WHATEVER IT TAKES - Unlimited Government $$$ until further notice
After one of the biggest and the fastest market down move in history, the U.S. Government and the rest of the world promise they will do "Whatever It Takes." The famous phrase used in the 2008 financial crisis becomes the motto of every politician.
Is it enough to distribute money to people and bailout most companies to solve this health crisis?. Of course, it is not. But it would be unbearable for our economy if the governments do not do it. It is what we need, indeed.
Since the crisis of 2008, all governments learned that massive, decisive, and quick action is always the right choice, they might err on excessive support, but the alternative is worst. We may discuss whether or not it is efficient and effective, but it is useful. If they wait to see and have a perfect plan, it will be too late.
The coronavirus crisis is about people's health, but the economics side effects are and will be humongous. The government money will not kill the virus, but it will help us overcome it and contain the spread of a different but fear kind of infection, an economic recession.
The U.S. government and the Federal Reserve have already implemented and close to approve a long list of emergency economic policies that are unprecedented, but not enough yet. I guess there will be more to come.
The economic damage of the business activity closures may reach several trillions of dollars, depending on the weeks of social isolation. The magnitude of the government's financial response has to be as massive as the economic threat of this virus.
I will need several articles to go in detail into all the policies. Still, it suffices to say the provide money to people, corporations, banks, and financial traders.
There will be a group of policies, who will make direct payments to people. You may delay your tax payments and have no penalty if you have a hard time. Then, of course, every credit interest rates will go down as well, to refinance loans and mortgages. There will be paid sick leave, and a virus test will be free. Even evictions will be suspended for a time.
U.S. Corporations will receive direct lending channels for short term cash, via the Small Business Agency. They will enjoy low-interest rates. And the Federal Reserve is even looking to purchase corporate debt directly to alleviate debt markets. Specific industries will receive bailouts, like airlines, transport, and in a way, shale oil-producing companies, as the government will buy their products for a while.
The banks, one of the most critical links in our economy, are being offered a royal treatment. The bank reserve requirement set at 0%. They opened a discount window to fund liquidity for 90 days. The Federal Reserve will continue to invest 1 trillion USD in the repo market to keep the cash. Banks will be allowed to sell to the Fed a wide variety of financial instruments, which the Fed will buy and provide liquidity.
Internationally, it is no different. As an example, a great one, by the way, The president of France said that no one would be loose their job, and no company will go broke during these hard times are over. Moreover, the France government will pay you rent or mortgage, your utilities, and even provide food if they require.
So there will be unlimited money globally until further notice.
Are the U.S. and global economy going to be in a recession? (defined as two-quarters of economics contraction of the economy GDP). We will not know until it is reported by government agencies months after it happened. We might be living a recession already.
But a sudden stop or slowdown of several industries globally, such as hotels, airlines, restaurants, retails, transport, and the deceleration of many more might without doubt cause one.
Of course, there are a select few who will strengthen themselves. Any company that has a growing digital footprint supporting the lifestyle of the shop at home, work at home, and learn at home, will win big time. It is already happening in particular stocks.
The decay process of brick and mortar based businesses model is just accelerating, which it will have tremendous implications from retail, work dynamics, school models, energy consumption, power distribution, real estate, and every investment linked to them.
By looking only at the quick adjustment of the financial markets, you may say they are expecting a recession already, or even a depression. The pessimism is so high that, by default, is widely accepted the global economy might contract, the question is how much and for how long.
Among the mayhem of this crisis lays the financial opportunity; the end of the world accepted belief it is a market extreme itself. When is the market cheap enough to buy? Have the market price correctly the coronavirus impact?. Those are the questions to keep in mind.
We know that the virus will not last forever. China got the infection under control in about eight weeks. They had a massive economic impact, but they are back on their feet. And we know the Chinese stock market survived it hold very well indeed so far. So we will also pass this crisis as well in due time.
One technical note about coronavirus cases reported daily. The media has a single focus on the total cases, the large number of people who had been infected. But they never talk about the recovered patients. I suggest checking the currently active and recovered cases as well.
For example, China has had about 80 thousand coronavirus cases, but today they have 8 thousand people sick, from which 2,600 cases are critical. About 69 thousand have recovered in 8 weeks. We should pray for every one of them, and indeed it is a considerable pandemic. The good news, among this disaster, it is that 90% of the people recovered in 8 weeks. So, it is possible to fight this virus effectively in the short term.
The S&P 500 has moved down -29% from February 19, 2020, to March 18, 2020.
A bear market, no doubts. Is it over? Nobody knows. Is it an opportunity? It might be one of those eventually, let us talk about it in a couple of years; these events look better with hindsight, nowadays we can only rely on our investment experience and skills.
Please, stay safe!