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The Three-Legged Economy

The Three-Legged Economy

March 16, 2020
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There is no doubt that we are experiencing unprecedented times in our nation. Our country is consumed by the “virus”. Some people are panicking and hoarding groceries and supplies. Some people are laissez-faire and treating this time as an extended spring break. There is one truth, regardless of your view, on the virus: we are facing a healthcare crisis that could turn into a financial crisis. We interviewed Dr. Alan Jones, the Chair of Emergency Medicine at the University of Mississippi Medical Center, this weekend and what he said is very sobering (links to the podcast here for Apple Podcast listeners and here for everyone else). Whether this turns into a full-blown financial crisis is yet to be seen, but we believe there are three things that work together to keep our economy from being wrecked:

  1. Monetary policy response: The Federal Reserve made its second and most dramatic emergency cut this weekend (100 basis points or 1 percent). The stock markets seem to be shrugging off the two emergency cuts. There will have to be more than just monetary policy alone. The Fed will also restart their asset purchasing program to total $700 billion, purchasing at least $500 billion Treasury securities and at least $200 billion Agency Mortgage Backed Securities (MBS). The Fed could also step in, as it did in 2008, and become a lender of last resort providing liquidity to the Commercial Paper market (market where corporations borrow over night for short-term needs like payroll).
  2. Fiscal policy response: US Senators and Representatives are working together to get a stimulus package approved (none announced at the time of writing), which would help relieve the direct impact to families and small business cash flows. There is talk of payroll tax holidays, expanding unemployment insurance and other direct payments to Americans. We are sure we will see a stimulus package in the coming weeks and will evaluate the impact once it is announced.
  3. Healthcare system success: The American citizen’s response to the measures suggested to “flatten the curve” of the spread of the virus is the other leg of the stool. If Americans stand together in an act of social solidarity to give our healthcare system and workers a chance to get ahead of infection rate curve, there is high likelihood that the economy will recover quickly. If Americans disregard the suggested measures and we have a steep curve that overwhelms our healthcare system, it is doubtful that we will recover as quickly. A steep curve means more rapid transmission and less healthy people to work and spend money. We cannot imagine that any citizen is excited about the thought of self-quarantine, but the data from South Korea (a successful strategy to curb transmission and mortality rates) shows that it works. Italy is the scenario we face if we do not get ahead of slowing the spread.

Successful implementation of the three issues is critical to best scenario recovery. A hiccup in one of the three will cause obstacles for an economic recovery, very much like the legs of a stool. We continue to actively monitor and adjust client portfolios through these choppy environments. The probability of recession (even if just a technical recession) continues to rise. Fortunately, our philosophy of managing investments shines in times like these (we bought the insurance before the house caught on fire). We continue to look for buying opportunities that will benefit our long-term investors.

This year may be the year of the virus, but we will recover. Take care of yourself, your family, and those in your life that are vulnerable. We are taking care of your savings and holding your hand. Thank you for the trust you have given us.