With far too much alone time this past week, and in response to the good questions you have been asking about this crisis, I developed the following narrative to convey what I believe is needed to restore confidence in the economy and the markets.
We need four things, in my opinion.
First, we need massive intervention by monetary authorities in credit and possibly equity markets. We need a highly active buyer of last resort. The Federal Reserve largely satisfied this condition on Monday with a huge array of facilities aimed at providing vast amounts of liquidity to the markets. They should probably be prepared to do more. The Bank of Canada is also very active and is well-positioned with a conservative balance sheet relative to most world central banks. The European Central Bank has also announced a large asset-purchase program.
So this prerequisite for capital market stability is largely in place.
Second, we need very large relief programs to deal with the tsunami of unemployment and financial stress that has been unleashed on a huge proportion of the population. Government policies to combat COVID-19, such as mandatory self-isolation, are crushing aggregate demand worldwide. Governments must compensate with big relief plans – they must act fast to avoid an interruption of income to millions of workers.
Denmark had the most innovative solution to this problem, with the government guaranteeing a high percentage of wages for workers up to a certain ceiling, to be paid through their employers’ already existing payroll systems. The U.K. has adopted a similar program, as I understand it.
Canada and the U.S. have taken a less integrated and more fragmented approach. In Canada’s case, there will be various supplementary benefit programs designed to send cheques directly from the government. While the government has various ways of directly sending payments to citizens, such as Employment Insurance, tax refunds and the Child Benefit, all of these programs take time to expand and, in the case of the new Emergency Benefit, to set up.
In the U.S., the array of programs is even more complex, though the overall package is enormous. Even David Rosenberg, a famously bearish economic commentator, was impressed with the sheer size of the U.S. relief package.
Suffice to say that our second wish is in progress. Governments should be prepared to do whatever it takes in this environment to help our citizens.
Third, there is the virus. We are all watching with mounting dread as the caseload and the death toll rises worldwide. We are constantly being reminded that the results we see are lagged because of inadequacies in testing and processing. And the caseload mounts remorselessly anyway, compounding at frightening rates.
We learn more about the progress of the virus every single day, and in the next three weeks, we will develop some idea of how big the affected population will be. We must hope that the physical distancing initiatives now well underway have the desired effect of flattening the virus’s growth curve. Our certainty about the course of the virus will only grow. Right now, we are at a point of great uncertainty.
A virus is a new factor in market psychology, so nobody knows how it will impact investors day by day. Presumably, there is some link between viral spread and the length of the lockdown, so I think it could be an additional factor in an already famously volatile market.
But the biggest news about the virus will be when it peaks and recedes. That is the third thing we need to see.
The fourth thing we need for the restoration of confidence is some idea that there is an end to the pain. President Trump was probably trying to provide that when he spoke of ending the shutdown by Easter, though most health authorities feel that is far too early.
The fact remains that it would be a great thing if we all felt that there was a plan to reboot this crashed world economy, and some sort of timeline to do it. The idea of the current situation persisting beyond a few weeks is alarming. North America is heterogeneous and libertarian, unlike the East Asian countries who were first impacted by this pandemic and which seem to have weathered it fairly well. It is reasonable to ask how long the population will accommodate extreme restrictions on activity.
When the viral curve begins to descend, the really tough part for policy-makers begins. At that point, they must start impossibly difficult utilitarian calculations to determine the greatest good for the greatest number of their citizens. Until then, all their moves are forced on them by the circumstances of the pandemic.
We are humane democratic societies. We see it as foundational to our culture that we should care for seniors and the medically vulnerable. It is also essential to our economy that we provide meaningful work to those who want it. With COVID-19, those two principles will eventually be in conflict. The more stringent the measures taken to combat the pandemic, and the longer they are enforced, the greater the damage done to the finances, educations and prospects of younger generations and the working class.
We should have compassion and patience for all concerned. Nobody wanted this, nobody foresaw it, nobody has all the answers.
But we need to know that governments are wrestling with these dreadful trade-offs. We need to know that governments are working on a plan.
There is no reason that all of these things cannot be in place within the next two months. Progress on the first two has already sparked a powerful relief rally in the capital markets. When they are in place (and it is a when not an if) we will all be able to see a path back to normal life. If this pandemic does nothing else, I’m sure it will have taught us to treasure that.
Richard Rooney, FCPA, FCA, CFA President, Chief Investment Officer
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