Massive Stimulus Plan

The United States economy is currently going through a financial shock that is unprecedented. Policymakers have implemented actions to help shave off a deeper financial downturn and we believe this is appropriate and necessary.

Federal Reserve Action

In the last two weeks the fiscal response to the virus outbreak has been nothing short of historic. The Federal Reserve has unleashed liquidity programs that dwarf the efforts made during the financial crisis of 2008. Not only have they implemented a zero interest rate policy, they have also put in place backstop mechanisms to protect money market funds, support  municipal governments, increase in liquidity in the fixed income market, and start buying fixed income assets in the open market. 

While these actions may be somewhat confusing, it is clear that the Federal Reserve is taking the financial impact of the virus pandemic seriously. If one was to simplify the Federal Reserve’s action now relative to the 2008 financial crisis, I would say they have increased their efforts by 300% more than what their efforts were during 2008. The action taken is historic. 

I am encouraged to see that the actions taken by the Federal Reserve were implemented with urgency. In 2008, the steps taken by the Fed were slowly rolled out over a 12-month period. The steps taken by the Fed during this crisis were all rolled out in a three-week period. Incredible and, in our view, wise.

Federal Government Stimulus Plan

The Federal Government likewise has implemented measures to stimulate the economy that dwarf what occurred in 2008. Deficits are not a consideration by Congress in today’s environment and it is clear that legislators believe that there’s a time and place to discuss fiscal restraint. For now, the goal is to arrest the economic slide to help avoid financial collapse.

The $2 trillion stimulus program is designed to provide a safety net for those impacted. Key provisions include (CNBC summary):

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• Give one-time direct payments of up to $1,200 for individuals and $2,400 for couples, with $500 added for every child, based on 2019 tax returns for those who filed them and 2018 information if they have not. The benefit would start to phase out above $75,000 in income for individuals and $150,000 for couples, going away completely at the $99,000 and $198,000 thresholds, respectively.
• Boost unemployment insurance, adding $600 per week for up to four months on top of what beneficiaries normally receive from states. It expands eligibility to self-employed people and independent contractors.
• Create a $500 billion pool of taxpayer money to make loans, loan guarantees or investments to or in businesses, states and municipalities damaged by the crisis.
• Give $25 billion in grants to airlines and $4 billion to cargo carriers to be used exclusively to pay employee wages, salaries and benefits, and set aside another $25 billion and $4 billion, respectively, for loans and loan guarantees. 
• Provide $17 billion in loans and loan guarantees for unspecified “businesses critical to maintaining national security.”
• Put $117 billion into hospitals and veterans’ health care.
• Provide $16 billion for the strategic national stockpile of pharmaceutical and medical supplies.
• Give $350 billion in loans for small businesses to cover salary, wages and benefits, worth 250% of an employer’s monthly payroll, with a maximum loan of $10 million.
• Include a tax credit for retaining employees, worth up to 50% of wages paid during the crisis, for businesses forced to suspend operations or that have seen gross receipts fall by 50% from the previous year.
• Require group health plans and insurance providers to cover preventive services related to coronavirus without cost sharing.
• Delay payroll tax for employers, requiring half of the deferred tax to be paid by the end of 2021 and the other half by the end of 2022.
• Ban companies that take government loans from buying back stock until a year after the loan is paid back.
• Bar employees or executives who made at least $425,000 last year from getting a raise.

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Source: March 25, 2020, CNBC.com
https://www.cnbc.com/2020/03/25/coronavirus-stimulus-bill-updates-whats-in-the-2-trillion-relief-plan.html 

The strength of this financial rescue program is significant. The amount pledged is equal to 10% of the total economic output in the United States which is an unprecedented effort to support the US economy. Additionally, discussions are already underway for a fourth stimulus plan.

Better Economic Strength Than 2008

Despite the current gloom, it’s important to remember that the United States economy was in much better shape entering this crisis that it was during 2008. The 2008 financial crisis was caused by irrational leverage by banks and financial institutions. Entering this crisis, banks were in strong financial condition with adequate reserves. Unemployment was low, inflation was low, energy prices were low, and economic growth was reasonable.

It is for these reasons that we concur with former Federal Reserve Chairman Ben Bernanke that the United States is coping with an unprecedented natural disaster rather than a systemic financial crisis. In a recent CNBC interview, he stated:

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“It’s really much closer to a major snowstorm or a natural disaster than it is to a classic 1930s-style depression. Bernanke said he does expect a “very sharp” U.S. recession, but also a “fairly quick” recovery.

Source: March 25, 2020, CNBC.com 
https://www.cnbc.com/2020/03/25/bernanke-says-this-is-much-closer-to-a-natural-disaster-than-the-great-depression.html

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You can watch the entire video interview here. It’s a great overview of the challenges facing the US economy and the path forward.

Source: March 25, 2020, CNBC.com 
https://www.cnbc.com/video/2020/03/25/cnbcs-full-interview-with-former-fed-chairman-ben-bernanke-on-coronavirus-impact.html 

Our View

And what do we think at DWM?  Chairman Bernanke agrees with our perspective that this is much more a sharp shock rather than a prolonged economic collapse. We believe the efforts taken by the Federal Reserve and Federal Government will have a significant impact in offsetting the massive economic slowdown we will see over the next 60 days.

To be sure, you will see unemployment rates temporarily skyrocket. Retail sales will crater. Home sales will be affected. Other economic measures will highlight how much the virus pandemic has negatively impacted the US economy. You should expect those headlines on the short-term.

However, I believe in  the long-term you will see that the United States comes through this crisis as one of the stronger economies in the world. I expect a bounce back in economic activity. This is not to say there will not be residual effects; there will be. But the US economy will get through this and markets and economic growth will stabilize.

We continue to make adjustments in strategy, and we continue to monitor conditions on a minute by minute basis. Our entire team is totally focused and working 100%. We will continue to take action as needed and want you to know that we are here if you need anything.

Thanks very much for taking the time to read these updates. We will keep them coming I can assure you. Any questions let us know. If you reply to this email, it will come directly to me and I will reply personally to you.

Be safe. Be well.  We will get through this.