MacroResearchBoard

Necessary, But Not Sufficient – March 30, 2020

We have noted that a number of “necessary, but not sufficient” conditions exist with regards to the financial markets, policy actions and economic trends in several recent reports. The most important example is that monetary and fiscal policies are now reacting aggressively to the COVID-19 pandemic, which will be very important once economic activity restarts. However, these actions will not be sufficient to resolve the crisis. Rather, medical developments and near-run quarantining are the critical elements needed to stabilize conditions.

Our research has tracked the progress of the virus, as it has spread around the globe: from early-responding countries in Asia, to intermediate-responding countries in the euro area, and now the virus has hit the laggards hard, including the U.S. and U.K. (and their critical financial centers). The good news is that it appears there is a way out of the crisis, i.e. the path taken by China and neighboring countries; the bad news is that it costs a lot in terms of economic downside and personal freedoms (not to mention massively distorted monetary and fiscal policies).

As noted in a just-published report, one piece of good news is that aggressive actions by the Fed and other central banks have helped to unplug parts of the credit markets. Investors have now discounted a deep drop in corporate cash flow and profits, and risk asset markets are oversold. However, risk asset bounces are unlikely to blossom into sustained rallies until the fog over the global economy has lifted enough for investors to see the other side of the earnings valley.