There is a certain paradox behind the coronavirus crisis.
On one hand it is a human, social and economic tragedy of unprecedented proportions, with tens of thousands of people dead around the globe, millions infected, tens of millions unemployed, small and medium businesses decimated, countless companies on the verge of bankruptcy and the global economy in a (hopefully brief) depression. On the other hand, it is precisely what all those who benefited from the last round of Fed bailouts - namely Wall Street banks, zombie companies, and overlevered sovereigns so desperately needed. But don't take our word for it: here is Morgan Stanley's chief US equity strategist explaining and admitting what so many can only whisper behind closed doors for fear of being branded conspiracy theorists or being suspended from social networks who are now the self-appointed gatekeepers of the First Amendment.
Last Thursday the Fed surprised us yet again by providing up to $2.3T in loan support while moving further down the quality curve with their secondary market purchases pushing into high yield and CMBS. The program goes well beyond secondary market purchases of existing credit and will also help originate new primary issuance both directly and via lending institutions--i.e., the banks--which remain in good shape to assist. While most investors have been expecting more out of the Fed, based on our conversations with many clients on Thursday and over the long weekend, this salvo from the Fed far surpassed expectations in terms of size and scope.
The bottom line for us is that this latest move is very much in line with our prior view that investors should not have any doubts about the Fed's resolve to do whatever it takes to make sure this recession doesn't turn into a depression. In fact, they now appear to be trying to limit the healthy damage we typically get from a garden variety recession.
As noted in our prior research, we think the nature of this recession--the unprecedented suddenness and trajectory of the contraction centered on a health crisis--has provided absolute cover for policy makers to go well beyond traditional support. As such, the bad actors of the last cycle are getting bailed out, which could ultimately limit the malaise we typically get in a recession. In short, the worst stocks will likely have the biggest recoveries...
A much more self-serving and less intellectually honest, if similarly apropos take on what is really taking place behind the scenes comes from JPMorgan's permabullish quant, Marko Kolanovic:
When it comes to market developments, we believe that the Fed's action last Thursday represents a pivotal moment in this crisis. Powell's statement included that "we will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery" and probably the most important, historic statement, "We should make them whole. They did not cause this." This crisis is different from any other in recent history in that it was not caused in any way by businesses or investors. Unhindered by moral hazard, the response of fiscal and monetary authorities is and will continue to be unprecedented, with the goal of essentially making everyone 'whole.' We believe the significance of this development is underestimated by markets, and this reinforces our view of a full asset price recovery, and equity markets reaching all-time highs next year, likely by H1.
Investors with focus on negative upcoming earnings and economic developments are effectively 'fighting the Fed,' which was historically a losing proposition
Got that? Anyone who bothers with such trivial, anachronistic fundamentals as collapsing earnings, economic developments, the terminal disconnect between security prices and underlying cash flow dynamics now that the Fed is buying junk bonds (and soon stocks), or even bothers to look at the yield curve as if it matters anymore now that the Fed is about to unleash Yield Curve COntrol, is fighting the Fed and destined lose. Thanks Marko for not saying that anyone who still dares to think outside of the brrrrox should be arrested.
So to loosely paraphrase Rahm Emanuel, "Never let a pandemic go to waste." For the sake of humanity, we can only hope that it wasn't a plandemic.
That said, one does wonder what crisis will spontaneously emerge in 5 years when all the bad actors who were bailed out last cycle, and were just re-bailed out again, will need to be bailed out one more time?