The word from Washington has changed from the coronavirus is ‘no big deal.’ We can get through this biological tap on the brakes of the economy with monetary ease (50 basis point cut in the Fed funds rate), a suggested cut in payroll taxes and, last Wednesday, a 30-day ban on flights from continental Europe. The word changed Friday to “Houston, we have a problem” … this virus is the real deal and we are going to move quickly (if not belatedly) to counter this monster.
Before explaining my statement I would like to head off the usual barrage of political commentary that can follow any post where I deliver any message critical of the administration. I am not doing this because I hate Donald Trump. I write what I write because I believe certain actions and messages out of Washington have direct bearing on the market activity. My opinions are based on what I believe is easily provable information. But they are opinions and not gospel, and if they feel critical, please trust that politics are not the basis of my critique. It’s all about perceived faulty policy.
The precursor messages
Up until Friday’s declaration of a state of emergency the president had openly downplayed the threat of COVID 19 to the United States … this in the face of healthcare professionals offering completely contradictory opinions. Back on February 28, as the market was beginning its swoon, The New York Times reported, “Trump Accuses Media and Democrats of Exaggerating Coronavirus Threat.” Please, regardless of the source, this is verifiable fact. Since the virus came on the radar screen and warnings about its contagious nature began to proliferate the president has downplayed the threat, refusing to upgrade the level of federal preparedness.
Mr. Trump’s answer was to juice the economy
He continued to badger the Fed to cut rates. Sadly they did … “Nothing inspires confidence like an emergency Fed funds rate cut.” (3/20). The market continued its decline. BTW, he is continuing to badger for lower rates when the ploy clearly did not work. Then the administration ran a payroll tax holiday up the flag pole … “Nothing the inspires confidence like a proposed emergency payroll tax cut.” (2/29/20). This, too, went over like a lead balloon. In desperation, last week the president put a 30-day ban on all air traffic from continental Europe (this was extended to Great Briton and Ireland). This, too, inspired no confidence.
Whether Friday’s market rally holds remains to be seen. However, with the declaration of a state of emergency and the injection of significant funds to aid in treatment and testing, it is the first time the administration has admitted the serious nature of the coronavirus threat. I believe that this should be a much needed bolster to our flagging confidence. Congressional action taken over the weekend should also be a positive.
A Final Note on the “R” Word
First of all recessions are normal economic events regardless of cause. They are multiple quarter over quarter GDP declines. Most have zero resemblance to the great recession. The media constantly harps on the dreaded “R” word but gives little perspective, i.e., they are not the end of the world.
By now there is no question that we are headed into a recession. It’s what the bears have been warning us about for the past decade. COVID 19 has been the trigger. So, we’re headed in and the Congress is already passing a relief bill for individuals and is looking into additional supports for hard hit industries like the airlines.
We also know the coronavirus crisis will pass, but based on the climate of panic in the grocery stores and stock market we are expecting the worse. We know the market is a discounting mechanism. With significant stimulus being put it place as we speak, what if we’ve over estimated the severity and length of the COVID impact on our economy?
Are you prepared for the best?
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