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Cash Still King as US Stays 'Uninvestable'

Cash Still King as US Stays 'Uninvestable'
(Dollar Photo Club)

By Monday, 23 March 2020 02:28 PM Current | Bio | Archive

The U.S. Senate did again (unfortunately) what it did during the 2007-2009 economic crisis when it failed to act quickly. On Sunday, the Senate failed to pass any legislation to deal with the economic impact of the coronavirus.

Yes, the stimulus proposals are massive, though the longer the delay, the bigger they will need to be, which is in fact nothing more than logic.

The areas of disagreement are perhaps inevitable. The length of time expanded, unemployment insurance recede, bans on companies receiving aid from buying back stock, and, most critically, from an economic prospective, the strength of job layoff protection.

If people lose their jobs during the phase-1 demand drop, they will not be ready to participate in the economy at the start of the phase-2 bounce back, which will come, no doubt about that. The only thing nobody knows is “When will it come”.

Such a situation will lengthen the economic downturn of the phase-1 demand drop and that will do considerable economic damage. 

It might be worth to take note that the United States is lagging some way behind Europe in this area and there is a possibility that the U.S. and Europe will have different timing around the bounce back if the situation in the United States is not resolved quickly.

Today, it’s clear again that financial markets are not happy with the delay of the U.S. Senate.

As President Donald Trump apparently is convinced that equity markets are some reflection on the economic success of the Administration, this may increase pressure for a deal to be done in the Senate. However, for procedural reasons, a final vote today seems unlikely.

The main signal of a failure of U.S. policy will be the labor market. St. Louis Fed President James Bullard has given widely publicized remarks predicting 30 percent U.S. unemployment in the second quarter.

That would be higher than the unemployment rate in the 1930s, though the employment rate would still be above the employment rate of the 1930s because of social changes in the composition of the workforce.

St. Louis Fed President Bullard is not known for being an optimist, but in the absence of a proper policy response to protect the peoples’ jobs, this sort of number is not entirely implausible.

In the meantime, markets are braced for very bad initial U.S. jobless claims numbers this coming Thursday, March 26, but please take care, those numbers may not reflect what is actually going on.

For investors it might be good to keep in mind that there may be not enough employees to process the level of initial jobless claims that are coming in, so that the numbers may be underreported.  

Over in the UK last Friday, the government presented a very broad job protection package with 80 percent of furloughed workers’ wages being paid for by the UK government. This was broadly in line with expectations and should do much to mitigate the length of the phase-1 demand drop. There is a question about how to help people that are self-employed but that have not established themselves as, for example, limited companies.

Germany from its side is expected to offer stimulus today with 3.6 percent of German GDP in discretionary spending and over 17 percent of GDP in loan guarantees, direct equity stakes in companies and capital market underwriting.       

Loan guarantees work well for businesses that have not seen demand fall or which are seeing demand being delayed. Loan guarantees do not work so well for businesses where demand is lost and that’s about 25 percent of the Euro Area consumer spending. 

Finally, about the overall equity market I consider it, for now at least, as “un-investable”. 

Yes, cash remains king while, based on what we know today, I don’t expect the U.S. dollar to weaken substantially anytime soon.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
About the overall equity market I consider it, for now at least, as “uninvestable.” 
cash, king, dollar, weaken
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2020-28-23
Monday, 23 March 2020 02:28 PM
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