SELFLESS TIMES - Passing Through the Eye of a Needle



As citizens, it is imperative to think about the well being of others right now. As a country, we are facing a hard trade off that requires restraint of our way of life to the benefit of society to beat the Coronavirus threat. If there were any moments to align efforts, this is it. As of now, experts agree this virus will be with us for a significant time before science develops a cure.


During that time, all we can do it is to slow down the spread and protect those who are more in danger. By reducing the growth of the virus advance, we will provide health institutions time to cope with the peak demand for critical care services, thus minimize human suffering.


Each country has decided on different approaches to control this illness, but all of them have chosen policies that will have human and economic costs. It is not a surprise all those worries reflected in financial markets. U.S. government has adopted a set of economic measures to address this emergency. As I do not know anything more than the average citizen of health care, I will just refer here only to the financial policies and how they might affect financial markets.


Last Friday, the U.S. government declared coronavirus pandemic a national emergency. This declaration will enable federal, state, and local authorities to make quick, harsh, and effective decisions. Financial markets rallied last Friday, as they heard this news, although they do not forget the economic impact, I will guess they felt secure to the government leadership support.


Among these policies, as a society, we are required to reduce any activity that gathers people together. Schools, businesses, and gatherings of any kind will simply stop for several weeks in the U.S. A massive impact on the economy, although it might be for a short time.


To cope with disruption, the U.S. government announced aggressive fiscal and monetary actions in the last three days between Friday, March 13th to Sunday, March 15th.


Last Friday, the U.S. government had expanded the budget of the Small Business Administration (SBA), a government agency that provides credit to small and medium businesses. The SBA will give loans to fund small and medium companies during these hard times. These credits can be used to fund working capital, capital expenses, and even salaries for up to 2 MM USD per company.


The Federal Reserve just cut rates -0.5%, less than two weeks ago as an emergency. On Sunday, March 15th afternoon, The Federal Reserve cut short term dollar interest rate again to 0% (0% to 0.25% range). The last time they did this was 2008 during the global financial crisis.


At the same time, the Federal Reserve implemented a new "quantitative easing" (or QE) of 700 billion to buy U.S. treasuries and mortgages on Sunday afternoon. They leave the door open to expand as needed. This measure will lower interest rates across all the U.S. Treasuries and mortgages terms (5, 10, 15, and 30 years). As a reference, the next Federal Reserve meeting was scheduled by next Wednesday, March 18th, but they considered doing it this Sunday.


The compound effect of these two actions will send any interest rate to the lowest possible level. It will enable companies and individuals to pay for lower interest rates. It will also propel the economy as much as possible. As I see it, these initiatives might not be the last actions for the Federal Reserve during this time of need; it seems to me there will be more actions before we are out of the woods.


Initially, at least, as I write this memo on Sunday afternoon, the U.S. market indexes pre-market session ( or future market) reacted negatively to the news, tanking close to -5%. We shall wait until Monday open to understanding the full impact.


All these support measures are designed to help the U.S. economy to pass through the eye of a needle, and yes, there will be a lot of difficulties ahead, but let us not underestimated the resilience and bravery of its citizens.