With global COVID-19 cases approaching three-quarters of a million, policymakers the world over have acquiesced to the necessity of drastic stimulus, both monetary and fiscal.
The world is facing a massive demand shock, and that requires government action, even as the very same officials on whom the burden falls to act are also compelled to facilitate the shock by shuttering their economies in order to stop the spread of the pathogen.
For the past two weeks, the financial community has been awash with riffs on the old “There are no atheists in foxholes” adage.
Cliff Asness, for example, penned a characteristically colorful missive asserting that there is no purely libertarian solution to this epidemic.
“I’ve always hated the argument ‘there are no atheists in foxholes’ as just because you believe in God when terrified doesn’t mean there is one (it also doesn’t mean there isn’t one!)”, he wrote. “But I believe that most libertarians are not anarchists. Particularly in viral foxholes. Certainly I am not”.
For his part, TD’s Chief US Macro strategist Jim O’Sullivan borrows Ben Bernanke’s riff in a new note. “There are no ideologues in financial crises”, O’Sullivan reminds you.
(TD)
Commenting on the biggest stimulus package in US history, O’Sullivan says it’s “large enough to boost growth significantly, albeit not by enough initially to prevent a fairly severe recession with sizable lingering effects on the unemployment rate and inflation”.
So, it’s nice, but nothing is going to save the US economy in Q1 and Q2. “Without the stimulus, our forecast would be much weaker than it is”, he goes on to say. TD sees the US economy contracting 3% in Q1 and 25% in Q2, with a 15% rebound in Q3 and a flat fourth quarter.
Tallying things up so far, Goldman’s Jan Hatzius notes that “following the passage of the ‘Phase 3’ package in the US, we estimate discretionary fiscal policy will ease by around 7½% of GDP in the US this year and by 3¾% of GDP globally”. That’s excluding capital for loans, loan guarantees and intra-year tax deferrals.
Here’s a handy visual that provides a kind of bird’s-eye view of the discretionary fiscal easing across economies in response to the outbreak:
For those interested in the more granular, detailed breakdown, the following two tables provide a pretty comprehensive assessment of the monetary and fiscal measures undertaken in developed markets over the past several weeks.
(Goldman)
Again, that’s just developed markets. EMs have done quite a bit as well.
As for whether it will all be enough to placate nervous markets, that remains to be seen. Even after last week (the best week since 2009 for US equities), the S&P is on track for its worst quarter since the crisis, down some 21%.
This week brings a veritable deluge of key data and the coronavirus news stateside will likely get materially worse.
“Global policymakers have already rolled out an impressive response to the coronacrisis [and] we are about to find out whether it will be enough”, Goldman’s Zach Pandl said, in a Friday afternoon note.
“Markets may be able to look through some pretty horrible economic data but will likely be sensitive to news on the duration of shutdowns and any signs of second-round effects”, he went on to say, adding that while he does “see a light at the end of the tunnel” in the form of “a reasonably strong argument for a V-shaped recovery”, Pandl concedes that “without medical breakthroughs of some kind, the next few weeks could be challenging for markets as we price in a deep global recession”.
V-shaped recovery? Looking at all the shuttered mom-and-pops on the UWS (the ones that hadn’t already been killed by amoral price-gouging REITs), I find it hard to believe that 100 percent will be up and running again after this is over. More like 60 -70 percent. The coronavirus is an existential threat to the retail and hospitality sectors — in the u.s. and globally — and will permanently change the landscape for those industries (and many others).
If one believed, before this crisis, that monetary policy and supply-oriented fiscal policy had already reached the point of pushing on a string, how do corporate loan guarantees and such amount to, economically, more than a hill of beans?
Nice post.
A consumer based economy was already struggling with flat wages and higher debt levels. The Great Recession helped household deleverage but then household debt began creeping right back up. At the very least it will seem necessary to let households refinance –reset mortgage and home equity clocks, extend car loans and leases, reduce interest on unsecured debt and extend repayment, the government/Fed assume all payday lending debt, which one would think a no brainer –in short a micro-finance parallel to the corporate measures taken. And it may be Draghi is right –outright cancelation is all that can save us or delay the onset long enough for the Keynesian quip about the long run to become relevant for this generation.
More broadly there is a serious demographic problem in developed countries —one solution would be to raise the limits on legal immigration –tariffs and immigration restrictions, if they are permitted to remain in place, will be a serious drag upon any recovery.
Nice post.
@RStanz It’s either debt cancellation now, or war and debt default/cancellation later.
If local banks had direct backstop from the Fed then they could get out and do intelligent triage on SMEs. Save the healthy enterprise and let the marginal enterprise fail. The local banks can make those local decisions
I know it’s not my job, but nice post.
People talking about V, U and L are forgetting about the fact l exists. We do not get to assume every trajectory is less than 90 degrees especially in the next few years. We will need massive stimulus and massive mobilization of resources to recover. If we do not replace Trump with someone competent in November I expect continuous deterioration. For the next year or two.
Speaking of V-shaped recoveries, this Bloomberg article about stresses in the residential and commercial real estate markets tied to hedges and other derivative products suggests to me that true price discovery in those markets has been broken for a long time. Hate to be a drag, but anyone sitting with a net worth tied to real estate is worth less than they think.
https://www.bloomberg.com/news/articles/2020-03-29/mortgage-bankers-ask-sec-to-save-them-from-wave-of-margin-calls
Take solace that wealth is relative. The trick of this business is to lose less than the other guy.
Ok, I’ve mentioned this fear a couple times, what happens if the Fed starts buying stocks? $1 TR of QE directed to SPY would probably rip the market to new highs. And set the stage for an even worse blowup very quickly, but the well connected and wealthy would have a chance to get out while their government suckers Sally and Joe to lose the rest of their life savings. I can’t imagine we would do such a thing, but I can imagine some in government would want to and unthinkable decisions seem to be made every week.
Congress would have to change the Fed’s legal mandate to permit it to purchase equities. Not likely. Not sure corporations would be wild about the idea of a consortium of private banks owning everything to say nothing of non-Fed banks.
A V shape recovery is laughable if one thinks back to how the last recession dovetailed into a non stop story about skills mismatch and too many untrained humans . Labor demand is not going to be shocked back into high gear, but instead, post virus, we’ll see companies like Boeing, cry about unskilled workers. The virus, might even be seen working hand in hand with the AI robotic boom. The virus essentially is Darwinism and or an invisible market force that will sweep us into a new era where only the strongest survive.