Where’s The Light At The End Of The Coronavirus Tunnel?

It’s all about visibility now. And there is none.

We keep coming back to the somewhat dismissive statement Treasury Secretary Steve Mnuchin made to Congress just a few days ago, when he said:

“This is going to have an impact on the short term of the economy….It’s very different than the financial crisis because the good news here is that there will be an end in sight.”

And look, in times of economic turmoil it’s the Treasury Secretary’s job to say that everything’s going to be OK, while working diligently in the background to make it so.

Because in a lot of ways right now, Mnuchin’s in charge. At least in terms of holding the economy together while the President and health officials play catch-up on getting people tested and treated.

At a House hearing, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, addressed the lag in Coronavirus testing, saying:

The system is not really geared to what we need right now….That is a failing. Let’s admit it.”

And that’s a big problem. Because the only way we’ll know the Coronavirus threat is subsiding is by seeing evidence new infections are ebbing. But if we don’t have sufficient testing to even know how many people are carrying it in the first place, there’s no way of knowing that.

In other words, the light at the end of the tunnel from a health perspective, will be evidence that each infected person isn’t infecting a bunch more people. But if only a small number of people are being tested, and only those people who appear to be very sick are being tested, numbers are only going to keep going up. And there’s nothing to measure against to determine if new cases have started going down. That’s why so much of the focus right now is on protective measures that might prevent cases from spiking. And that’s why we’re seeing all the school closings, limitations on public gatherings, etc.

We don’t even care at this point whose fault this is. We can hash that out afterwards. We don’t care the White House is putting out the message the President’s not getting tested, because we’re not likely to come in contact with him. We don’t even care that Trump’s campaign staff makes fun of Joe Biden for “hiding” while vowing the Trump campaign is going full steam as usual, even though there are no rallies on the President’s schedule still. (And haven’t been for a couple of weeks, which is rare.) At least that seems to have gotten Biden fired up on social media, an area he’d kind of neglected until now. Also, Biden was out giving a speech Thursday.

But that lack of visibility: no light at the end of the tunnel, is also why we’re seeing seeming never-ending plunges in the stock market. Resulting in the biggest single day percentage loss Thursday since Black Monday in 1987. (Nearly 10%, compared to the 22% dive on Black Monday). And as major a threat to the U.S. economy as we’ve seen in more than a decade.

We believe it’s unfair to say what we kept hearing in various news reports: that the Federal Reserve’s move to give access to $1,500,000,000,000 in funds to the U.S. financial system had very little impact. It’s true that it only temporarily stemmed the tide of market declines during the trading day, but that didn’t mean it was a waste of time, money and effort. In fact, it looks like that unprecedented move may have been completely necessary anyway to hold the banking system together, even if it had no impact on stocks.

Especially with a President blundering his way through a crisis and continually sending mixed messages. And we’re not just talking about his Oval Office address to the American public details of which did not match up with a “Presidential Proclamation” released by the White House at the same time, and is still being deciphered and elucidated. We are talking about a President who during that address urged:

We are all in this together. We must put politics aside, stop the partisanship, and unify together as one nation and one family.”

And then but a few hours later took to Twitter to attack Democrats, including his favorite target: Obama.

What the Fed did was promise to put an unbelievably huge amount of money on the table in order to stop a train wreck. We can’t overemphasize the importance of that action. Even though we keep seeing it written off as failing to inspire the markets. That would’ve been a nice side-effect, but it’s not the point.

The point is if banks are having temporary trouble balancing their books at the end of a tumultuous day, they now have somewhere to turn other than other banks who might be in similar predicaments. Now they can come and do a quick-and-clean deal with the Fed and grab some cash—even a lot of cash—in exchange for some collateral, on a very short-term basis. And then if they need to do it again, they can. The Fed calls these actions “Repo Agreements”, which sound complicated, but are really pretty simple. Even in the Fed’s own definition of it:

[E]conomically similar to a loan collateralized by securities having a value higher than the loan….Repo transactions temporarily increase the quantity of reserve balances in the banking system.”

So that’s both reassuring and alarming:

  • Reassuring because the Fed’s doing all kinds of things to show it’s got the back of the American economy to the extent that it can, while the President and Congress (and Treasury Secretary Mnuchin!) work out a coherent set of emergency measures (and perhaps eventually, emergency measures on top of those emergency measures).
  • Alarming because it presumably means banks are having trouble balancing their books at the end of the day given all this turbulence. Or if it isn’t happening already, the Fed sees a spine-chilling chance of that happening soon.