In this week’s update, Jill talks about current environment.
Script
Hi Everyone,
Watching the market is like getting a whiplash. In less than a month we dropped 30% only to gain more than half of it back a few weeks later. This might not be sustainable. We are all concerned that a second shoe might drop – potentially in lock step with round 2 of the coronavirus.
I recently listened to a discussion with former Federal Reserve Chair, Dr. Ben Bernanke. He discussed some of the differences between the current crisis and the Great Recession of 2007-2009. He said the structure and causality are different.
In the Great Recession, the global financial system was on the verge of collapse. He feels the financial system will be a strength as we move from this crisis.
The playbook the Fed created for that crisis has allowed the current Federal Reserve to act quicker because they had tools in place that had been tested.
In the Great Recession, the enemy as he termed it, was the financial institutions creating something to point fingers at which also delayed fiscal stimulus legislation. In the pandemic, there is a common enemy and fiscal policy response has been relatively rapid.
I didn’t realize this but the central banks of 14 countries – the most developed ones – are in constant communication. And because the dollar is the predominant source of liquidity worldwide, the Fed swaps dollars overnight to other nations to sustain this liquidity. In this crisis, the Federal Reserve has set-up such a window to swap for dollars with other nations as well.
Liquidity is important in a crisis. It was one of the problems in 2008.
I mentioned to you in my last podcast about a V shaped recession, a rapid decline followed by a rapid ascent, or a U shaped one that goes down and languishes before rising. Dr. Bernanke discussed a W shaped recession which is 2 V put together. So far, what we’ve seen in the markets reaction is a steep decline followed by a rise. However, if COVID-19 returns in the fall, you could see a second steep decline followed by a rise. This would correlate with the discussion about a second outbreak of the virus later this year.
The IMF, short for International Monetary Fund forecasts that the U.S. economy also known as Gross Domestic Product or GDP, will shrink by 5.9% in 2020. For perspective, the GDP decline during the Great Recession was 4.3% from its high to its low. The Eurozone is expected to decline by 7.5% while China is expected to grow 1.2%
This is all predicated on gaining control of the virus so recovery can begin in 2021.
So as before, all forecasts we read use assumptions about control of the pandemic. If we don’t succeed in controlling and finding a vaccine, the impact will be more severe.
Hubert Joly, former CEO of Best Buy, wrote in the Harvard Business Review, [quote] “This is a time when performance will be judged by how a company and its leadership serve everyone and fulfill a higher purpose – and specifically how they have shown up and met the requirements and the expectations of its multiple stakeholders.” [end quote]
Such an example is Target. They increased hourly worker pay by $2, waived its absenteeism policy, extended 14 days paid sick leave for those with the virus or quarantined plus offer child or elder care backup for all its employees for 25 days.
Other companies have increased benefits but what sets Target apart is that they are also allowing high risk employees such as seniors and pregnant women to stay home for 30 days while continuing to be paid.
In our last email, I mentioned some of the COVID-19 scams being seen. A client contacted me and wanted me to remind Apple users that the company will never call you. Apple communicates by email so if you receive a call saying it is Apple, hang up!
On a different note, last week was Earth Day. Worldwide the air is cleaner, fish are back in Venice, deer are in the streets of London and Thailand and Florida are seeing the rare leatherback sea turtle nesting on the beaches. It is always nice to find the occasional silver lining.
That’s it for now. Please let us know if there is something on your mind or if you see a video you think might be a mood booster for others. Thank you.