Zero Interest Rates, Zero Confidence

Disclaimer: I am not an economist nor possess any special knowledge of economics or finance.

As I write: the number of coronavirus infections worldwide is 169,552. 6,516 people worldwide have died. In the United States, approximately 3485 people have been infected with coronavirus. 65 people in the United States have died. Widespread testing has not taken place in the United States so the infection rate numbers are expected to rise dramatically.

The Dow Jones average is 23,185 or about a 21.5% drop from its high in February. The S&P is 2711 and has declined 20.1% from its high in February.

The federal reserve has reduced interest rates to 0%.

The following analysis represents my thinking and should not be used as a guide for investing etc.

What does this interest rate cut mean?

  1. It is the last remaining bullet in the Fed arsenal and intended to bolster the faltering stock market and economy, as I indicated in the summary above, Both indices have dropped over 20% since their highs last month. Many financial experts are expecting another 20-25% drop given the projected rise of the coronavirus infections and further disruptions to businesses and the U.S. economy in general. There are some financial analysts insisting that the stock market will come roaring back by the end of the year and recover much of its 2020 losses. I doubt it. One also needs to see the rate of recovery accomplished in China and Europe. If you have pulled out of the stock market and are now in cash, you are very limited as to how you can earn a return.
  2. Reflects the politicization of the Fed. President Trump has insisted on lower interest rates and just yesterday threatened to remove Chairman Powell from his job. The president is ever mindful that the November election is less than eight months and how a recession will adversely affect his chances of being reelected. Trump has done a very poor job of communicating what measures need to be taken and has miscommunicated the severity and urgency of this emergency. I would not be shocked that Trump would not be re-nominated as the GOP candidate if the country experiences higher than projected infections and death within the next four months. Seniors and retired people (part of the Trump base) will be panicked when their investment funds settle to significant losses.
  3. Trump’s priorities are investors and stock prices. He is leaving the dirty work of dealing with managing the pandemic and health issues to state governors and local communities. He has no choice. Trump has no bench of competent leaders or administrators to guide his actions. His “by the seat of his pants” decisions on travel bans have angered our allies and American citizens caught in Europe.
  4. Reflects the realization that the coronavirus emergency is not a two week or one month issue. There are no quick fixes and this virus will not disappear overnight. It is going to have a bad long term effect on the economy, corporations, small businesses and workers.
  5. Confirmation that the economy is not well and that strong measures were needed to prop it up. Seems obvious to me that many businesses are going to require bail outs in order to survive if the length of the coronavirus bands continue past May. Due to lower sales and cash flow issues, businesses will be forced to access available lines of credit creating capital and risk management concerns for banks and financial institutions. Airlines and the cruise industries are looking at 3-6 months minimum of travel dislocations and cancellations. Regrettably individuals who will become unemployed will also be accessing their available credit card lines of credit but they will not be receiving any bailout money from the government other than temporary unemployment insurance.

Stock Market Graph.jpg

6. The country is seeking a hero, someone who displays competence, communication skills and leadership. Don’t be surprised if the next serious Presidential candidate comes from a governor who protects his state and ensures that the necessary medical care and resources are available. (Cuomo from NY??)

 

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