Coronavirus infects financial markets

Recent news about the coronavirus outbreak is tragic, with unimaginable and unmeasurable implications for the many affected. As we attempt to discern incoming economic data, our goal is not to diminish the harsh realities faced by those affected, but to keep in mind that there are economic impacts on investors and to make sense of a market environment that reacts in real time to public health emergencies. What’s happening? Global equity markets sold off sharply today following reports over the weekend that coronavirus infections are spreading outside of China at an alarming rate. The global demand shock will be hard to quantify for some time as the scope of the social and economic impacts in affected countries remains fluid. Governments are trying to balance the need to provide the public with information against the risk of causing panic. We are observing confusion among governments and policymakers, which is spurring risk-off behavior among investors. Yesterday, U.S. Treasury Secretary Steven Mnuchin told reporters that policymakers would explore options to respond to coronavirus. We think elevated levels of two-way volatility will follow today’s initial reaction to the spreading of the virus. Therefore, we caution investors against reacting to these acute price moves. Bigger

February 25, 2020 No Comments

How the Fed impacts your portfolio

Since September of last year, the Federal Reserve has been buying $85 billion in bonds every month, aiming to lower long-term interest rates and boost economic growth. Overall, the U.S. central bank has bought more than $2 trillion of government bonds, private debts, agency housing debts and other bond instruments dating back to the Financial Crisis. It has paid for these purchases by crediting funds to the reserves of private banks, which is commonly referred to as “money printing.” Liquidity trap The Fed began printing money because, in its view, the crisis plunged the country into a “liquidity trap,” a situation in which many people hoard cash due to uncertainty and the lack of good options for a decent return. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s; and the Fed is operating as if the U.S. is in one now. Economists who study liquidity traps, including Fed Chairman Ben Bernanke, argue that some of the usual rules of economics don’t apply as long as the trap lasts. Budget deficits, for example, do not drive up interest rates in a liquidity trap, and printing money does not have the same inflationary

June 11, 2013 No Comments