Got just a little sick to my stomach on Thursday morning. Knew I would. The seconds ticked off, counting down to 08:30 ET.
Another painful Thursday morning. For the week ending April 4, more than 6 million more folks successfully filed for unemployment benefits across our great land. I write "successfully," because there are issues. These numbers, awful as they are, in truth are worse. The week prior had been revised upward to nearly 6.9 million, a new record, bringing the four week average -- now a useless metric -- up to nearly 4.3 million. Continuing claims ran up to just less than 7.5 million.
I read a number of economists who I consider to be brilliant, by the way. Of these folks' estimates, the lowest number I have seen for a real-time unemployment rate is 14%. Others go as high as 18%.
Remember, they are trying to estimate the number of folks having trouble filing in states that are either overwhelmed or were caught off guard and running antiquated computer systems when governments (federal, regional, local) were forced to turn off the U.S. economy.
So, forget the word "recession."
Anyone and everyone now understands that the economy has contracted meaningfully. Some of those same economists estimate annualized real-time gross domestic product contraction of 25%. Those are the nice ones. It gets, in some cases, far worse. Do we call this a "depression"? We do if the nation does not come out of it in a relatively short period of time. The problem with that, is that this economy will have to be rebuilt, not turned on. The labor force will have to be cleared to work, from a public health perspective. That takes mass testing: a whole nation. And there will have to be persistent hands-on maintenance of the public health condition, with the expectation that there will be fits and starts in this rebuild.
Not only will there be fewer employers trying to add more unemployed folks, but leaders will have to anticipate localized outbreaks of the coronavirus and be prepared to contain those outbreaks, so that this economic shutdown does not happen on a monthly, or weekly, basis once activity (velocity) starts to build.
Avoiding a "Depression"
There are heroes among us. They are the front-line health care professionals, who are risking their very lives as they aid those sick with this illness. There are also those who maintain order in the streets, and who answer the call to put on a uniform as their spouses and children beg them not to. There are those who move the freight, truck drivers and the like. Folks who stock the shelves at grocery stores and pharmacies.
Many seemingly ordinary tasks such as delivering freight, picking up trash and stocking store shelves now require a certain level of uncommon valor in meeting the demands of these extraordinary times.
Folks who pick up your trash on a regular basis. All heroic. Many seemingly ordinary tasks now require a certain level of uncommon valor in meeting the demands of these extraordinary times. Then there are those in positions of financial authority that now find themselves in the toughest of spots that they ever could have possibly imagined.
Thank Goodness For This Guy
Fed Chair Jerome Powell: once the scourge of Wall Street. I, myself, criticized the nation's trajectory for monetary policy back in 2018 when I felt that the policy was headed the wrong way. It was, but that is neither here nor there at this point.
This nation has a habit of somehow placing the right person in the right spot at the right time. Been true since they handed George Washington a rag-tag army camped at the outskirts of Boston in 1775. This Federal Reserve, the 2020 version, has been as aggressive, as responsive and as anticipatory (which is all I ever asked) as any in my lifetime, and probably in history.
This Fed has fought every fire at the first sign of trouble over and over again. There really can probably not ever again be a serious argument on who is the greatest Fed Chair of all-time. There is a very good chance that he is speaking right now on your television while I pen this article.
On Thursday morning, in response to (or really in anticipation of) the awful macro-economic data staring a nation in the face, the Fed took action, again. Americans already knew that this Fed had been aggressive in overnight funding markets, as well as in short-term cash funding, meant to ease liquidity concerns. This Fed had taken the Fed Funds rate down to just a hair above 0%, while aggressively restarting an aggressive -- very aggressive -- regimen of quantitative easing aimed at allowing the U.S. Treasury to borrow as much as necessary at little cost to finance the fight against Covid-19, not to mention trying to put a lid on mortgage rates once they had started to rise. That's not all, the Fed put down uprisings in markets for corporate paper, investment grade corporate debt and money market mutual funds. That all came before Thursday morning.
In Action
The Fed's action Thursday morning sets up the ability to support the $350 billion small business lending facility created last month by the $2 trillion fiscal support package passed by congress and signed into law by the president. This new tool should in practice allow participating banks to increase that participation as what it does is extend credit to these institutions, by taking these loans as collateral ... at face value.
Separately, the Fed will buy up to $600 billion in loans, aimed at supporting Main Street, U.S.A., that will come with the Treasury's backing of $75 billion.
Even more interesting, you have heard local and regional political leaders discuss their broken budgets, as public expenses have soared and expected tax revenue has been delayed. In a double-whammy, the Fed will set up a new facility (the Municipal Liquidity Facility) to offer up to $500 billion in loans (with $35 billion in backing from Treasury) to aid municipalities now suffering from sudden stress to local cash flows. Along a similar theme, the Fed will also purchase up to $500 billion in the form of short-term notes directly from U.S. state governments to include the District of Columbia, and even county and city governments with populations of over 2 million and 1 million respectively. Localized quantitative easing?
Seems like a lot, right? We're not done. The central bank also increased in both scale and scope already existing facilities with an aim toward solidifying corporate credit markets. The re-established TALF facility (Term Asset-Backed Securities Loan Facility) had been set up to permit the Fed to buy securities backed by auto, student, and revolving debt, in addition to making loans to businesses through the Small Business Administration. As of now, triple-A rated commercial mortgage backed securities and triple-A rated newly issued collateral loan obligations that include leveraged loans can be permitted for use as collateral.
As far as corporate bond-based exchange traded funds are concerned, the Fed confirmed the purchase of both long-dated investment-grade product, but also some high-yield (junk-rated) corporate bond ETFs as well to include recently downgraded paper.
If for some reason, all of this has managed to escape the average Joe or Jane, who has not yet seen severe damage to either their health, or financial condition, or have not had to witness such impacts to those around them, Jerome Powell gets the magnitude of this situation. To put it politely, we are in a heck of a jam. The steps taken by the Fed, and by the Treasury Department (Hats off to Treasury Secretary Steven Mnuchin, as well) are laying the groundwork to constrain contraction at a certain, unknowable level of economic minimums, while trying to set up the potential for elevated velocity upon a careful, incremental re-opening of the economy.
Do not fool yourself. Everything has changed. More will be required by the Fed, and the Treasury, and they are fully cognizant of this. There is no light switch. We will have to rebuild as a people and as a nation. We are all called to sacrifice for one another to some degree, and it with great cheer and enthusiasm that we accept this call. For today, it is up to the scientists, and the medical professionals. God bless them and protect them in their daily work. Tomorrow, it will be up to us. We pray for guidance in all we do. TEAM.
