FINSUM

FINSUM

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Monday, 23 March 2020 16:07

Morgan Stanley Says 30% GDP Fall in Q2

(Washington)

The forecasts for growth have been reverberating through markets. When this whole crisis started, Goldman Sachs initially said there would be a 5% drop in GDP in the second quarter. Oh how delightful that sounds now. Things have escalated considerably since then. Here is a smattering of various Q2 GDP forecasts: Goldman Sachs at 24% decline, Morgan Stanley at 30%, and the St. Louis Fed at a whopping 50% decline.


FINSUM: We think it is safe to assume that the GDP decline in Q2 is going to massive. So much so that the actual figure matters much less than the pace at which the economy bounces back thereafter. Is it going to be a V-shaped recovery, or a U, or the dreaded “L-shaped” recovery?

(New York)

Wall Street made a grim prognostication today. The street reminded investors that so far the losses in equities have been modest compared to prior routs. The S&P 500 is down (before today) 32% since its peak. That compares to 57% during the Financial Crisis, and 49% in the Dotcom bubble. Goldman Sachs says the S&P 500 will see a 41% fall from peak to trough, while Bank of America thinks it will be 47%.


FINSUM: It is easy to imagine a couple more weeks of double digit losses before peak case-load hits and markets start to calm down. In our opinion, the rise and eventual decline in US cases will be the switch that turns markets on.

Monday, 23 March 2020 16:06

The Fed Just Brought a Bazooka

(Washington)

The Fed announced an unprecedented monetary stimulus package this morning. The central bank declared that its new bond buying program was unlimited, and that it would immediately start buying hundreds of billions of different types of bonds in an effort to unclog credit markets. They also extended lending facilities to new markets such as municipal bonds.


FINSUM: The Fed has been far from shy to in reacting to this crisis, but nothing it is doing seems to be helping markets much. Post-announcement, the Dow is already down over 3%.

(Berlin)

Germany has been very successful over the last three decades with a fiscal stimulus strategy that helps to offset mass unemployment during economic downturns. The tactic is called “kurzarbeit”, or short work, and a policy by which instead of getting laid off, workers go on shortened hours and the government pays a portion of their salary to offset costs for the company who employs them. A typical example would be a factory that needs to cut a group of workers’ hours by 80% as demand shrinks. In this case, the employer would pay 20% of the previous wage, with the government covering something like 60%. This leaves the worker with 80% of the previous wage, and the prospect of still having a job so that when the economy improves, they just go back to full-time.


FINSUM: Our team has family in Austria and Germany that are currently on a kurzarbeit program and have done so in the past (during the European debt crisis nine years ago). It works very well and is something that the US should seriously look at right now. That said, Germany has some advantages that make it more feasible—it has lower property rents, and it is a nation of savers, meaning there is more margin for error in household budgets.

(San Francisco)

Investors have made cash the only thing that matters in markets. The Dollar is surging and investors are fleeing assets in favor of cash. Cash is a scarce and valuable asset in this downturn, and which companies have a ton of it—tech companies. While the Silicon Valley giants will take a hit from lower consumer spending, the reality is that the shutdown of normal life is pushing things ever more online—their domain. As this crisis eventually abates, giants like Apple, Microsoft, Google, and Amazon, have huge cash reserves (currently $350 bn) that will help them attract shareholder capital, and also grab market share as competition gets weeded out.


FINSUM: Tech is probably going to be in a stronger position in a year than it was six weeks ago. Their fortress balance sheets will be key.

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