We wanted to take this opportunity to say thank you for your continued trust in our firm’s Intellectual Capital. Even though we have never been through this type of scenario before, we remain confident that we will get through this and will have a V shaped recovery once we get some clarity on the virus and its effects on the economy in the short-term. We would like to let you know that since the day we founded Fortem, we have built a very robust Technology platform that will allow us to work remotely from any location and maintain the service you have been accustomed too. We currently do not have any plans in working remotely, however we are prepared if we were mandated by Federal, State or local governments. We will continue to monitor your portfolios and the technical levels (as fundamentals are currently dislocated) and will make the necessary changes. Here is a very well thought out opinion on the virus that we wanted to share.
It’s a bit frustrating when we see analysts and the media make statements like “Fed Medicine Won’t Work this Time”, or “Central Banks’ Actions are Futile”. These comments, though well thought out, miss the point that the Fed’s job this crisis is not the same role it played in 2008.
In 2008, the central nervous system of the U.S. economy, the financial system, was infected. The infection started in the CNS, and before policy makers could even identify the cause, let alone a cure, the most critical organ in the U.S. economy shut down. Once the brain of the U.S. economy stopped functioning the way it was intended, it was followed by complete organ failure across the economy.
Today, the U.S. economy’s central nervous system is beginning to show signs of infection, but the infection began elsewhere, in the economy’s second most important organ, the U.S. consumer. Policy makers, like doctors fighting an infection that’s approaching the brain, need to administer medicines that will 1) attack the infection, to buy the patient time until his immune system kicks in 2) increase the functioning of the immune system, to speed up that process, and to reduce the risk that it reaches the central nervous system and 3) keep the central nervous system from shutting down permanently from the all-out war between the infection and the immune system.
This last piece of the treatment is neither cure, nor palliative care, but is rather preservative. And unlike in 2008, the Fed’s job today is to protect the financial system from damage while the body fights off the infection. In a medical setting, doctors would do this by completely anesthetizing the patient (medically induced coma), to preserve brain function until the infection has been cleared. The Fed’s role today is the similar; the medicine it’s administering isn’t designed to “cure” the patient, it’s designed to anesthetize the financial system while fiscal policy (the medicine) and aggregate demand (the immune system) kick in. In this light, the economy is very likely to worsen well after the Fed stops adding liquidity, and global financial systems may show little sign of recovery, and may even show deterioration for some time more. That doesn’t mean that the Fed’s medicine has failed, it just means that the Fed’s intended outcome is different from prior crises. Among the key measures to watch as the Fed brings more of the financial system into a liquidity-induced sleep are:
- Breakeven Inflations - A rise is preferable to a pause, but a further drop would be worrisome
- Treasury Market Liquidity – Bid to ask spreads for Treasury notes need to return to and stay near normal levels to ensure proper functioning of other markets, at a minimum
- Repo Financing – Repo rates need to remain near effective Fed Funds rates, indicating that Treasury market liquidity will remain viable if Treasury selling picks up
- LIBOR to OIS Spread – Perhaps less important in 2020 than in 2008, and likely less important than repo rates this time as well, this measure still has implications for how much corporate borrowers are benefiting from lower short term borrowing costs
- MBS Spreads – MBS spreads need to move back towards and below 40 bps to ensure that consumers will be able to reap the benefits of lower yields
Source: Strategas
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Sincerely,
Fortem Financial
www.fortemfin.com
(760) 206-8500
