The Great Reset
The Great Reset
The Great Reset…that’s the best way to describe this. I have yet to hear anyone try to give this crisis a name, so I will take it upon myself.
Never before in human history has the world’s leading nation attempted to completely dismantle its economy and rebuild it from ashes. Who would have thought an economic “do over”, “mulligan” or better yet a “reset” was possible. Not only is it possible…it is absolutely BRILLIANT.
There will certainly be pains along the way but in the end, the efficiency it will bring back to the U.S. economy will be staggering. It will keep America as the leading financial powerhouse for decades to come.
I understand the emotional anguish of this is nowhere near over, and the numbers of sick will get worse before it gets better. That’s why I am simply remarking on the financial side of things.
The response by the Federal government and the Federal Reserve has been nothing short of remarkable. I take back all the terrible things I said about Jerome Powell. He just made up for it in spades.
The speed at which they backstopped and supported the economy through both monetary and fiscal stimulus is mind-blowing. The lessons of the 2008 crisis were clearly learned, and the powers were determined not to repeat the same mistakes.
The Fed acted with lightning speed in response to the economic slowdown caused by the Coronavirus, and has done all the right things so far. What took months and even years in 2008-2012, the current Fed did in hours.
The intent was to ensure that credit continues to flow to households and businesses during this difficult time, and that the financial system doesn’t seize up or suffer so that when the crisis recedes, the economy will rebound sharply and quickly to create and provide goods and services to meet demand.
First, let me define the difference between monetary and fiscal policy.
- Monetary policy (Federal Reserve) involves changing the interest rates and influencing the money supply.
- Fiscal policy (Congress) involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy.
Below are just some steps that have been taken by the Fed to mitigate the spread of the virus will limit spending and hurt the incomes of businesses and households, leading to a recession. For more information: https://www.brookings.edu/research/fed-response-to-covid19/.
What is the Fed (Monetary Policy) doing to support the economy and financial markets?
- Near-Zero Interest Rates
- Cutting the Federal funds rate by a total of 1.5 percentage points since March 3, bringing it down to a range of 0 percent to 0.25 percent. The federal funds rate is a benchmark for other short-term rates, and also affects longer-term rates, so this move is aimed at lowering the cost of borrowing on mortgages, auto loans, home equity loans, and other loans, but it will also reduce the interest income that savers get.
- Forward guidance: Using a tool honed during the Great Recession of 2007-2009, the Fed offered forward guidance on the future path of its key interest rate, signaling that rates will likely remain low,
- Securities purchases (QE):The Fed has resumed purchasing massive amounts of Treasury and mortgage-backed securities to restore smooth market functioning so that credit can continue to flow.
- Lending to securities firms: The Fed will offer low interest rate (currently 0.25 percent) loans up to 90 days to 24 large financial institutions known as primary dealers.
- Backstopping money market mutual funds
- Repo operations: The Fed has vastly expanded the scope of its repurchase agreement operations to funnel cash to money markets and is now essentially offering an unlimited amount of money. The repo market is where firms borrow and lend cash and securities short-term, usually overnight.
- Direct lending to banks: The Fed lowered the rate that it charges banks for loans from its discount window 1.5 percentage points, from 1.75 percent to 0.25 percent, lower than during the Great Recession. These loans are typically overnight—meaning that they are taken out at the end of one day and repaid the following morning—but the Fed has extended the terms to 90 days.
- Temporarily relaxing regulatory requirements: The Fed is encouraging banks to dip into their regulatory capital and liquidity buffers, so they can increase lending during the downturn.
- Direct lending to major corporate employers:
- Commercial Paper Funding Facility (CPFF): Commercial paper is a $1.2 trillion market in which firms issue unsecured short-term debt to certain money market funds and others, to finance day-to-day operations. Through the CPFF, another reinstated crisis-era program, the Fed buys commercial paper, essentially lending directly to corporations for up to three months at a rate between 1 to 2 percentage points higher than overnight lending rates. “
- Main Street Business Lending Program: On March 23, the Fed said that it soon will announce a program to support lending to small-and-medium sized businesses, complementing efforts by the Small Business Administration (SBA).
- International swap lines: the Fed is making US dollars available to other central banks so they can lend to banks that need them. The Fed gets foreign currencies in exchange, and charges interest on the swaps.
Congress (Fiscal Policy) has been just as remarkable. (I never thought I’d say that). The list is equally as long and you can read more about it at Here’s what’s in the $2 trillion coronavirus stimulus bill from CNBC.com
The bottom line is that Americans were awarded a $2 Trillion stimulus package, with the promise of more if needed. The stimulus will provide direct support to regular Americans, Main Street businesses and hard-hit industries and manufacturers, among others.
Between these 2 tremendous support levers, the economy should be able to withstand the economic hardship of the economy literally seizing up and providing a solid backstop for the economy to rebound stronger than ever before….the Great Reset.
It is important to remember that Wall Street will start to rebound way before the headlines do, and even as the numbers of infected are still rising. It is still very possible that we will get a common retest of the lows so be prepared.
However, the smart money – hedge funds, private equity, and large money managers are starting to look past the crisis and on to the recovery. They like what they see and so do. I and I have been and will continue to make adjustments in portfolios to do whatever is necessary to take advantage of the opportunity along with the necessary protections needed.
The financial market’s favorite thing is a financial fiscal? stimulus. It’s like ice cream with sprinkles, in a chocolate dipped cone, wrapped in an oatmeal or chocolate chip cookie (you choose). The biggest advantage out here right now is that the guys printing the money are telling you they are going to keep printing the money. Investors must heed this promise and recognize the opportunity.
The Bottom Line
The bottom line is that it’s not going to be a straight line up from here. The current crisis is very emotional, especially when we are bombarded by social media and the 24-hour news cycle that thrives on bad news.
This country has been through worse and I have absolutely no doubt we will emerge from this stronger and quicker than expected. Now is the time to be bullish on America.
If you have any questions or need to speak to me for any reason, please do not hesitate to call me.
“Invest for need, not for greed!”