Jerome Powell, Federal Reserve Chairman, made yet another unprecedented monetary move today that will solidify his spot in the “Fed’s Hall of Fame” right next to Paul Volcker, Alan Greenspan, and Ben Bernanke. This morning, immediately following the release of the horrendous 6.6 million weekly unemployment claims, the Fed announced that it would be providing another $2.3 trillion in liquidity to prop up the US economy.
Jerome Powell is attempting to cancel the recession, and the S&P 500 futures sharply rallied from down 1% to up over 2% on this news.
Will The Money Pump Be Enough?
The government has been pumping the US economy with what appears to be an endless stream of capital and liquidity. The Fed has already dropped its benchmark interest rate to its lowest level and announced what I interpreted as unlimited quantitative easing (QE). Two weeks ago, Congress passed a $2 trillion-dollar fiscal stimulus package (the CARES act), which aimed to provide financial liquidity to both suffering businesses and the massive number of newly unemployed workers.
Will the government’s aggressive capital infusion into this halted economy be enough to save the US?
The public equity markets are beginning to think so, with the S&P 500 up 28% from its low March 23rd, starting what some are calling a new bull market. In my opinion, the public equity is not an accurate representation of what’s happening in our economy right now. The past two weeks have shown consecutive record-breaking unemployment claims that are 10-times any prior record.
In an interview with Bill Gates, co-founder of Microsoft MSFT, this morning on CNBC, he said, "no one should think the government can wave a wand and all of sudden the economy is anything like it was before this happened." He could not have stated that better. The government can provide a cushion for the economy, but this is not going to make everything better again. Businesses are going to fail from this prolonged economic shutdown.
For the world to truly go back to normal, we need medical solutions. Whether it’s a vaccine or antibody treatment, we need to feel safe from this virus.
The extraordinary level of economic and fiscal stimulus that the government continues to throw at the economy is temporarily propping up asset prices, but is it actually saving businesses and workers? The Fed will not be able to come in and save every business on Main Street, and that is where the most significant problems lie. The CARES act’s payroll protection program is not working. Companies are finding that even with a government grant, it is cheap to furlough its employees and take the government loan out.
Unemployment benefits have been sizably increased for the next 4 months, but what happens when the economy takes 12-18 months to recover?
We are amid a war against COVID-19, and the tools that the government has at its disposal are financial. The good news is that the US dollar is the strongest it’s been in almost 2 decades, which means that the Fed can continue printing money without much risk of destroying our currencies value.
Risk In Public Equities
From my perspective, the public equity market is enormously overvalued, considering the extraordinary risk that this global health crisis has presented. The number of cases in the US is not even close to leveling off, and I don’t see normal business resuming for months, and when it does, it will be hampered.
Social distancing and pandemic fears are going to remain until a treatment is widely available, and antibody testing can be done universally. The ability to do these tests on a large scale is many months out, and a vaccine is 18 months out at a minimum. There are over 450,000 confirmed cases in the US today, and roughly 30,000 new cases are added daily.
I am holding cash for now and waiting for equity prices to reflect the economic risk more accurately. I have bought a couple of S&P 500 tracking ETF SPY put options to hedge my portfolio for now, but I am not making any significant moves in the market yet.
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