Baldwin Investment Management

Monetary Mitigation…

In the current environment of social distancing to “bend the curve” of the COVID-19 infection rate, the Fed has “stepped up” to do its job of protecting the U.S. economy with incredible speed and with enough size to demonstrate to markets that “it will do whatever it takes” to accomplish its mission.  Lessons learned from the Great Recession were not forgotten.  Mistakes from the last “meltdown” have not been repeated.

As investors began to fear the coronavirus and its anticipated ramifications, the demand for safe assets skyrocketed – the demand for cash soared.

CHART 1

The Fed satisfied that demand by doubling excess bank reserves, buying massive amounts of notes and bonds, thereby dramatically increasing bank liquidity so that the banks could satisfy their customers’ demand for cash.

CHART 2

This move on the part of the Fed facilitated a surge in lending to small and medium sized businesses, allowing those companies to weather a period of sharply reduced revenues after their doors were closed for business.

CHART 3

As a result, market fears of Armageddon (a depression) have been “taken off the table”.  No doubt the recession we are in the midst of will be painful.
But we suspect it will be short (a couple of quarters in 2020) if an effective vaccine is developed in the relatively near future.  People are anxious to get back to work because they need to get back to work.  But we do not think that people will be stupid.  They are not so eager to restart their “normal” lives that they would put their health or their loved ones’ at risk.

CHART 4

Happily, discovery and innovation are alive and well in the medical sciences.  Research is advanced in pursuing tens of candidates for a vaccine for coronavirus.  Companies like Gilead, Johnson and Johnson, Pfizer and Moderna, as well as institutions like Harvard, Penn, Johns Hopkins, The Mayo Clinic and Oxford University are weekly publishing results of studies being conducted on antiviral candidates.  A vaccine will be found.  A treatment will be found.  Once discovered and widely distributed, people will return to their “normal” lives.

In the immediate future, the economic numbers will be ugly.  Unemployment is already “through the roof”.  It will get worse in the short term.  The U.S. and the world’s GDP (Gross Domestic Product) will decline sharply.  Business bankruptcies will rise.  But we think that the markets are not focused on just the next few months.  That gory news has already been discounted by the markets.  Further, with the Fed’s assistance of ample liquidity, the worst-case economic scenario is not operative.  We believe that the markets are fixated on the arrival of a vaccine.  The quicker it arrives, the quicker the world’s economies rebound and the markets recover all that they have lost recently.  Obviously, the reverse is also true.  We think that the best minds in the world will develop a vaccine sooner rather than later.