It’s Friday AM and it’s been one for the record books. There’s a lot going on and I’ll try to quickly cover the most important developments for the economy and the pandemic. Most importantly, I want to give you some context for why the financial markets are changing and perhaps stabilizing. We’ll approach from the way Dr. Robert Shiller would: what is the story the world is telling itself about the pandemic?
As Marketplace’s Guy Risdall likes to say, first the numbers. As of 9:45ET, there are 163 countries with the virus, over 10k deaths and 86k recovereds. Italy has surpassed China for the largest number of deaths at 3.4K with 41k total confirmed infections. In the US, there are 14,250 infections and 205 deaths. Remember, I warned about a surge in the number of infections this week as more testing kits were distributed. My over/under for this week was 20k and we’re well below this for now. More on this later for the markets.
There are a lot of moving parts over the last 24 hours that has seen California’s Governor declare a state-wide shelter-in-place and the US Senate moving at lightning speed to deliver a massive spending and tax rebate bill. The call by CA Governor Bill Newsome comes after he received estimates that 56% of the 40 million citizens in his state may contract the coronavirus over the next 8 weeks. At the minimum, this would require an estimated additional 20,000 hospital beds for the state. NY Governor Cuomo just asked New Yorkers to do the same. PA Governor Tom Wolf ordered all “non-life-sustaining” business to shut down, or risk enforcement from state police. These come after actions taken by other states to close bar and restaurants.
To economically counteract this, the Senate moved at light speed to create the Coronavirus Aid Relief and Economic Security Act or CARES Act Thursday night. There are 4 major parts to it. First, a rebate section based on 2018 income that sends $1,200 to individuals and $2,400 per couple plus $500 per qualified child. These rebates phase out after $75k per individual and $150k per couple. Second, there is up to $300B for small business loans from traditional lenders will be federally guaranteed and may convert to grants if they are spent on rent, mortgage or payroll. Third, there is $250B available for loans and loan guarantees for distressed industries with $50B set aside for airlines and $8B for cargo carriers. For those in sports and entertainment, casino gambling, hotels public transportation and restaurants, this should help. But don’t expect the NBA, MLB, NFL or major sports to be going live anytime soon.
Fourth, healthcare support for a wide range of areas including supply chain improvements, coverage of testing, and telehealth. The total spend for all of this should be north of $1 trillion.
Lastly, we just had US Treasury Secretary Mnuchin state that IRS payment due date has been extended for 2019 to July 15th. All of this is good news for the economy and US citizens.
There are numerous central banks acting around the world to aid their economies from the wrath of the virus. I’ll stay focused on the US with the Federal Reserve re-starting many of the 2008 financial crisis programs to ensure the capital markets remain functioning. As an example of one of the programs, the Fed is acting as a backstop for commercial paper and this has been a key step to calm the markets with many credit spreads on energy and transportation related paper and debt exploding higher against US Treasuries. They’ve also done this for money-market mutual funds. Also, the Fed also established currency swap lines with 9 other central banks to help ease the global demand for the US dollar. Finally, the Fed announced today they are expanding their QE to include municipal bonds, something Illinois and California will love. These are just a few of the activities the Fed is engaged in to provide liquidity to the financial system during a time of severe stress.
Getting back to Dr. Shiller, I spend a lot of my time monitoring the economy and the markets for the big stories that are driving them. Yes, stories and I put out a research paper back in March of 2019 to explain how I took Shiller’s Narrative Economics theory and added to it. What I see today is that the old narrative of the Fed being the biggest influence on the markets has been temporarily pushed aside as the markets keep repeating the Fed can solve a pandemic. This change in narrative or story has led to a massive increase of uncertainty as the market searches for its next driver.
What is this like?
It’s the equivalent of people being told they may be quarantined in their homes for two-weeks and everyone running out to buy toilet paper. In this case, the toilet paper is US Treasuries or what is perceived as the safest investment. This is the panic that has ensued. The stock markets fell dramatically and have experienced unprecedented volatility as they attempted to find a new narrative.
Where from here?
At this point, we are finally seeing markets begin to stabilize with less day-to-day volatility. Why did this happen? As I said, the markets are trying to process what will happen with the pandemic and figure out what the next narrative is for the world. The process of this is uglier than me trying to rap a MOP song. However, something has changed. I pointed out on Wednesday how some big names in finance came out with dire predictions for the economy and the markets. Bill Ackman, Ray Dalio and Gary Cohn all had media play and the markets dove to lows for the day…but they didn’t stay there and pulled back half their losses by the end of the day. This movement is something I always looked for as a currency trader to tell me we were nearing an inflection point of market sentiment. It’s where you get a lot of news and data all pointing in the direction of the current trend or narrative and you don’t get the same movement in that direction. This has occurred.
And while you’ll hear the Trump administration and WHO all discuss bending the infection curve to make it lower, what they are also doing is attempting to change the market narrative from extraordinarily dire to somewhat positive. I can’t look you in the eye and say this is the end of it. But I will say, this is the beginning of the process to change the narrative, provide some positive feedback and give everyone hope that we can overcome this pandemic.
At this point, this is the best we can hope for and we should be hopeful that better times are ahead.
Alright, that’s where we stand today. I’m Andy Busch economist and market expert. You can get all my research on andrewbusch.com and check out these videos on my YouTube channel.