Chart of the Week

RECESSION RISKS IN AN ERA OF FISCAL DOMINANCE

Are recessions no more given that policymakers are spending so much money?

As Sir John Templeton said the four most dangerous words in investing are “this time is different,” but it is hard to see a major and protracted recession taking hold when most Governments are already running substantial fiscal deficits and the Central Banks are providing bundles of liquidity support.

This is particularly so in a US Presidential election year, which makes the chart below an important one to watch as we head towards polling day on 5^th November.

As we have noted before, the Treasury General Account (TGA) is the US government’s current account at the Federal Reserve. It’s used to manage day-to-day federal spending and is where the Treasury department deposits the funds it raises from tax receipts and new debt issuance.

When the balance is rising it typically means liquidity is being sucked out of the economy and markets, which tends to coincide with “risk off” events. Conversely, the TGA balance falls when the authorities wish to provide a fiscal boost to spur stronger economic growth or a stock market rally (or both).

With the election fast approaching, the odds strongly favour the TGA being bled down from its current level around U$800bn because the incumbent Democratic administration will want to goose up the economy and markets as we head towards year-end.

Should this fiscal firepower be deployed, the risk of a US recession will diminish, at least in the near-term. And that should be a constructive environment for equity markets.