(Washington)

President Trump is changing his view on coronavirus. When the virus first started sweeping the world, he maintained a cavalier attitude. He then pivoted to be very focused and concerned about protecting against the virus. Now he is moving back in the other direction, saying that at the end of the current 15-day lockdown, he is considering opening the economy back up, joining a chorus of business leaders who say that the “cure cannot be worse than the virus itself”.

FINSUM: This is a difficult and risky decision—lives or livelihoods? However, Trump proceeds, it seems unlikely New York, California, and Washington, will take his lead.

(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.

(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.

(New York)

One of the most commonly asked client questions about annuities is “what is the best age to buy one?” The answer, as advisors know, is that there isn’t one; it depends on your financial goals and circumstances. That said, there are a couple things to bear in mind. Firstly, those in their mid-40s or younger should almost certainly not consider annuities (outside of some variable annuities) because they have the time to take additional risk (and get the additional growth) of direct exposure to the market. On the other end, annuity availability for those 80 and older declines rapidly. Accordingly, depending on circumstances, the sweet spot is likely in that range.

FINSUM: Annuities seem to be best bought for what they guarantee, not what they might offer, as downside protection and income protection are truly the name of the game.

(New York)

If anything is becoming clearer about coronavirus’ effects on the economy, it is that job losses are going to be staggering. But what will be the knock-on effects? One of the many looks likely to be a serious credit crunch. Without income flowing in, many borrowers are going to be late or default on payments, which means lenders will run short on money and everyday companies will not get their normal cash flow. Not only will this hurt earnings and weaken credit ratings and corporate solvency, but it will likely cause a serious decline in consumer credit scores that will have a lingering effect on credit for years.

FINSUM: Everyone seems to be trying to mitigate this threat. Banks are suspending mortgage payments, credit bureaus say they won’t report delinquency etc. This is unprecedented, but it remains to be seen how it plays out (and for how long).

(New York)

This week has a very worst-case-scenario vibe to it, and thus we wanted to examine what the worst economic effects of the coronavirus outbreak might be. With a recession seemingly a foregone conclusion at this point, the question on economists’ minds is whether a depression could occur. A depression is an economic contraction that lasts for a long time, as in years, not a couple quarters. Since 1854, there has been 33 recessions and only one depression—by 1933 the US economy was only half the size that it was in 1929.

FINSUM: Many factors led to that huge downturn, and it takes a perfect storm for them to lead to a depression (e.g. the Fed raising interest rates at the same time as a huge drought in the Midwest). That multitude of factors does not seem to be in place right now.

(New York)

Usually, down markets are a very good tailwind for fixed annuities. With losses mounting, the prospect of full principal protection is usually very appealing. However, something odd is happening across the market—insurers are pulling many products from the shelves. Unlike the empty shelves in your local grocery store, it is not because they are selling out, it is because insurers desperately need to reprice the products given the huge moves in interest rates and market prices, and they do not have enough capacity to do this on the fly.

FINSUM: From a buying perspective, this market is perfect for fixed index annuities. Advisors may find some very attractive offers for clients.