MARKET Update: 04/01/2020

This market update was recorded on April 1st, 2020

Automated Video Transcript

Hello, I’m Alan Gillespie, managing partner of investments here at Fintrust Capital Advisors with the market update today is April 1st 2020.

Value of Money

First thing I wanted to kind of speak about today is really just that. What is the value of money at a time like this due to the business drop off. We’ve seen a two-trillion-dollar stimulus package passed last week. The Fed is going to finance this, so the Fed balance sheet is going to basically expand from at least 4.5 billion to about 6.5 trillion and maybe as much as nine-trillion through all the various programs before it’s all said and done. So, if you want to think about that is the number of dollars in existence, from a central bank finance and standpoint, basically is going to double in here. So, theoretically the number of dollars has gone up, so the value of an existing dollar should be less. The reason for that is money velocity obviously has fallen. I mean, if everybody’s at home. They aren’t getting paid they aren’t out spending so money velocity is dropped and so it’s very much a deflationary dynamic currently, but ultimately those number of dollars on the backside when there is a recovery, if they do get velocity, there’s going to be a lot more of them out there.

So there could be some long-term inflationary impacts that obviously people aren’t thinking about today aren’t the main focus today. The dynamics today or obviously very deflationary for everything from real estate and leisure, an restaurants, right? We’re seeing  high impact values, and in those industries. But it is important to remember what are the long-term implications of all these dollars only because in hyperinflation I think people get confused sometimes what those periods may or may not look like, and I hate to use that word. It’s not very common, but that’s driven by both supply and demand. So in those types of environments, you basically frequently see supply chain shortages or the inability to produce a good as part of what causes the price to go spiking. So right now we’re seeing a little bit of that right. There is high demand force, a surgical mask and equipment, but our capacity to produce it right now is constrained, so the immediate effect is price increases until you get the supply coming back online to bring those pricing back down.

So that is one thing to sort of be aware of how market dynamics you might begin to see spiking. Processes and sort of key items of food, right? Obviously, you know the value of food is gone way up, but as capacity to produce it hopefully improves, right? You should see that price come back down and moderate so. Important to watch those dynamics as we go forward over the next couple of years, but certainly something that sort of getting embedded it may be endemicly to the system as people kind of watch this real explosion in the amount of government involved in the system.

But it may not play out persay the way people expect. I mean, that’s something we saw in the 40s were kind of in an effort that’s very similar to World War Two, so if you think about it going into the war you don’t, you’re not really out there producing tanks. But then after the war you don’t need tanks, you need houses for everybody. So you kind of get this lead and lag because of supply chain constraints and so the 40s actually had pretty high inflation for the period, but it didn’t necessarily show up in the bond market.

The Bond Market: looking Back at May 2019

A year ago, or last May rather, the yield curve, you’ll notice how to upward slope here at the first part of all the way out to about six months. So six months from May would have been about November, December. You can see then it went into a longer, sorry bout that, a longer slide for about a three year period and then recovery thereafter. So in essence, if you think about where is the economy going to be, you know, six months from May. A year from May. You know, two years from, and three-years from May. This was how the bond market was priced at the time. So basically, a peak early this year, more extended economic slide in then a recovery thereafter.

The Bond Market Today

On to today you can see as a result and after the stimulus package we now have a very steep slope with really recovery starting almost immediately and kind of moving forward. So we actually view this as a big positive note. Things feel real negative right now, but the bond market is pointing to recovery. The one thing will point out obviously, the right levels are a lot lower than in May, so that tells us something about the strength, but the direction is up, but the strength will be, you know weak, but we are the bond market does seem to be pointing that recession is now priced in an were stimulus package and the things that we’re doing should help the economy begin the process of recovery, though that recovery is likely to be weak.

