In the latest issue of his monthly newsletter, Eric Sprott, head of Sprott Asset Management, says that while the massive $2.8-trillion in cheques already written, which are part of a grand total of $11-trillion in total stimulus commitments, has been great for the stock market, it remains to be seen if indeed the positive effects will make it to "Main" Street.
Sprott discusses data that suggest this is as good as it gets - that the effects of the stimulus are already wearing off.
The majority of the Act (ARRA - American Recovery and Reinvestment Act of 2009) consists of tax cuts and transfer payments to citizens, the impact of which was felt within the first two quarters of being received. By the end of September 2009 this stimulus will have worn off, and along with it will vanish the greatest marginal impact of the entire stimulus package itself. According to economic forecasters like Moody's, by 2010 the net impact of the stimulus package to real GDP will be barely over 1%.
China's $4-trillion yuan economic stimulus too has been unprecedented. It effectively represents 64% of China's GDP, and it makes China the greatest stimulator of all. Beneath it all however, Sprott points out that it has resulted in 7.9% GDP growth increase for 2009, a mere $1-trillion return on a $9.37-trillion investment.
So if the money hasn’t generated GDP growth, where did it go? It’s gone everywhere. Their government-induced liquidity flood has “soaked” virtually every speculative asset class in China. Copper, nickel, steel, Chinese equities, Chinese real estate - they’ve all appreciated in spite of the obvious and acknowledged weakness in the global economy.
What happened?
In our assessment of recent economic data, there are only two possible explanations for the recent market rally. Either investors are discounting an incredible economic recovery that is just around the corner (hard to believe), or the extra liquidity injected into the economy has found its way into the stock market. We’re leaning towards the latter alternative.
What's next? Sprott says that a double dip recession is more likely now and investors should prepare for what is waiting beyond the stimulus, as there will nothing to replace all the artificially induced demand.
Read the whole letter here (pdf), or below:
Click on the top right hand corner of the reading pane to full screen the document.
