The Dividend Cafe - Fiscal Stimulus Bazooka Has Now Gone Nuclear

Episode Date: March 23, 2020

The utter insanity of today's financial markets continued in Sunday evening futures action, Monday morning futures action, and throughout the day Monday. The largest Federal Reserve announcement yet came, and plenty needs to be said about the so-called "fiscal stimulus bazooka." Today's special Dividend Cafe provides as much explanation of these crazy times as we can muster, and offers yet more practical guidance on surviving the bear market we are presently enduring. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. because there are so many things happening at once. Most of them are really profoundly important to how we expect things to shape up, maybe for the next few days, but certainly for the next few weeks and months to come as the table's being set for how we're going to get our way out of this unbelievable disaster of the last several weeks. The stock market futures hit a 5% limit down last night, Sunday, almost immediately, and stayed there into my bedtime as the motion procedurally for Senate to go forward with a stimulus vote failed. And there ended up being some final interventions from the Democrats to block the vote going forward,

even though there had been indication that they had come to a deal between the White House, Treasury Department, and the Republican majority in the Senate. So those things had broken down. And then when I woke up at about 3.15 this morning, the futures were down 500 points. So they had cut their losses in half on optimism that a deal was coming. But again, still no deal and still down in the market. And then about an hour or so before the market opened, the futures went all the way to up 500 or so. On the announcement from the Fed, which is really the biggest news of the day, despite what the stock market did on the day, that the Fed was going, I mean, this bazooka now is a nuclear bomb. And they announced that they were in fact going to put

unlimited quantitative easing under their balance sheet. They would support the treasury market and the mortgage-backed security market at whatever level it took to ensure functioning capital markets. They didn't use this term, but I will tell you that a big part of it will be yield curve control. They will manipulate open market transactions so as to shape the yield curve in the sloped direction they want, which is much more of a reasoning for doing a lot of treasury bond purchases to allow a curvature in the yield curve that is healthy. And then that facilitates greater liquidity in the financial system, greater rationality, and then it allows other credit markets to function more healthily. But then I think the bigger components to the Fed intervention

were their statement that they will now intervene in corporate bond markets up to five years of maturity. So not just six months in commercial paper and money market type transactions, but all the way up to five year maturing dates of corporate bond credits, all the way down to a triple B minus credit rating. So that's not junk bonds, but it's the lowest level of investment grade bonds all the way up. And their ability to come in and be the buyer of last resort on these money good bonds is going to add a lot of equity in the system. Now, there's such an avalanche of selling and limited buying that it can't possibly rejuvenate that marketplace immediately.

So I need to be watching data. And I'm in touch with our bond traders and our bond managers and other sources we have on the street daily to kind of find out when you start seeing this. But that size of transaction is going to bring spreads in dramatically, which is such an important part right now in the financial economy. So at DividendCafe.com, there is a greater kind of layout of some of the specifics that the Fed is committed to. I don't want to leave any of them untouched, but the one line summary is that they're just throwing everything at the whole entire deal. And I think it's a big deal for financial markets, money markets, dollar markets, liquidity, credit, debt.

It isn't a direct impact to stocks, but it will most certainly have an impact to stocks when these other markets are able to kind of realign or normalcy. It's also a big deal in the mortgage market. We've seen mortgage rates go up even as interest rates have come down. A lot of people have been asking us how the heck that could be. And the reason is because the spreads have blown out in the mortgage-backed security market. So you don't have a place to place those mortgages into bonds that are competitive if they're done at non-competitive rates. It's pushed mortgage rates higher. That should really come in in the days, certainly

weeks ahead, we would think. So the Fed announcement was a big deal. But then why did markets still go down? Markets ended up going up about 400 points to the high. They went down almost 1000. They closed down over 500 points. And we still do not have that stimulus bill. I've got a lot more information in the last couple of hours as to what we think is going to happen. You know, we do know some of the things the Democrats are holding out for things like solar tax credit and emission standards and vehicles and things. So everybody can have their own opinions as to whether or not this is the time to be fighting on some of these issues. But my point being that I don't think anyone believes that a deal is going to be held up forever on some of this stuff. And yeah,

