Mar 16, 2020

Axios Markets

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🎙“The purpose of separation of church and state is to keep forever from these shores the ceaseless strife that has soaked the soil of Europe in blood for centuries.”- See who said it and why it matters at the bottom.

1 big thing: Economists call for direct-to-taxpayer fiscal stimulus

Photo: Drew Angerer/Getty Images

Now that the Fed has fired its monetary policy bazooka — announcing yesterday the second emergency interest rate cut in as many weeks, this one taking rates effectively to zero — expect the drumbeat for fiscal stimulus to pick up, as more economists pound the table for government action.

Why it matters: Market watchers of all stripes agree that the Fed's tools alone are insufficient to counter the damage likely to be done to the U.S. economy from the COVID-19 outbreak and shutdown of businesses that has already begun.

  • Fed chair Jerome Powell admitted as much during his press conference Sunday, saying,"We don’t have the tools to reach individuals and particularly small businesses and other businesses and people who may be out of work."
  • "I think fiscal policy is a way to direct relief to particular populations and groups ... we do think fiscal responses are critical.”

Between the lines: Many economists say the proposals presented by Congress so far lack the requisite muscle to offset the coming recession they are baking into their forecasts this year.

What's happening: A growing chorus of liberal and conservative economists are lining up behind a proposal published in the Wall Street Journal by Harvard professor Jason Furman, who chaired the Council of Economic Advisers (CEA) under President Obama, that calls for direct government payments to households.

What it means: Furman proposes Congress pass a "one-time payment of $1,000 to every adult who is a U.S. citizen or a taxpaying U.S. resident, and $500 to every child who meets the same criteria."

  • He adds that the law "should also specify that the payments would continue in 2021 and beyond if the unemployment rate rises to 5.5% and remains there or higher. Hopefully this will not happen, but if it does, the money will be needed."
  • "The comprehensive and dynamic response should also include extensions of unemployment insurance and increased Medicaid matching for states. These would be passed pre-emptively, so that they could trigger automatically in states where unemployment rates rise."

The bottom line: "The issue is not aggregate demand but social insurance," N. Gregory Mankiw, a Harvard economics professor who served as CEA chair under George W. Bush, told Axios in an email Thursday.

  • "You need to help people get over a time when working is impossible for some occupations, and to discourage people who have symptoms from leaving their homes just to get a paycheck. $1000 per person sounds about right."
  • (Mankiw expanded on these thoughts after "several reporters emailed" him in a blog post on Friday.)
Bonus: Call in the chopper

The proposal for direct payments to households also has been backed by noted conservatives Michael R. Strain and Scott Gottlieb of the right-leaning American Enterprise Institute, who advocate for direct payments that are "temporary and only for states experiencing severe outbreaks."

But, but, but: Many are worried that Congress and the White House have become too dysfunctional to take bold action and are expecting to see the Fed forced to push forward with helicopter money — effectively the same policy, but instituted by the unelected U.S. central bank rather than the country's politicians.

Stay woke: Former Fed senior economist Claudia Sahm warns that using helicopter money could be dangerous, and is seen as "the nuclear option" inside the Fed.

  • "The political ramifications of the Fed essentially printing money and giving it to people — there are ways to do it, but the problem is if the Fed does this and Congress still has not passed anything ... that would mean the Fed has stepped in and done something that Congress didn’t want to do," she tells Axios.
  • "If they did helicopter money without congressional approval, Congress could, and rightly so, end the Fed."

Plus, "I really don’t want Congress or the administration to think that’s a real option," she adds. "It’s un-American in the sense that we have a democracy and elected officials. We shouldn’t be using that."

2. Catch up quick

The CDC has urged that events of 50 people or more not be held in the U.S. for about two months. (Bloomberg)

The Bank of Japan expanded its monetary stimulus at a hastily called one-day policy meeting on Monday, announcing expanded purchases of stocks, corporate bonds and corporate commercial paper, while also boosting its loan support program. (Nikkei)

President Trump's exaggerated claims about a Google-developed website to triage coronavirus diagnosis and treatment fit his pattern of tech hype. (Axios)

3. Why the Fed action matters
Expand chart
Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

Axios' Felix Salmon writes: The Federal Reserve, in conjunction with central banks around the world, took drastic action on Sunday night — the kind of action not seen since the global financial crisis — to try to prevent the coronavirus from devastating the economy.

Why it matters: Thousands of businesses and millions of households are about to suffer extreme economic hardship. Employers and employees in the travel, entertainment, sports, hospitality, retail and many other industries are going to see losses and layoffs for as long as COVID-19 is raging.

  • Once the pandemic is over, all of those businesses can and should come roaring back. In order to do so, they will require new loans to help them get through the bad times, as well as money to refinance existing debts as they come due.
  • Monetary policy can't fight the coronavirus directly. But it can help ease the economic pain that the virus causes.
4. What's next for the market
Data: FactSet; Chart: Axios Visuals

Despite earning praise from Trump, who said it made him "very happy” and that "people in the market should be very thrilled," the Fed's rate cut was followed by more bloodletting in Asian and European markets overnight, as panic continued to grip markets.

What happened: The Australian ASX index fell 9.7%, its largest fall on record; Hong Kong's Hang Seng dropped by 4%; and, benchmark indexes in India and the Philippines saw almost 8% losses. The European Stoxx 600 was down by more than 7%.

  • Bond yields declined and oil prices fell while the dollar strengthened against most currencies, excluding the Japanese yen and Swiss franc, which are seen as safe havens.

Why it happened: "Just as people are hoarding food and supplies, companies and investors are hoarding cash. The Fed is panicked and right to panic and do what they did," Bryce Doty, senior portfolio manager at Sit Fixed Income, said in a note.

  • "Fed actions size up the enormity of the economic challenge but do little to address the spread of the virus."
  • "Nothing the Fed will do can completely stabilize financial markets."

What's next: "With recession looking inevitable due to COVID-19, and inflation likely to fall further below target, the funds rate could be near zero for several years," analysts at TD Securities said in a note to clients Sunday night.

  • "We expect there will also be a lot more than $700 billion more QE. There will likely have to be sizable fiscal stimulus as well."
  • TD analysts also said they expect the yield on the 10-year Treasury to fall to 0.3% and for the dollar to decline broadly in value.

Goldman Sachs research analysts said in a note to clients they expect the S&P 500 to decline by 26% and fall to a "mid-year trough of 2000 before rising to 3200 at year-end."

5. The world's debt situation is much worse than in 2008

Illustration: Rebecca Zisser/Axios

Perhaps the biggest risk for financial markets is the potential for wide-ranging debt defaults, particularly as companies have significantly increased their debt load and more are rated at the bottom of the investment grade ratings scale.

  • The world's companies are in a much worse position than they were ahead of the global financial crisis.

State of play: Economists at the Institute of International Finance write, "Corporate debt is already very high relative to earnings — and earnings prospects are deteriorating: At nearly $75 trillion, the fast-growing mountain of global corporate debt (ex-financials) is around 93% of global GDP."

  • That's significantly higher than the level of corporate debt in the run-up to the 2008 global financial crisis (75% of GDP).
  • Worse, IIF notes, "Some of the highest debt burdens are in sectors with weak and volatile earnings profiles."

Quote: "The purpose of separation of church and state is to keep forever from these shores the ceaseless strife that has soaked the soil of Europe in blood for centuries."

Why it matters: James Madison, the "father of the Constitution" and the fourth U.S. president, was born on March 16, 1751.