Daily Trade Ideas & Trends

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13 May 2020

Doc's Daily Commentary

4/29 ReadySetLive with Doc and Mav

The Mind Of Mav

The Fed’s Recovery Ploy

Arguably today’s most impactful news item was a 6-minute speech given by Fed Chairman Jerome Powell regarding the future of economic recovery. There’s been a lot of reporting about what he said, but none of the pieces that covered it looked at what he really said.

More on that in a minute.

First, the high-level summary:

– Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March

-The path ahead is both highly uncertain and subject to significant downside risks

– The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt

TL;DR: This is basically a doomsday scenario. It may cause generational decline, akin to the Great Depression, for 10 to 15 years, depending on congressional action.

Ouch.

Now, let’s break his speech, and what he actually said, into the important parts: the PROBLEM, the PROGRESS, and the PLOY.

He began by highlighting the PROBLEM with a Fed survey being released tomorrow:

“A fed survey being released tomorrow reflects findings similar to many others. Among people who were working in February, almost 40% of those in households making less than $40,000 a year had lost a job in March. This reversal of economic fortune has caused a level of pain that is hard to capture in words as lives are upended and made great uncertainty about the future.

This downturn is different from those that came before it. Earlier in the post World War II period recessions were sometimes linked to a cycle of high inflation followed by fed tightening.”

The Problem, as he uses the numbers to confirm, is that the recovery will be slow.

The PROGRESS was then summarized into four neat points:

“At the fed we’ve also acted with unprecedented speed and force. After rapidly cutting the federal funds rate close to zero, we took a wide array of additional measures to facilitate the flow of credit in the economy, which can be grouped into four areas.

First, outright purchases of treasuries and agency mortgage backed securities to restore functionality in these critical markets.

Second, liquidity and funding measures, including discount window measures, expanded swap lines with foreign central banks and swift treasury backing to support smooth functioning in money markets.

Third, with additional backing from the treasury, facilities to more directly support the flow of credit to households, businesses, and state and local governments.

And fourth, temporary regulatory adjustments to encourage and allow banks to expand their balance sheets, to support their household and business customers.

The fed takes actions such as these only in extraordinary circumstances like those we face today.”

Now, ignoring that Fed actions (or more accurately inactions) prior to the Crisis without a doubt exacerbated the economic fallout we’re seeing now, let’s try to take him at his word here.

They are using the playbook for every economic downturn we’ve seen over the last ~30 years:

Fed comes in, spikes the market with helicopter money. Then they realize it’s worse then they thought and the economy goes in a coma.

They were hoping to ease the downturn, but there’s been an uncontrollable spike in unemployment and consumption is way lower than they predicted, hence Jerome made the assertion in the Problem that the recovery is going to take a lot longer to recover.

Without even addressing the lingering virus that’s the main case for uncertainty and consumer behavior, we can also start looking to a dual-edged force of apathy and adversity facing common people: How are you going to motivate people to work when they’re getting stimulus checks and jobs are non-existent / temporary?

You create a population that is both unable and unwilling to work in a short amount of time.

So, you have the clear Problem, and we can see that the Fed — so benevolent in their efforts and clearly without ulterior intent — has made what Progress they can with what they have.

And, right on cue, here comes the PLOY:

“The result could be an extended period of low productivity growth and stagnant incomes. We ought to do what we can to avoid these outcomes, and that may require additional policy measures. At the fed we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well underway.

Recall though that the fed has lending powers and not spending powers. Alone from a fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly but worth it if it helps avoid long-term damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives who wield powers of taxation and spending.”

There it is!

Did you catch it?

Look right at the end there, “Additional fiscal support could be costly but worth it . . . this tradeoff is one for our elected representatives who wield powers of taxation and spending.”

Do you see what he did?

This is the FED Chairman saying he believes the economy is going to need FED support for some time to come. This mean more pumping and interest rate wrangling.

He made it clear that the SOLUTION is up to Congress (making sure that the blame for the PROBLEM isn’t directed at the Fed).

He didn’t specify any new measures other than reiterating that they will provide liquidity, but to me that translates to loans, stimulus, grants, etc.

So that’s what he really said. The Fed needs more power to make the Problem go away. This has happened with every major economic crisis since the Fed’s creation, and this one will be no different. What’s clear is that he’s trying to paint the target on Congress for public ire.

He specifically said that policy makers need to come together and try to enact new laws that will help the economy restart.

He didn’t provide specifics about which laws should be written.

The Fed shot bazookas, ICBMs, nuclear missiles, and surgical drone strikes at this problem. They’re using everything they have, it’s time for congress and the Senate to actually work together to do their jobs for once.

Oh boy.

It seems like the market has been popping only because the Fed has been providing that liquidity and confidence. If Congress needs to get involved, that seems like a bad sign for at least the short-term.

Congress definitely doesn’t inspire the same level of confidence. In fact, they inspire no confidence at all, at least from where I’m sitting.

Now, does this mean everything is about to blow up? No, probably not.

But, it’s quite clear that “economic recovery” doesn’t mean some idealized version where we wake up with the same economy we had six months ago. What “recovery” truly means in this sense is that we are at the beginning of a very different economy with very different rules at play.

Strap in.

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