People gather on Wall Street in front of the New York Stock Exchange, October 25, 1929.
Ullstein picture | Getty Images
President-elect Joe Biden’s Covid spending plan could restore financial conditions leading up to the Wall Street crash of 1929, with rising inflation possibly causing the bursting of an “epic” stock market bubble, according to a hedge fund manager.
The comments come shortly after Biden outlined the details of a $ 1.9 trillion bailout to help households and businesses through the coronavirus pandemic.
David Neuhauser, chief executive officer of Livermore Partners, said Biden’s spending plan appeared to be an attempt to mimic the “roaring 20s” by quickly getting people back on the workforce.
“But be careful, the ‘roaring 20s’ led to the stock market crash and the Great Depression in 1929. So be careful what you want,” he added.
If the American Rescue Plan is passed by the new democratically-controlled Congress, it will include $ 1 trillion in direct aid to households, $ 415 billion to fight the virus, and approximately $ 440 billion to small businesses.
“We don’t just have an economic need to act now – I think we have a moral obligation,” Biden said Thursday as he announced his plan from his interim headquarters in Delaware.
The former vice president is due to be inaugurated on January 20th.
US President-elect Joe Biden speaks out on January 14, 2021 at the Queen Theater in Wilmington, Delaware, on the public health and economic crises.
Jim Watson | AFP | Getty Images
When asked if investors should be concerned that the president-elect’s spending plan could lead to an event like the stock market crash of 1929, Neuhauser replied, “I think so.”
“You are seeing this massive $ 1 trillion deficit spending due to a pandemic that the world has naturally stopped for the past nine months, and the goals, of course, are, ‘We’re going to get a vaccine (and) we’re going to get through this,” said Neuhauser opposite CNBC’s “Squawk Box Europe”.
“We still don’t know how quickly and how quickly we can get through this. We also don’t know what global growth will look like in the years to come.”
After the stock market crash of October 29, 1929, the S&P 500 fell 86% in less than three years and did not exceed its previous high until 1954.
Neuhauser cited the expectation that US GDP (gross domestic product) could grow by 6% in 2021, but warned that growth is likely to normalize at a rate between 2% and 3% in subsequent years. An aging US population and massive corporate and national debt would also mean it’s likely a “hard road”, he said.
Neuhauser’s view, however, is not a consensus. James Sullivan, head of Asia Ex-Japan Equity Research at JPMorgan, told CNBC on Friday that Biden’s plan was more than double what the bank had expected.
So it was a “positive surprise” for the market and for general US growth in the years to come.
Separately, Goldman Sachs analysts increased their estimates of US household spending in the news in a release on Friday. They noted that Biden’s proposal on individual stimulus payments, unemployment benefits, state tax subsidies and public health funding went further than expected, but stressed that he faced hurdles in going through Congress.
US stock futures were lower Friday morning, with contracts linked to the Dow Jones Industrial Average falling 89 points while the S&P and Nasdaq both traded in negative territory. The major US indices are currently on track to close the lower week to date.
Even so, the Dow and Nasdaq posted new all-time highs for the day in the previous session, while the S&P closed around 0.81% of its record high.
“The market is trying to figure out which narrative they should go with. And in the past nine months it has risen almost in a straight line in relation to the stock markets,” said Neuhauser.
“I think what happens in the end is that (there) so much is going to be built into the market and (we) will eventually start inflationary factors coming in. Those are the things that will ultimately burst the epic bubble.”
Earlier this week, data showed that US consumer prices rose in December on a spike in gasoline prices, but underlying inflation remained relatively low. The U.S. Department of Labor announced Wednesday that its consumer price index rose 0.4% last month, after rising 0.2% in November.
In the 12 months to December, the CPI rose 1.4% after rising 1.2% in November. The numbers were largely in line with economists’ expectations.