Negative Interest Rates in the United States, Economic Stimulus, and More
Welcome to the Monthly Economic Update. Today we’re going to discuss negative interest rates in the United States, economic stimulus, and more. It’s a doozy—lots of records broken, and things that we’ve never seen before. Bud Kasper is going to join me today. And while we’re doing our social distancing, we’re going to give you as much information as we can about what we’re seeing what we’re doing, what we’re hearing, and what we think is ahead. Enjoy.
DEAN: Thanks for taking a few minutes to join Bud Kasper and me for this monthly economic update. As everyone knows, we’re on lockdown. And so Bud and I are attempting to do this virtually.
Negative Interest Rates in the United States
“Never in my wildest dreams did I ever think we would see negative interest rates on our treasury bills here in the United States.”
– Dean Barber
Source: Chaikin Analytics
We’re going to give some data here. So Bud, thanks for taking a few minutes to share your thoughts on the economy with me today. Let’s start with the chart above, and what I’ve got up here is the 12 different sectors of the markets and a chart of those on a year-to-date basis. And, you know, if I start adding in energy, is it-
BUD: Technology?
DEAN: Yeah, technology, industrials, materials, real estate, virtually, there has not been a safe haven in any sector in this bear market. And this thing came at us at lightning speed, the fastest decline from 30% ever, even faster than the decline in the Great Depression.
However, just as you and I are doing this recording on March 25, 2020, negative interest rates appeared in the United States for the first time on the One-Month and Three-Month Treasuries. Now, negative interest rates have been a reality around the globe for several years. Never in my wildest dreams did I ever think we would see negative interest rates on our treasury bills here in the United States.
BUD: No, you’re exactly right and the Federal Reserve backed up our thoughts. Last year, when the negative interest rates in Europe were becoming more pronounced, the Fed was saying, “No, we don’t see negative interest rates ever coming to the United States.” And yet, here it is today. And now we have negative interest rates on the One-Month and Three-Month Treasuries.
What Does Negative Interest Rates in the United States Tell Us?
DEAN: So, what does that tell us? Is this telling us that people are willing to get paid less than what they put into these treasuries just for the safety of knowing that they’ve got the full faith and credit of the United States government behind it? They’re so fearful of everything else out there, that they’re willing to accept a small loss on their money, just to know that they’re going to get at least most of it back?
Black Swan Events
BUD: I think that’s why the standard definition is, “I’d rather pay a little bit of money and have it backed by the United States government, rather than being in any other type of a position that is out there.” But by the same token, when we examine what we see with this, remember that this is just another one of what we call a black swan event. A black swan event is something totally unpredictable or unexplainable and happening at the speed of light.
Remember “Superman…faster than a speeding bullet”? Well, that’s exactly how this feels. When the high watermark of the market ended on February 19, 2020, I think it was up somewhere around 4.8% at that time. Put that on top of the approximate 30% gain that we had in the entire year of 2019. Then within 30 days, the fact that we had to give up all that return we experienced is unprecedented.
DEAN: Well, and before the most significant gain that we’ve ever seen since 1933 that occurred on Tuesday, March 24, 2020. It took us back to January of 2017 in terms of gains. In virtually 30 days, this market wiped out all of the market gains. I’m speaking about the Dow Jones Industrial Average for all of 2017 through 2019, and within the first couple of months of 2020, it was all gone in a matter of 30 days.
We’re Staying Vigilant
I think obviously, there were some adjustments and some things that we’ve made in the different portfolios in that we have some more tactical and some more asset allocation driven. Each different type of portfolio we manage, we are giving our attention to; there have been changes made. The important thing here is to understand that we’ve never been in this type of environment before—a situation where we have a virtual shutdown of the global economy. Some people say the impact is going to be pretty sharp, but it will be short. Then we’ll see a rapid recovery. Bud, you were referencing something, as you and I were talking earlier this morning about some quotes from our former Fed Chairman Ben Bernanke.
Economic Impact, What’s Bernanke’s Take?
BUD: Yes, Bernanke came out on Wednesday, and he said that he thought that we’d have a sharp recession, but a quick recovery. I think I can get behind that with the amount of stimulus put in front of this issue. This is like trying to put the genie back in the bottle, though. There are so many adverse effects that have occurred because of this event. People have lost their jobs, and they’ve lost their insurance; it’s tough to reverse those issues. Employers are facing decisions they never wanted to have to deal with before. Who would believe that restaurants around cities have closed, and the only way that they can get any type of revenue is to do curbside delivery of food?
Fight, Flight, or Freeze
DEAN: I think we have a fight, flight, or freeze reaction. That’s what people will do. What I’m seeing is both the flight and freezing, right? Some people are thinking, “I’m not doing anything. I don’t know what’s going to happen. So I’m not going to make any changes. I’m not going to do anything.” Well, maybe that could be right. Perhaps it could be wrong. There’s no crystal ball here.
I think the worst thing a person could do at this point is the flight and just run scared. We have a Congress and a President who are committed to putting the entire power of the United States government. We’ve got the Treasury officials and central banks all providing liquidity into the bond markets. This is something that I think that it’s going to last for a while. I think it’s going to take from a governmental and fiscal perspective, years to unwind the stimulus packages, and what the treasuries are doing.
