Finally, at long last, the market has forced the administration to do what it had to do: Send money to the people via a check in the mail, of course, assuming Congress approves this fiscal bazooka. The Treasury secretary announced this morning that he would propose a $1,000 check be given to every American: “Americans need cash now, and the President wants to give cash now, in the next two weeks.” (Source: Bloomberg, White House Press Briefing March 17, 2020)
I wrote about this inevitable outcome in this forum multiple times last year, and after seeing the performance of a panicked FedFDX which did little to soothe markets, it became obvious at least to me last week that a direct-to-the-consumer check writing campaign was not too far behind. If the condition of the market does not scare you, just look at the picture I took last night at my neighborhood grocery chain – empty shelves everywhere!
In my humble opinion, last week probably marked a turning point from “In the Fed We Trust”, to “In The White House We Must Trust”. Though not confident of White House policies, let me be the first to say that this move is the right one for a wounded economy. This is because it cuts out the middleman – the banks, who have shown no desire to distribute money to the public. In addition, the fact that taxpayers can defer payment of taxes for 90 days is also the right move in the current environment. The government can print dollars at essentially 1% a year, and use the money to declare a tax holiday. There are willing foreign and domestic buyers of these bonds.
So where we are today is that the fiscal authorities will print money (by essentially borrowing more) to give directly to the public, and the monetary authorities will buy up the bonds thus issued and pump in more liquidity into the system which most likely will remain clogged up. The lack of coordination between the monetary and fiscal authorities will likely keep the bond market volatile for the moment, but yields are probably not going anywhere fast. There is the chance that foreigners who have lent the US lots of dollars realize they are subsidizing the tax deferment and run for the exits while they can. But where will they go to park their capital?
What does this mean for markets?
If printing money and giving it to the public causes Americans to go out and spend, helicopter money could turbocharge inflation, for which no one is currently prepared. On the other hand, if Americans decide to hoard the checks for precautionary measures or essential spending that they had not planned for (e.g. lost wages from having to stay at home and watch the kids), then this could just add to the malaise of too much liquidity but not enough consumption. I doubt that most Americans would actually go out and buy stocks with this windfall, never mind try to eat at a restaurant that’s closed. So the equity market rally that this stimulus is designed to fire up might not yet happen. But it’s a step in the right direction.
In my view, the important thing is not what the immediate response of the market is, but the fact that doors closed for awhile have suddenly been opened. Helicopter money is here to stay, and this might begin the trend where beaten down real assets such as food, materials, oil, and metals could compete with financial assets such as stocks and bonds. There are plenty of closed end funds in the energy and real asset category that have been sold by panicked investors to raise cash. They might be worth a look.