if you're not surprised that this is the state of American politics, then you may be a little bit less cynical than I am. But this is sort of what we kind of thought would happen is the last minute jockeying would create added market volatility towards the deal getting done. Now, I want to be careful to predict that once a deal is done, it means the market gets to soar because I do not believe that. I do think that you still right now are primarily seeing a market dealing with total non-fundamental buyers and sellers. You have a rush to sell. People have to sell. Forced selling has clearly not worked its way through the system yet. And the heavy moves back and forth explain a lot of that. But I also think that credit spreads being so wide speak to dislocations, speaks to forced selling,

and people trying to trade around what the Congress may and may not do. Some of the particular details have been unknown. But I do think that the market knows the stimulus bill is coming and the market is still sold off. So I'm a little muted in my optimism. I would not want to be going short into the announcement of what will be the largest stimulus bill in American history. And a lot of it, I think, is going to be highly efficacious in repairing some of the economic distress that we face in the months ahead. distress that we face in the months ahead. But I do think that there's still a very good possibility that markets will remain muted until some of that health data begins to point in the positive direction. Between an improved credit market environment, improved liquidity in the

financial system, the avoidance of a solvency crisis by addressing the depths of our liquidity crisis, which are severe, combined with the stimulus that both addresses big public companies in the sense of support and loan assistance to larger sectors and troubled industries and companies, as well as on the small business front, $350 billion to target small business owners that can keep their people on their payroll. That's the most important thing in the country right now, because the payrolls can be restored quickly, and there could be that financial liquidity gap to help maintain employment that will make the recovery more V-shaped and less U-shaped. So that's a metaphor you're going to hear a lot of from me in the days, weeks, and really months

ahead. How much of what we get inevitably to by way of recovery will be V-shaped instead of U-shaped. And I think things like the small business assistance programs, when levered with the balance sheet of the Fed, will provide more of a V-shape to the recovery instead of a U-shape. However, there's just a lot of other factors out there in the for-selling world that make it hard to say exactly when the equity market finds a bottom. So I don't have a ton of people asking me anymore. We had a lot previously. I've been given an honest answer all the way through. For the last several thousand points, the market was closer to a bottom than to a top, in my opinion, and remains significantly so now. But do I think that the market ends this week 2,000 points higher? I have absolutely no idea. I certainly

think it's possible, and I certainly think it could be lower as well. Okay, that's the reality. Equity holders who do not need to access cash right now have to somehow divorce themselves from the thought of where the bottom is because at this point it doesn't matter. They're riding it out, waiting for the inevitable long-term trajectory of equity market returns. That's the only mental, emotional, and economic way to approach this. In the short term, the risk of trading in and out is severe. And yet, you know, someone could get very lucky doing it. That's not, I mean, obviously that can happen. But the viewpoint we would offer you is that some stimulus bill has to come when these people that have, for God knows what reason, been elected to rule over us in D.C. get it done. the effects of the federal monetarist intervention and to the extent that you get a eventual exhaustion of the technical factors driving stocks down, I think you're going to have some degree of

a breath of relief in both equity markets and across all capital markets. Then we have the fundamental work to do of the economy being repaired from the damage done in the second quarter. And the damage in the second quarter is largely going to be quantified by the length of time that the American people are still shut down in the social isolation. Some more severe, like New York, California. Other places maybe less so. So the health data will continue to have to be monitored and so forth. There's a lot of good news out there. There's bad news out there. But those are the things that capital markets people can't control. We have to react to and interpret as

intelligently as we can. So I'm going to leave it there. I hope the podcast has been helpful. I hope this gives you some information you need about where we are in the short term. My view of things right now and the decisions that me and my investment committee are tasked with are longer term. They're three to six months as to where we want to be properly repositioned, rebalanced, opportunistic, but defensive, prudent. We do want people who need cash in the short period of time to have access to cash apart from the stock market. That's the way we asset allocate in our business. If you're not a client of ours, that should be an important consideration of yours. Allow for the time for this thing to re-breathe and re-heal.

Yet, we certainly do believe that there are longer-term opportunities that we want to play right in the months, quarters ahead. So in the meantime, every day is still the grind that it is. We'll see what the new cycle gives us in the hours and nights ahead, days ahead, all that stuff. Okay. Thank you very much for listening to this special podcast of the Dividend Cafe. Please reach out to us with any questions you may have. God bless you and your family. Stay healthy. Stay safe. Thank you for listening to the Dividend Cafe.

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