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Economic Stimulus
The Treasury Department and central banks came in and said, “Gosh, we’ve got to provide liquidity to the bond market, because last week, we saw the most significant panic in the bond market that we’ve seen since 2008.” So what normally would be your safe haven type of investments also got taken down last week, but not nearly to the degree that stocks have. Bonds are things you expect when the markets are doing poorly would do well, but the bond market is acting like we’re going to have massive defaults and massive bankruptcies, and the real estate market is acting the same way on the traded REITs. I think that’s the part that spooked everybody. However, markets tend to overreact. They tend to overreact to the downside and the upside.
BUD: In Trump’s plan, they’re providing $2 trillion, I think a little bit more than that Dean, for them to keep the window open for Fed borrowing. So, there is a backstop to this, which is necessary. Think about this in comparison when back in February of 2008, President George W. Bush signed into law the economic stimulus act. Now that was a black swan event. My point is, we had legislation providing taxpayers rebates from $600 to $1200.
The legislation was to encourage citizens to spend, reduce taxes, and increase loans on homes. The stimulus also provided businesses with financial incentives with available capital for them to borrow inexpensively from the government.
Learning from the Past
“Everybody remembers that Bear Stearns went out of business, a venerable hundred-plus-year-old company at that time. Lehman Brothers, the largest bankruptcy we had in US history as they went out of business. Then $85 billion, was provided as a line of credit to AIG, who was ‘too big to fail.’ Well, I’m telling you that isn’t the case today.”
– Bud Kasper
Dean, you and I remember 2008 vividly. If my memory is right, I think it was somewhere around September of that year, that Congress came up with what was called TARP (Troubled Asset Relief Program). It was a $700 billion package to loan to the banks with interest to be able to recapitalize these banks.They should have been capitalized in the first place but were not because we didn’t regulate them enough. How did that turn out? Did taxpayers just cough up more money the government saw fit to give away to the banking system? No, the reality is all that money was paid back to us US taxpayers with interest.
I think this allows us to see a blueprint from 2008. We can take part of that blueprint into what we have now, even though we have offshoots of this that are quite different. But there is the fundamental rebuilding of the foundation to get solid so we can then expand from here.
Stimulus Hopes and Market Gains
DEAN: Yeah, Bud, you’re right on. Nobody’s got a crystal ball. We don’t know exactly how this whole thing is going to unwind. But what you’re talking about is the very reason why we saw such a surge in the market on Tuesday, March 24, 2020. There were hopes of this new stimulus package passing, and word got around, that it’s closer and closer. There will be relief, but look, we would be remiss if we were to assume that the volatility is behind us. Just because Congress passes a stimulus package, doesn’t mean there isn’t going to be any more volatility. It doesn’t mean there isn’t going to be any more uncertainty.
We’re in the early stages of this, I think there will be more volatility, and there will be more uncertainty. The thing we have to impart out here to our clients and people that are not yet clients is that in our financial planning process, we can identify what I’ll call the “Goldilocks portfolio.” What’s the right thing for you? If you’re having trouble sleeping, if there’s a little bit too much uncertainty, you need to speak with us. You need to let us know what you’re feeling and what you’re thinking. We can make some small adjustments. What we don’t want to do is make wholesale changes and get caught on the wrong side of the super volatile time.
Today is Not 2008
BUD: I agree. Everybody remembers that Bear Stearns went out of business, a venerable hundred-plus-year-old company at that time. Lehman Brothers, the largest bankruptcy we had in US history as they went out of business. Then $85 billion, was provided as a line of credit to AIG, who was “too big to fail.”
DEAN: Right?
BUD: Well, I’m telling you that isn’t the case today. What came out of that time was Dodd-Frank, a congressional act that forced the banks to do what Glass Steagall did back after the Great Recession. Dodd-Frank made banks have a certain amount of capital in them at all times to be a bank. They enforced and regulated it, tested it, and our banking system is more solid today than it’s ever been. So, I don’t have those particular types of issues. And I want people to put that aside because that isn’t where we are at present.
DEAN: Right. We’re keeping an eye on every single thing every single day, staying on top of this. Have some faith in the fact that the Great Recession is a relatively recent memory. There were a lot of lessons learned from that time—a lot of the lessons we learned then have caused some rapid and swift action. We already know that the Fed is stepping in and doing more today than they ever did during the Great Recession.
Hoping for a Short-lived Economic Shutdown
So, I have some comfort of thinking we’re going to get through this, and the shutdown of the economy will be short-lived. Hopefully, with the support of the government and the Fed, we won’t have massive bankruptcies or massive layoffs, and we can come out of this on the other side, looking great. Only time is going to tell. Bud, anything else you’d like to share
BUD: You know, let’s face it, America is at its best when it’s in troubled times because people pull together. Even though we have a very split party system here in the United States presently, it and this economy will mend itself, and we will find ourselves out of this problem and back into prosperity. Perhaps just a couple of months from now.
DEAN: Bud, thanks for taking some time. Ladies. Gentlemen, thank you for taking the time to join us for our Monthly Economic Update. I’m Dean Barber, along with Bud Kasper. Look for another update in about a month.
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