are showing that consumers are confident in their future earnings. This is especially noteworthy because income support from the government expired at the end of July.

Many Americans used their stimulus checks to add to their savings or pay down debt, so this retail sales jump may still be more tied to government aid. It will be interesting to see if spending continues its upward trend in the coming months as employment data remains bleak.

Unemployment

Jobless claims totaled 898,000, which is 53,000 higher than the previous week, while continuing claims fell to 10 million.

Seeing a drop in continuing claims is a bit of a red herring because many of those people may have exhausted state aid and moved to the Pandemic Emergency Unemployment Compensation program, which provides up to an additional 13 weeks of benefits. PEUC numbers rose by 818,054 to 2.78 million for the week ending September 26th.

Another important note is that California, the most populous state, has frozen its initial claim numbers at mid-September levels due to its two-week pause for filing new claims.

Earnings

A few of the largest U.S. banks released their earnings this week. Banks had a strong quarter because companies have been rushing to the financial markets to raise capital. Banks typically assist in the capital-raising process and make fees. This can largely be attributed to the liquidity rally fueled by the Fed.

Banks have set aside record amounts for loan losses, and these losses are expected to rise next year and peak towards the end of 2021.

Summary

The sugar high from government bailouts and stimulus surely had a positive impact on the markets and certain businesses. The real question is, when will this sugar high wear off?

We are now borrowing against our future and cutting longer-term growth. The impact of this will be a lower return investment environment. The stock market should have muted long term returns, and investment-grade bond yields should be near zero, which will force investors to look elsewhere for returns.

We like assets longer term that have a few properties:
1) Faster growth relative to their competitors (higher relative growth potential)
2) Unique return profiles relative to their risk (higher risk-adjusted returns)
3) Assets that are less correlated to the broader markets.

See you next week,
-Saul & The Round Team

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