Coronavirus Impact Musings
We all have been reading and hearing a lot about the Coronavirus and its impact on the world economy, markets and life in general. A lot of us have even become philosophers. I thought I should share some thoughts in a quick digestive format without getting into too much detail… Let me know what you think of it as it will motivate me to go into a meditative state even more.
The United States of America for the first time now has more confirmed coronavirus cases than Italy and China. At the start of the month the US had only 100 odd cases, now they are at 82404 cases according to data from John Hopkins University.
Additionally, 3.3 million Americans filed for unemployment claims for the week ending March 21, 2020 making this the worst ever filing. The last such one was in 1982 and the number was 0.7 million (7 Lakh).
Despite all of this, the US stock markets have sharply gone up by 20% in the last 3 trading sessions (Yes, they are still off 24% from the high of 29568 it made on February 12).
Why are the markets going up? Have they found a bottom?
I won’t get into the part that the markets were overvalued (and any economy that is growing will continue to be richly valued) but address the strategy that needs to be taken to address this crisis.
Governments can adopt a 3-pronged strategy and I will limit myself to the US government action and then see what’s happening here in India.
The Formula = Monetary Policy Action + Fiscal Policy Action + Coronavirus Containment (Reduction in number of cases or a possible cure)
The US Government has fired a bazooka on the first 2 parts of the formula.
The Fed has cut short term borrowing rates to ZERO and have taken many other liquidity measures on the Monetary Policy side. The US Congress, on the other hand, have cut out the largest ever check of $ 2 Trillion on the fiscal side and I have shared some key points on this front…
- One-time direct payments of $1200 for individuals and $2400 for couples with another $500 for every child based on 2019 tax returns or 2018 if they have not filed 2019 returns (Won’t get into much details here)
- $117 Billion into Hospital and Elder Care.
- $350 billion loans for small businesses to cover salary and benefits worth 250% of an employer’s monthly payroll, with a maximum loan of $ 10 million (This is seriously something as it will help small businesses in these tough times and stand up on their feet).
- Delay payroll Tax with half to be paid by End of 2021 and another half by 2022.
- $500 billion of Taxpayer money to make loans or invest in businesses, states or municipalities affected by the crisis.
- $25 billion of grants to airlines & $4 billion to cargo carriers to be utilized exclusively for paying salaries. There is an additional $25billion & $4 billion respectively set aside for loans to airlines and cargo carriers respectively.
There are many others, but these are some of the key highlights…
The markets are naturally reacting favourably and positively to these actions as they are pretty powerful. This is because markets don’t run on what’s just happening today. They run on what they think is going to happen ahead…In short, the markets are always ahead of the economy and factor what it thinks will happen in the next 6 months – today. Yes, economists have predicted a more than a 20% decline in GDP and that around 10 million people will be out of work and this is exactly the sort of news that already has been priced in the sharp market decline so far (To add to that there is always panic…I have a very small note on Why so people actually sell from just a thinking perspective that I will share as well). So only if there is more bad news on the Coronavirus front or the third part of the formula does not get addressed, the markets can go down even further, and we might not have found a bottom. However, generally, a bottom formation happens when people start talking that it’s less bad. The virus seems to have been contained in China however the cases in the US are going up.
The first 2 parts of the formula have been addressed as they are still in the government’s control (and there is talk about some more) but the third part is the tricky part. The pandemic containment is what is uncertain and in no one’s hands.
What should you be doing? I have covered this well in “Embrace the Bear – Part2” so I won’t repeat this again.
So, what’s happening in India on all the 3 factors of the formula will form the next note.
Let me know what you thought of this… I would love to hear from you…