by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
Author: Greg Valliere
March 18, 2020
HORROR STORIES FROM ITALY and new projections of hundreds of thousands of infections in the U.S. have panicked this city. The certainty of a severe recession has sunk in, and the mantra on policy is overwhelming: “Go big,” as Donald Trump stated yesterday.
AS WE SUSPECTED, the Federal Reserve will throw every tool into this war; resurrection of the Primary Dealer Credit Facility is a major plus. Banks are well-capitalized, as this activist Fed and Dodd-Frank provisions ensure ample liquidity.
THE FISCAL RESPONSE WILL BE JUST AS AGGRESSIVE: Treasury Secretary Mnuchin, earning high grades, told lawmakers yesterday that without decisive action, the unemployment rate could spike to 20% later this year. So he and Trump will go big, steamrolling reluctant Republicans.
THE THREE BILLS: The first measure, earlier this month, allocated about $8 billion for medical supplies. The second bill, which should win enactment within the next day or two, will allocate about $100 billion to victims of the virus — expanded sick leave aid, more generous employment benefits, etc.
THE THIRD BILL, costing a minimum of $1 trillion, will come into focus in the next week and should win enactment by the end of March. There will be one lump sum payment — probably $1,000 per person — this spring, and still another payment is possible in the summer if the virus doesn’t subside.
NO ONE LIKES THE WORD “BAILOUTS,” but they’re coming — first for airlines and the tourism industry, but primarily for small businesses. Massive bankruptcies are a major concern in this sector, which will prompt even more stimulus, including loan forgiveness.
THE THIRD BILL MAY BE FOLLOWED BY A FOURTH cash infusion in the summer, bringing total government aid close to $2 trillion. The budget deficit in this fiscal year could approach a staggering $3 trillion — yet the mood among most politicians is that money is no object.
THERE ARE DISSENTERS: The Wall Street Journal editorial page criticized the lump sum payments this morning, apparently oblivious to ordinary people who live paycheck to paycheck — people who will struggle to pay rent and buy food. Sen. Elizabeth Warren insists that no airline aid should go to CEO pay or stock buybacks. And Sen. Rand Paul, always out of the mainstream, said the stimulus should be paid for by withdrawing from Afghanistan.
BUT THE OVERWHELMING CONSENSUS in this city is that Trump has given cover to proponents of massive aid. Money is no object; easing the length and depth of the recession is a top priority.
BUT IT’S ALSO SINKING IN that all the money in the world cannot produce a vaccine for another year, and that we’re several weeks away from the virus peaking. Despite the mood to “go big,” the underlying sentiment from Washington to Milan has changed dramatically — it’s evolving into a resignation that our lives have been changed for ever.
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This post was first published at the AGF Perspectives Blog.
