What Is a Put (Keynesian)?
Investors who believe that fiscal stimulus measures will soon benefit the financial markets in general and a particular investment, in particular, hold a Keynesian put, which is an optimistic view of the market.
An investor may want to examine a Keynesian put strategy about the stocks of electric bus makers or solar panel firms if they are considering a proposal for significant government investment to reduce greenhouse gas emissions, such as the one included in a federal budget resolution for 2021.
Tax cuts, lower government spending, and looser Federal Reserve monetary policy are examples of fiscal stimulation.
Getting to Know the Keynesian Put
In 2016, analysts at Bank of America Merrill Lynch first used the phrase “Keynesian put.” The name alludes to the economic theories of the renowned British economist of the 20th century, John Maynard Keynes, who supported government expenditure to stimulate a flagging economy.
The phrase also alludes in jest to the Greenspan put, a term first used in 1998 to characterize the accommodating monetary measures then-Federal Reserve Chair Alan Greenspan employed to stave off a recession. Proactive monetary measures like a reduction in the prime lending rate aim to boost the economy by promoting increased borrowing by households and companies.
A Keynesian put is predicated on the idea that expenditure by the government will be necessary to sustain economic growth.
The expectation that governments everywhere will aggressively employ their spending power to promote their economies has grown since the global financial crisis of 2007 and 2008. That will almost certainly help keep stock prices high.
An illustration of a Put
To make up for the harm the COVID-19 pandemic did to Americans and American businesses, the American Rescue Act of 2021 injected $1.2 trillion in federal funds into the economy. With a Keynesian mindset, an investor may wonder where all that money is going. Here’s how some of it ended up:
- A total of $242 billion was distributed as unconditional payments to almost every American and as bonus money for parents of small children.
- Local governments received a payout of about $350 billion to make up for lost tax revenue. Priorities included helping locals and small companies facing income losses and providing funds for emergency medical response services. Upgrades to municipal water systems and broadband services were among the basic infrastructure projects for which a portion of the funds were allocated.
The money paid to taxpayers directly went into the economy as consumer spending. Also, government purchases of commodities and equipment on a large scale result from infrastructure investment.
Despite the ongoing disruption caused by the COVID-19 epidemic, this helps to explain why the S&P 500 Index, a dependable gauge of the general health of American large industry, increased from 3,870 at the start of March 2021 to 4,468 in mid-August 2021.
Implications of the Keynesian Put
Hard to measure, but also difficult to refute, are the impacts of the Keynesian put. Spending on infrastructure, such as enhancing highways, bridges, airports, hospitals, and high-speed internet, boosts GDP, generates new jobs, and boosts corporate profits in the short run.
On the other hand, increasing government expenditure also results in a larger deficit, which could eventually lead to higher taxes and inflation. For this reason, bondholders are not particularly drawn to the Keynesian phenomenon.
Conclusion
- If you bet on a Keynesian put, you think that the government will change its policies to help the economy and certain investments in particular.
- Analysts at Bank of America Merrill Lynch coined the phrase in 2016.
- If you own a Keynesian put, you think the government or monetary authorities will spend money to keep the economy growing and inflation low.
