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'We definitely need stimulus': Optimal Capital Dir. of Strategy

Frances Newton Stacy, Optimal Capital Dir. of Strategy, joins The Final Round to share how President Trump's announcement to end stimulus discussions will impact markets.

Video Transcript

SEANA SMITH: I want to bring in our first guest. We have Francis Newton Stacy, director of strategy at Optimal Capital. And Francis, just going through the big headlines that we've been talking about for the last 10 minutes, Trump ignoring Powell's calls for more stimulus talks, selling off on the news. In your notes this morning, you said that you think that the market is counting on stimulus. So now that we're not going to get it, I guess, how does this change your view on the market between now and the election?

FRANCIS NEWTON STACY: Well, in the short term, I'm not sure that the market is certain that Trump is not going to change his mind or that this isn't part of the art of the deal. And that was indicative by the fact that, you know, the markets didn't take out my support today, which was 11,093 on the NASDAQ, which is primarily what I'm watching at the moment.

And so the thing is, is that we have to look going forward into the near-term volatility in the news cycle, and then look out into the future to see what is the purpose of fiscal stimulus, why is Powell suggesting very strongly that we have to have fiscal stimulus to keep the recovery on track.

And the simple answer to that is, is that we have had now trillions of dollars of stimulus since COVID began. And that's the thing that's kept asset prices moving higher in the face of shutdowns and, you know, a lagging economy, et cetera, et cetera, et cetera.

The thing is though we have new debt in the system from all of that stimulus. And so you have to keep enough liquidity in the system to pay off that debt because when you get new debt, you get new debt service, and you need even more liquidity in the system. And it goes faster.

Liquidity doesn't last as long in the system. Is that a risk tomorrow? No, but Powell is not thinking about tomorrow. Powell is not thinking about next month. He's just saying, if we do not get this from Congress soon, you're going to start to see a dip in that.

Interestingly, if you look at the asset level on the balance sheet of the Fed, you know, they waned on buying because there was a lot of discussion around fiscal stimulus. And now they have increased their asset purchases because this is a real risk on the table, moving forward.

And so, in the interim, hard to say with the whole Twitter deal and the election coming up. But in the longer term, we definitely need fiscal stimulus.

SEANA SMITH: So Francis, then the big question is, what do investors do at this point? Because recent volatility, obviously, is evidence of how quickly market trends can change. You see the news today, the news flow. The headline news here is very indicative, just in terms of how quickly things could change inside or down on Capitol Hill. So what should investors do at this point?

FRANCIS NEWTON STACY: Right, so I would add diversification to portfolios. And one of the great ways to diversify, basically, is the US dollar, and that's because of its historic negative correlations with both the equity markets and also with gold. So put in an asset class diversifier.

I like the ETF UUP, whether you're going to buy calls in the options market or you're going to buy shares of that. It's a very-- it's not a volatile trade. But if equity markets head south or gold heads south based on a deflationary trade versus gold winning on an inflationary trade, you just have a lot of diversification in the portfolio.

As far as equities go, still watching this NASDAQ. What's the catalyst to compete with the all-time highs that were given to us by Softbank? We have a lot of money on the sidelines. And if we're going to get another stay-at-home trade or something like that with COVID, like now we have new closures again in New York City and the case cases are up, then, of course, that was the-- tech was the flight to safety.

But even further out than that, we have problems in the credit markets. We just don't know how bad they are yet. We have over 100 million loans in forbearance and, you know, an ever increasing percentage of the mortgage market being in forbearance. And so we don't know what percentage of the loans in forbearance are going to be actually default risk.

And of course, those big tech companies have great balance sheets. And so we may continue to see assets from the sidelines pour into those as a flight to safety.

SEANA SMITH: And Francis, I wanted to ask you about that credit risk because when you were on just around a month ago, you were talking about the potential credit risk in the fourth quarter, which we're in right now, more than 100 million, like you just said, loans in forbearance. How much of that risk could you think, if any, is priced into the market at this point?

FRANCIS NEWTON STACY: It's almost impossible to price in. I think what's being priced in is extended volatility throughout the end of the year. Some of those forbearance periods are supposed to end at the end of October. But we don't know if policymakers, and certainly if we can shove a fiscal deal through, if any of that's going to be extended. So there's that there.

But I mean, I think people are pricing in it with volatility. I don't think that there's any way. And of course, we'll continue to watch credit spreads. But I don't think there's any way to tell what percentage of those loans are going to default.

But the employment picture being as dire as it is, and furthermore, if we don't get fiscal stimulus, as we found out from Powell's testimony with Mnuchin just recently, you know, Mnuchin said, oh, sure, we can work on loans, you know, around $100,000 for small businesses. And Powell said, no, no, no, not so fast. The Fed cannot underwrite those loans.

And so that's really why Powell is saying, look, I can continue to buy assets from the monetary policy perspective. But we need fiscal stimulus because at the end of the day, coming out of COVID with the employment picture, the wealth gap should be our largest concern.

SEANA SMITH: All right, Francis Newton Stacy, director of strategy at Optimal Capital, always great to have you on. We'll talk to you soon.