Mountains of Money

Story Highlights:

• The global response to the financial crisis has been unprecedented in its coordination and sheer size—fiscal stimulus, in particular, has been huge.
• All this spending may spike deficits, but historically when government spending peaks, stocks tend to do well going forward.
• While we won't likely agree with every federal line item, given the alternative—frozen private and public sectors—just this once, we prefer mountains to molehills.

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These days we're navigating mountains of money—government money. The global government response to the financial crisis has been unprecedented in its coordination and sheer size. We've discussed coordinated global monetary stimulus in, but investors should note fiscal stimulus has been just as huge.

How huge is huge? Nearly every major developed country has announced plans to spend tens of billions of dollars—simply unprecedented in history. And that number grows daily. The worst of the financial fallout was here in the United States, and in line, our government plans to spend $825 billion, or 5.8% of GDP. Add that to TARP funds, and the total grows to $1.5 trillion, or 10.6%. And that is in addition to the already planned deficit spending. In emerging markets, China will spend $586 billion and India $60 billion, or 14.0% and 5.0% of GDP respectively. Italy is planning $102 billion, or 5.7%, and the EU as a whole $254 billion, or 1.5%.*

All this spending may spike deficits, but historically when government spending peaks, stocks tend to do well going forward. Why? Even though the first spending decision by the government may be ill-conceived, that money will be handed over to individuals, institutions, and other governments (state, local, or other federal institutions). The money gets spent and respent, and the many later transactions are mostly dictated by free markets. All that cash, once it gets going, eventually benefits the economy overall.

Furthermore, stimulus is never perfect and we shouldn't expect it to be. Each and every plan will always have weaknesses. But if stimulus is needed at all—and to fight the deflationary effects of last fall's financial panic, we think it is—it's less important to analyze exact spending methods than to measure magnitude. That means it's a good thing that, so far, taken together, fiscal and monetary stimulus has been massive.

We likely won't agree with every federal line item. But given the alternative—frozen private and public sectors—just this once, we prefer mountains to molehills.

* Source: Barclays Capital, Fisher Investments