FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 17, 2020

IN THIS ISSUE:

1. Overview – It’s All Coronavirus All The Time

2. Fed Slashed Rates to Zero On Sunday, But Will It Work?

3. Fed Makes Massive Cash Injection Into Financial Market

4. Trump Declared “National Emergency” Friday, Now What?

Overview – All Coronavirus All The Time

I must admit, when I sat down to write today’s letter, I was tempted to write only about the continuing spread of the coronavirus. While the virus has reportedly peaked in China, much of Europe is in complete lockdown. And as we all know, the numbers continue to get worse in the US every day. This is a global crisis.

I stayed home on Sunday and watched all the morning news shows, and it was all coronavirus all the time. Businesses are closing right and left; grocery stores are in a frenzy with shortages developing; most Americans are in a near panic; and no one knows how this ends. Clearly, things don’t look good, the stock markets have crashed and the economy may be next.

But you know all that. There’s not much I can add other than to urge you to be smart and stay safe. Given that, I think it’s best for me to stick to issues I normally cover today. We’ll start with the fact that the Fed on Sunday moved to slash short-term interest rates to zero and is resuming “quantitative easing” in an unprecedented move. The fact that the Fed took this emergency action on a Sunday proves the Fed is now clearly in panic mode!

Following that discussion, I want to address the fact that President Trump declared a “National Emergency” on Friday, which has major implications for the economy, the financial markets and even our daily lives. Many Americans don’t know what this means, but they need to. So those are the issues I will focus on today. Let’s get to it.

Fed Slashed Rates to Zero on Sunday, But Will It Work?

The Federal Reserve Bank has taken several extraordinary actions in the hopes of stemming the coronavirus-induced implosion in the stock markets so far in March. On March 3, the Fed convened an unscheduled emergency meeting of its policy committee to invoke a 50 basis-point cut (0.5%) in its key interest rate, the Fed Funds rate. Yet stocks continued to plunge.

Last week, the Fed again intervened in the financial markets on three separate occasions by dramatically ramping up asset purchases amid the turmoil created by the coronavirus. This latest Fed action essentially amounts to the resumption of “quantitative easing,” (QE) although the Fed didn’t call it that (more details below).

The Fed Open Market Committee (FOMC) held another unscheduled emergency policy meeting last Sunday and slashed its key Fed Funds rate to zero (0.00% to 0.25%), rather than waiting until its regularly scheduled policy meeting for today and tomorrow. The Fed also announced it is resuming its policy of quantitative easing, which means buying huge amounts of Treasuries.

The fact that the FOMC took this action on a Sunday means the Fed is now in full panic mode.

It was reported over the weekend that President Trump once again publicly criticized Fed Chairman Powell for not cutting interest rates more aggressively, and this may have been one reason why the Fed took the unprecedented action it did on Sunday.

Some Fed-watchers question whether the FOMC should be intervening so aggressively in the financial markets, while others believe the central bank should be doing even more. The questions are many, but here are just a few.

With the economy still relatively strong, should the Fed be cutting rates to such low levels? Does the Fed believe the coronavirus impact will send the economy into a serious recession? With rates now at zero-bound, the Fed will have very little ammunition left to fight the next recession. What does it do then? The answers are not the least bit clear.

Another question is whether the FOMC will consider negative interest rates as is the case in much of Europe? Fed Chairman Jerome Powell has made it clear that the central bank does NOT want to move to negative rates. Negative rates haven’t saved Europe or Japan, and it would be a risky move in the US. So, what does the FOMC do if the Fed Funds rate is zero-bound? More QE, apparently.

Fed Makes Massive Cash Injection Into Financial Markets

In addition to the big interest rate cut to near zero late Sunday and the resumption of quantitative easing, the Fed also announced last Thursday that it would make a massive cash injection into the markets by pumping an additional $1.5 trillion or more of direct stimulus at the end of last week.

The Federal Reserve said it would make vast sums of short-term loans available on Wall Street and purchase Treasury securities in a coronavirus-related response aimed at preventing ominous trading conditions from creating a sharper economic contraction.

The Fed’s promise to intervene substantially in short-term money markets, together with the resumption of QE followed two days of trading last week in which Treasury market functioning appeared to have degraded. That is a concern for the Fed because the Treasury market is the most liquid and actively traded bond market in the world.

