I’m pleased to share this article from the Investment Management Group that manage our Core Investments.  We rely on them for prudent and appropriate investment and this article gives some insight into their view on markets now; the impact that the current efforts will have on your investment and the economy as a whole.

We sincerely wish you all the very best at this difficult time.



Fiscal policy can and will help

This week we are seeing financial markets swinging between gains and losses in almost unprecedented fashion. We have also seen the US and UK governments initiating versions of the clampdown on social interactions that have been a feature of policy in China and in much of continental Europe.

But there has been some constructive news in that on both sides of the Atlantic we are seeing the beginnings of a fiscal policy response which have proposals in them that will help to cushion the economic collapse that we are witnessing in many sectors. Enactment of these policies will in some cases have logistical challenges but the intent is itself a positive and if there is actual delivery then they will have a materially positive impact.

Here in the UK the government is talking about making £350 billion available in a combination of spending and loan guarantees to businesses and individuals suffering dramatic falls in income at the present time. That sum is 15% of UK GDP. The Prime Minister has suggested today that more measures will be taken as needed.

In the United States the Administration and Congress are discussing the expenditure of perhaps $1.2 trillion, about 6% of GDP. That too is a significant sum and again could be increased.

What is happening on both sides of the Atlantic is a willingness by governments to do “whatever it takes” as Chancellor Sunak, consciously echoing Mario Draghi, said yesterday.

They can do that because the last thing on anyone’s mind to worry about is the size of budget deficits. Both gilt yields and US Treasury yields have hit new historic lows in recent weeks. For now this gives governments the opportunity to respond to this crisis aggressively.

Markets are not yet focusing on how these kinds of sums of money may help cushion the collapse in activity but ones suspicion is that they will. If we start to see some of these things being enacted they could begin to give investors a sense that the offsets will assist. From there it is a small step to begin to think about when to start investing for the rebound rather than investing in fear of the drop. For now the focus remains on the latter but we may look back on this week as the time when we could begin to think about the former.

To be more specific, we can expect to see several things from government stimulus programmes. Firstly, there will be elements of replaying the 2008-09 playbook. The largest single stimulus enacted then was the American Recovery and Reinvestment Act of February 2009.

That bill included, among other things, tax rebates, handouts to social security recipients, extension of unemployment benefits and spending on infrastructure projects including in education. All of those things, combined with a bigger focus on health care including the provision of subsidies to health care providers combatting the virus, would make sense in the 2020 stimulus.

Note the timing of that legislation. It came less than a month before the US market bottomed. It had taken a long time to get to it but it helped. We are getting there a lot faster in this cycle.

The 2020 version is also likely to see things that were avoided eleven years ago including giving individuals cash directly. When that happens it will fit the definition of “helicopter money”, often attributed to Ben Bernanke but actually a Milton Friedman notion whereby, as a last resort, newly created money is dropped from helicopters.

There are other things that are being talked about and that would be effective too such as mortgage interest relief whereby banks would be given mortgage interest payments by the central bank and individuals would not have to pay. For corporates the elimination of business rates to assist the High Street along with corporate tax rebates for companies in the most impacted industries. There will be short-term loans extended to businesses to keep them solvent with the risk taken by the Central Bank.

This is not a comprehensive list but gives a flavour of the sorts of things that governments in extreme times can do. Alleviation of the dramatic economic pain being hit by those working in travel, food, leisure, retail and sport would be a positive for those people and would be seen as the “right thing to do” in a situation that mirrors a natural disaster. No-one objects to victims of an earthquake receiving exceptional help and the victims of this economic earthquake should be treated similarly.

There are risks of course. One is that if either the UK or US government does create money out of thin air and give it to people we have entered a world of economic theory that is fascinating for economic historians but is an experiment that has enormous consequences. The traditional interpretation of the contract between citizens and governments is that the government can tax the citizens and spend that money, and a reasonable amount of borrowed money, on things that the citizenry agrees are legitimate ways to spend “tax payers money”. Creating money and giving it to some citizens is at least stretching that contract.

Another obvious problem is that it will be setting a precedent that may be difficult not to repeat. At that point it starts to look like Universal Basic Income, an academic idea that has a wide following among Progressive politicians on both sides of the Atlantic. That begins to question the traditional notion that you receive an income from your labour or from your capital. Some would now be receiving an income merely for being alive. That either of the above might be enacted by a Republican President and a Conservative Prime Minister is a reminder of the upside-down world we appear to be in.

A subject for a future piece is therefore what the medium term impact will be of helicopter money and of some of the other policies under consideration. One suspects they have positive implications for things such as gold and inflation linked bonds.

But right now governments on both sides of the Atlantic need to be seen to be helping us get to the medium term in one piece. The ideas being discussed this week are a positive step in that direction.

So the cavalry is coming. Look up though to see them.

William Dinning

18th March 2020



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