Know These Plots and Characters to Guide You as This Drama Unfolds

I am currently bullish on risky assets, like stocks, as well as high yield and municipal bonds. But, of course, we all need a guide. So, when it comes to guidance during this economic and societal drama playing out before our eyes, I'm going to break it down as a story with two important plots and three main characters. The main plot revolves around, you guessed it, the fight against for the coronavirus. The parallel subplot is the problem of the bottom up economic crisis we are in. The characters? Those are the central banks, governments and, perhaps most important and critical to the main plot, the disease fighters themselves. Let's dissect the story: The Plots Our battle strategy on the virus front impacts our economy today. How successful we are in quashing Covid-19, the disease caused by the novel coronavirus, however, will impact the economy tomorrow, too. This is the absolute driver of the future of the economy and of markets. This is the main plot of what's happening right now and in the future. Still, we have the unfolding subplot that I call the bottom up problem. Unlike the financial crisis, this is bottom up, rather than top down. How so? This problem doesn't start with big companies. This is much more about small companies and people trying to make ends meet when the war on the virus has impacted their ability to make money. Their problems, trickle up. I don't mean to be insensitive, but it seems like the right word. They miss rent payments. They don't pay suppliers or services. Their problems become the problems of those who they aren't paying, and so on. Understanding that this a War on the Virus and that is largely a Bottom Up problem is crucial to estimating what the likely policy response is and how to evaluate whether any policy is effective. Policy should address the war and the people and companies most affected by it. Three Main Characters Now, we have the players in this story. I think that we can distill this market -- and the economy -- down to three main characters: The Big Guys. First, we have the central banks. In terms of the Fed, we now know several things: If it isn't big enough, the Fed will make it bigger. If the Fed isn't impacting an asset class like as wanted, it will find a way to do it. So, investment-grade bonds, mortgage-backed securities, money markets -- they have already benefited. Look for other markets to get help if required. These central banks, are far from out of ammo, too, so they can keep firing, if needed. You can also expect them to do the unexpected, such as deliver helicopter money -- which would be direct deposits to our accounts by the Fed -- and yield-curve targeting. Next, we have governments. Washington, more than any, must understand the two plots. Washington can address the war on the virus and help the people hit the hardest. Until recently, Washington didn't seem to think of the virus in these terms. The Cares Act fell short on many fronts, for example. It wasn't big enough. It wasn't directed enough. And, part of why it wasn't directed enough was its lack of size. Only recently has the government consistently spoken about the virus in terms of war. This is a good development. You can see that shift in mentality as everyone in D.C. is talking about the next package (I'll call it More Cares Act). The Virus Fighters. Thanks to these players, there have been positive headlines that get drowned in the sea of gloom. Germany and South Korea have been effective in combating Covid-19. We're seeing news of treatments that seem to show some promise. Production of supplies of necessary equipment is ramping up. And, so far, hospital systems in the U.S. haven't been overrun to the breaking point. This is a pivotal point in the war on the virus and it is too early to claim victory, but not too early to be hopeful. Of course, the virus fighters are interwoven with the plot of the war on the virus. And so, you need to know the shape of the curve to flatten it. We've spent so much time on flattening the curve, yet too little time on knowing the shape of the curve. More recently, experts are talking about the need for testing, testing and more testing. The only way to beat the virus is to know what you are up against. The U.S. may have been somewhat saved, inadvertently, by Italy. That nation was used an example of what could happen here, and appears part of the basis of some of our social distancing measures here. Now, the curve might be flattening. I think a lot about a hypothetical world where actual cases grow exponentially. In that hypothetical world, steps were put into place to slow the spread, but testing doesn't become common until later. In that example, you can see that confirmed cases look like they are growing exponentially, while actual cases are already slowing. I optimistically believe that the U.S. is in that part of the curve. Understanding where we are on the curve will determine whether your investing decisions are correct. If I'm correct, and the number of actual cases is much higher than confirmed cases, then it means mortality and hospitalization rates are vastly overstated and that the worst-case scenarios are too severe. I'm also taking it as a given that the Fed -- and other central banks -- will do more than their share. I'm less confident that governments will do the right thing, but now that they seem to understand (finally) that this is war and they have asked many to sacrifice on behalf of our war effort, they seem to be headed in the right direction. On the virus front, there are so many unanswered questions, but I'm cautiously optimistic that we've now priced in more bad news than will hit the tape. Stay Safe and Fight On!

Know These Plots and Characters to Guide You as This Drama Unfolds

As the Covid-19 crisis takes its toll on our people and economy -- and the world's -- we must break things down as simply as possible to see what's happening.

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