On Tuesday, March 3, the Fed cut the target Fed Funds rate by 0.5%, in what we thought was an unwise move. T-Bill rates were somewhat trading a below the Fed Funds rates so a 0.25% cut made some sense considering past Fed rate policy. At the same time, In our view, a 0.5% move suggested some degree of desperation. Well, now the Fed has gone from desperation to full panic mode.
In addition to their cut in the Fed Funds rate, they put in place $1.2+ trillion of credit lines for repurchase agreements. We have talked about the meltdown in the REPO market in the past and that we thought it was a challenge that could end the bull market in equity securities, at least for a while. As a reminder, the repos markets are used by banks and institutional investors to finance their portfolio of loans, bonds, and stocks. Spikes in the repo rate signaled an over leveraging and credit quality problem. To paper over this problem, had been supplying the market with a $100 billion repo line. Now that we are in the current meltdown is seems nobody wants to finance speculators. Who can blame them? So now the Fed as to do all the heavy lifting.
On Sunday the Fed lowered its target for the Fed Funds rate to a range of 0.0% to 0.25%. But let’s face it, they are going to target 0.0% and they would be happy to see the Fed Funds rate go negative. Who will pay the price? Anyone, who invests in low-risk bonds, like the conservative individual, insurance companies and pension plans.
But the sad truth is that cutting interest rates will do nothing to help the economy. What we have is a health problem. The mainstream media is not helping as they are whipping everyone into a lather. Instead of helping people keep a clam head, they are promoting panic. Who knows, maybe the fed is reacting to the nightly news. Whether they know it or not (and we believe they do not), by cutting short-term rates a second time between meetings, the Fed is signaling panic on their part.
Over the weekend, Apple said they would close all their stores outside of China for 2 or 3 weeks. So yesterday I went to the mall to confirm that Apple had indeed closed their stores and found that it was indeed true. I also found that Verizon and T-Mobile had closed their stores as well. (I did not check ATT.) Also of note, the shopping crowd was much smaller than normal.
Investors have heard the message loud and clear and they are selling everything in sight. SPY, the ETF that tracks the S&P500 is down 10.4% in premarket trading showing people are selling first and asking questions later. I am wondering how much of this is margin calls.
The important thing to remember that there is a cycle to viral outbreaks like the annual flu. One of the factors that bring these things to an end is the change in seasons. Once Spring hits, the sun gets stronger which we read is antiviral, and people get outdoors. Sunlight helps people’s bodies produce vitamin D, a core vitamin and hormone that is the basis of our immune system. It seems natural therefore that Spring brings an end to the cold and flu season.
I went to the park for the first time this year to do some running and calisthenics. The sun was out and the temperature was in the 50s. It was actually quite crowded and I had some trouble parking where I normally do. Most people seemed to be ok and enjoying themselves. Yes, there were people talking about the health-scare, but most behaved like it was any other day. Sadly, there what one person who was overcome with fear.
Ultimately, we think we are closer to the end than the beginning of the cycle. That does not mean it will be over in a week. We are thinking more like a month, or perhaps two. We think the social-distancing will hit the economy hard and at the same time, help bring the outbreak to a quicker conclusion nat the margin. For investors, we do not know where the bottom is, but when it comes along the Fed and the Federal government has injected so much nitroglycerine into the economy the stock market rally from that bottom will be breathtaking.
Photo by Shashank Hudkar on Unsplash
