Written March 3 after the close of the market yesterday before the Super Tuesday Primaries results but not posted until March 4 8:36 AM
The Fed’s Move: and the market’s reaction
Widely debated by the savants of economic forecasting at the end of last week, the Fed cut 50 basis points off its target rate. This came after a kind of coordinated mouthing of mutual support by various countries in the G-7, but no substantive policy change. Australia, hard hit by China’s massive slowdown had already cut their rate prior to the G-7 communique and the Fed’s announcement and press conference.
The Fed’s move was largely applauded by current and former members of the FOMC who largely praised “getting in front of the curve,” based on the claim that getting ahead of events is thought to be propitious, based on lessons allegedly learned from prior crises. Whatever econometric evidence is available that “getting in front” will work has to be viewed as tentative, but at the least it seemed to satisfy the equity markets…until doubts crept in shortly after the announcement. Prior to the G-7 message and the Fed’s press conference, the Dow 30 was up some 300 points, offsetting some of the massive gains on Monday. An hour or two after the Chairman Powell finished, the market turned south and finished off more than 2% across the board.
The Growing Unknowns of Corona Virus
The subsequent commentary of market participants ranged the entire gamut of praise by those who felt the move was appropriate to anger by those who thought it was liable to trigger even more fear or uncertainty. Some suggested that policy makers were either knowledgeable of much more severe consequences of the virus spread or really knew very little of the economic consequences and did not want to be caught out if the economy truly turned sour.
Despite assurances from the President that the circumstances are not dire and that Washington is “in control,” predicting the consequences of the virus is murky at best. How can anyone be sure of the extent of the spread as it emerges in the US or of our ability to cope with it in the short run? Acts of faith are not good immunology and the level of preparedness will only be known after the full scope of the illness descends on us. Surely, no one can take the Chinese statistics at face value. Even the supposed mortality rate of some 2% could be well overstated, properly recorded. Undoubtedly there were many Chinese whose illness wasn’t counted if they lived in areas without easy access to medical treatment or remained home because someone was there to care for their symptoms or awareness that a suitable care facility was not available. It is too early to know how the virus will play in the US.
If we don’t know the extent of the future infections or their seriousness, it is impossible to predict what might happen to employment or output or for that matter subsequent demand as travel and other forms of consumption weaken. One can conjecture scenarios that either overstate or understate the expected damage.
Finally, whether or not the US has sufficient clinical facilities or treatment methodologies at this point is a matter of future empirical data. We and the Market can only guess.
Political Cosmetics: Super Tuesday and Market Fears
Today 14 States are voting on delegates. Sometime tomorrow we will know the disposition of 1357 delegates (31.4% of the Democratic total). Will Senator Sanders have an overwhelming victory threatening a first ballot victory in Milwaukee in July (13-16)? Or will former VP Biden’s recent win in South Carolina carry forward momentum with the capture of significant numbers of delegates and a brokered convention? No one knows tonight. Was the Market’s ultimate turn around and decline (DJIA -2.94%, S&P -2.81% and NASDAQ -2.99%) the result of fear of a huge victory for Sanders? Or was it the spread of the virus in the U.S. (9 deaths in about 115 cases)? Tomorrow may give us some numerical results, but it is hardly going to create sufficient certainty.
Markets despise uncertainty so we should expect even more volatility, and either politics or the course of the disease is likely to continue a high degree of uncertainty. Undoubtedly, whatever the outcome of Super Tuesday, politicians will use both economic policy measures and the raw “stats” of the virus to claim they know the “real causes” and the “real solutions.” Of course, this is fantasy, but today the US suffers from a great deal of “magical thinking.”
One more ingredient to this cauldron of bubbling magic is the fact that now that people under 29 years of age represent the largest single group in the U.S. Many of them are devoted to a Sanders promise of a complete overturn of America politics. Call it Sandersism or Socialism, it highlights the allure of universal medical care with no real assessment of its cost; a cancellation of student debt; and a devotion to climate change measures whose costs are vastly understated and whose impact on jobs are unappreciated.
Years ago, one of my academic friends wrote about the coming clash of generations when the young would demand that their futures be guaranteed by older Americans. Class war but not of a Marxian variety. Sanders has a loud, demonstrative cohort of the young who are excited by the “Revolution.” In front of the Guillotine, the sans culottes screamed “off with their heads.” Lenin’s slogan was “all power to the Soviets,” and in Cuba, it was “to the wall” (where the prisoner would be shot). Complaining the “billionaires” are running the country, financial markets are rightfully fearful of Sanders, but small investors with company sponsored health plans are not calm either.
Enduring the cosmetics of monetary policy and of medical response is not going to be easy.