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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Very good non-political message, Bill. I totally agree with your viewpoint.
Hi Bill, With all the measurements of the economy being what they are, how can this be a recession rather than just a major market correction. Or are you thinking we could be going into a recession because of the virus?
Well John, everything that I’ve seen in the past 48 hours in terms of closures, restrictions on size of meetings, restrictions on restaurant occupancies,Travel and tourism, tells me we are going into a recession. It’s no longer a probability. it’s gonna happen.
A recession is defined by the economic research bureau equals at least two consecutive quarters of negative GNP numbers (not the near death experience we had in 2008 with the financial crisis) In a recession we should see an increase in unemployment in a general economic slowdown. This is all being brought about by reactions to the coronavirus … moves Being taken by state and local governments to protect the population from the spread of the disease. The more severe these restrictions are in the short term the bigger the negative economic impact.
As the market is supposed to be a discounting mechanism it has adjusted pricing to reflect a recession and, in my opinion, Something even worse. So what I would say is that a recession is already in the price. Now we have to ask ourselves how bad is that recession going to be.
Up unti last Friday the administration was essentially pooh-poohing the impact of the coronavirus. Moves like pushing the Fed cut interest rates (the 50 basis point that we saw a couple of weeks ago) and suggestions that we declare a payroll tax holiday were thought to be the ways halt the decline. They just accentuated the ineptness of the people in charge. To say the administration, in particular the man of the top, are slow learners is an extreme understatement. How to stop the spread of the virus wasn’t even on the menu.
That all changed on Friday when they came to the “Houston we have a problem“ moment and declared a national emergency. The federal government has loosenEd the reins on funding to fight the virus and make sure testing gets done. Meanwhile the congress has passed legislation in the house of representatives designed to help people who are displaced by the virus, people who might lose their jobs and not get the benefit of a reduction in payroll taxes. I think the bill moves to the Senate for approval tomorrow. Meanwhile there is a second group of legislative initiatives that are being proposed to help companies most affected the airlines, cruise lines and tourism. My senses they’ll be more of that.
So, you have to ask yourself how long is this going to last? If it turns out we lock down like China, it will be very economically painful. However China is open for business again. All the Apple stores in China are open for business again. Apple just closed their US stores last week. I might also point out that when China was taking all of its drastic measures its stock market was in the tank and since early February it has rallied to the point where it was knocking on the door of a new 52 week high last week.
One last item, we have been conditioned by the media to think of a recession is something absolutely unacceptable and horrible. That is stupid. I started in the business October 1 of 1970. The Dow Jones industrial average was approximately 750. In the last 50 years we have seen several recession’s, some very severe. After shaving about 6000 points off the Dow in the past two or three weeks, we are still trading at about 23,000 +. I know that life cycle, considerations of age do play a role In the way people invest their money. This should be the case. Again, I could be totally wrong on this but up until the black swan event of the coronavirus we had a very strong and resilient economy. Measures are being taken now to ensure that/remains the case. Whatever the market does tomorrow morning In my opinion it may not exactly be reflective of that underlying strength.
I hope this helps.