Credit Spreads: Moody’s Baa Data, 03/20/2020

One of the things in credit, right? Obviously, that’s the government bond curve, but where can companies actually borrow money? This is the last five recessions in the United States, so we basically went to instant recessionary pricing. We finished the month that in BAA credits corporate credits by Moody’s at 389 basis points over a comparable Treasury. So comparable Treasury was basically at 70 basis points so called at 4.6%. We hit a high of 431 uh, so you see, we pretty much jumped right, you know, uh, as businesses shut down, we jump right to an ‘08 sort of scenario. I think if people do get back to work, there’s a chance to see some improvement in this, but obviously very stressed environment. Obviously, an environment very similar to ‘08 in the work stoppages and things. And we do think that will cause some longer term overhangs. And this effect also is somewhat uneven by industry. Obviously, leisure industries being much harder hit, but again very similar to what we see in other recessions and not unprecedented. I would just point out that the March ‘20 level at 389 very similar to the recession of the early 80s. It’s just been obviously along time since we’ve seen recession.

So, I think the Fed stimulus initially we were seeing two effects, both credit effects, but then liquidity is just people backed out of the marketplace, and banks hit these stress levels. The fed is pretty much said, ‘we will help in SBA program.’ I’ll kind of point out loans are going to be priced at 4%, so that would be about 320 basis points above comp treasury. Obviously, SBA’s are smaller, so they tend to be riskier, so not, not unheard of sort of money and pricing.

So we are definitely seeing that sort of recessionary pricing throughout the system. We’re seeing the yield curve having straightened up, and historically, equities will bottom about the same time as corporate credit, right? Because they are tied to the same cash flows. So, looking at the yield curve, we do have reasons to be positive once we get through the bulk of the health situation may be quicker than market participants effect. But we do think there will be some long-term impacts on business models on purchasing behavior.  So pretty dynamic shifts under the hood we think. But from a general standpoint, obviously I think it once we get past the bulk of the health.

The market is saying there is a recovery we’re not going and we’re not making the same mistakes. I mean, you’re hearing a lot of people talk about the depression because of the big jumps. I want to kind of touch on that for a moment.

In the depression, there was a big mistake made. This yield curve here, because they were trying to defend the currency, they actually jacked interest rates up, so it was almost two declines on top of each other. And this time we made it very clear that we’re not going to concern ourselves with the currency, so I wouldn’t expect those same sort of dynamics to play out. Maybe a different set. It maybe not necessarily, but I don’t think it will play out quite like the Depressionary Period because again in the Depression, they actually hiked interest rates to defend the currency, and one of the things we’re saying is we’re going to print the money that is needed to help people out who were under quarantine.

Equity Markets

Again, equity markets were reflecting a lot of what we’re seeing in the bond market. Obviously, the decline in revenues, the pressure on corporate cash flows, corporate credit, obviously impacting in the more debt industries and companies had coming in to the downturn, the tougher, but again, some of the very positive stories we’re seeing. Big data seems to be a winner. One of the more interesting stories we’ve seen. IBM used their Watson system to analyze potential drug candidates to solve for this. Fascinating combination of a big data working quickly to help narrow the range of research fields. We’re seeing 3D printing companies do things with ventilators of development tools to be able to have one ventilator serve multiple patients, right? So, we think 3D printing very interesting outcomes. Doing a lot of heavy lifting. Ultimately, we think some jobs supply chains will shrink, so you’ll see kind of a re-shoring and sort of build out there.

So a lot of good stories, kind of under the hoods, companies working hard. Uhm, people working hard kind of behind the scenes people doing their part to stay at home to keep everybody safe from this again it’s it’s a full-on effort. I do you think it’s very much like war efforts in more times. Hopefully we’ll find a little bit more unity on the backside of this from this common experience, but there are some good things happening. I know it’s hard to keep that in mind when everything looks a little bit crazy, but. Amazing people doing amazing things every single day. See distillers switching over to make hand sanitizers. I really think companies are doing their best to keep things moving. They also want to be able to bring people back, but they want to be able to bring their talent back in a safe way, so it’s a dynamic time. It’s a tough time, but ultimately I think where there’s a will. There’s a way. And we are seeing companies doing amazing things to step up and answer the call, and candidly, we’re seeing our government work better. I mean, the stimulus package, I would just point out as tumultuous as it’s been, went through on a unanimous vote, in at least one of the chambers, I don’t know about the other chamber, but. So obviously people are capable of putting differences aside and getting to the right decisions, so hopefully will come through this thing reasonably well without too many more health impacts going forward. But our thoughts and prayers are certainly with those whose families are directly impacted through this at this time. Thanks bye.

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