“These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed, which conducts the central bank’s market operations, said in a Thursday statement, amid a historic washout on Wall Street that ended in the worst daily stock market rout in history.

The Fed made the changes for short-term funding markets following instructions from Chairman Jerome Powell, who consulted with members of the rate-setting Federal Open Market Committee before the public announcement was made.

The huge injection of buying last Thursday and Friday was designed to preserve liquidity in the market; in other words, the Fed wants to prevent “freezes” and make sure buyers and sellers still have the ability to trade. While the Fed’s official statement didn’t say so directly, most Fed-watchers believe the central bank is prepared to make even more large purchases if need be just ahead. They made that abundantly clear in their surprise decision on Sunday.

While US equity markets rallied strongly on Friday, stocks plunged to new lows on Monday morning, despite the Fed’s unprecedented rate cut on Sunday, with the S&P 500 slammed by nearly 12% on the day. This is worrisome in light of how much stimulus the Fed enacted on Sunday and late last week.

This is a very serious, fluid situation. I’ll keep you posted as best I can.

President Trump Declared a “National Emergency” Friday

Last Friday President Trump declared a national emergency and enacted emergency powers outlined in the Stafford Act because of the novel coronavirus pandemic. There is no way he would have done this unless his Advisors believe we are facing a potential economic crisis over the coronavirus.

Every US president since 1976 has declared at least one national emergency during their term(s). Former President Obama declared an emergency in 2009 during the H1N1 influenza, or “swine flu,” pandemic. Unfortunately, many Americans don’t know what a national emergency means, so let me summarize.

The national emergency declaration, in this case, will allow for up to $50 billion in federal aid to flow to state and local governments. It will also enable the administration to tap the $42.6 billion in FEMA’s Disaster Relief Fund, if necessary, to help address the damage from the spread of the virus and enables states to request that the federal government cover 75% of emergency expenses, including workers, tests, supplies, etc.

Using his new powers, President Trump said he was unilaterally waiving the interest on all student loans held by federal agencies, indefinitely. He also authorized the Energy Department to purchase enough crude oil to fill the nation’s strategic petroleum reserve.

President Trump also announced a new government partnership with the private sector to expand and speed up testing for the virus, with widespread drive-through testing locations and 1.4 million additional tests to be made available this week and 5 million within the next month. The administration had faced heated criticism from lawmakers in both parties about the problems with coronavirus tests being available.

Following President Trump’s declaration of a national emergency, the House passed the “Families First Coronavirus Response Act” on Friday evening. The Senate is expected to pass it this week. This new legislation is focused on providing free testing for everyone who needs it, including the uninsured. It also includes provisions for paid sick leave, enhanced unemployment insurance, strengthened nutritional security programs like food stamps and increased federal funding for Medicaid, among others.

Once passed by the Senate, President Trump will sign it into law, but the new legislation is not without controversy. For one thing, it does not specify how much money the government is authorized to spend. It also suggests that a whole new bureaucracy be developed to administer it. Government spending on steroids!

I’ll close with one final thought on your investments. These are scary times in the markets, and clearly the stock markets have overreacted to the coronavirus. Yet it is rarely a good idea to make knee-jerk investment decisions when we are emotional.

If we can help in any way, even if it’s only a second opinion, or to share what we’re thinking, don’t hesitate to call us at 800-348-3601 – even if you’re not one of our clients. And remember, we will get through this!

Wellesley Investment Advisors Webinar – March 25 at 11:00 AM Eastern Time

On Wednesday, March 25 at 11:00 Eastern, we will host a live webinar with Wellesley Investment Advisors. Wellesley invests exclusively in convertible bonds and has an enviable performance record stretching back 25 years. Take a look at Wellesley’s FACT SHEET.

If you are looking for an alternative to stocks, this is one webinar you don’t want to miss. Wellesley will offer a brief presentation on how its convertible bond strategy works and then take live questions. Be sure to register for what will no doubt be a very timely discussion. Even if you can’t attend the live event, register anyway and we’ll send you a recording of it.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

Trump Declares National Emergency, Stocks Surged

Fed Announced Massive Cash Injection to Financial Markets

Media Should Stop Fanning the Flames of Panic

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.