The Financial Legacy of the Wuhan Virus

March 11, 2020

My Dear Reader,

I believe that much of the effects from this corona virus freak out will be short-lived. I’m strictly talking about the stock market here, for those who have experienced loss of life the effects will never go away. But for the majority of people this will be simply another chapter and the weird book of 21st century plagues, it’ll be filed under the Swine Flu and Ebola chapters. As for it’s lasting effect on the economy, on the surface it should be limited. Stock prices were affected indeed, but because of the U.S job base and strength of our medium size businesses, I believe that the short term effects will be quickly erased by future gains. However, there is one effect that will not be reversed in the near future, and whether it is benign, benevolent, or baneful is not yet clear.

Sovereign man investing recently published an article titled “Negative interest rates in the US are virtually guaranteed now”. And it’s article sparked my interest in this topic, one line that sold out to me was:
“Yesterday the Federal Reserve did the same thing [as they did in 1987]. Stock markets worldwide have been jittery lately due to Corona Virus fears, so the Federal Reserve stepped in and cut interest rates by 0.5%. Honestly there are so many things that are remarkable about this—First, the Fed already has a regularly scheduled meeting coming up in two weeks on March 17th. But apparently they thought the situation was so severe that they held an emergency meeting yesterday and hastily voted to cut interest rates by 0.5%.”
The theory behind the rate cuts has to do with the banks themselves, and the attempts to increase the amount of available capital to larger companies. Especially companies that conduct business in China and its factories.

This is an action typically taken when there is something really wrong in the economy, when a bubble bursts or the natural process of a correction takes hold. In order to mitigate the effects of the banking system responding to a crisis with a clamp down on capital, a rate cut can jump start a stabilization period. But in this case, the effect was quite the opposite. In the same Sovereign man article, writer Simon black also made this observation:
“Ironically, this interest rate cut caused investors to panic even more. After the Fed made its announcement, the Dow Jones Industrial Average plummeted another 800 points. It’s as if the entire market collectively thought, “Holy cow, if the Fed is taking EMERGENCY action, things must be even worse than we thought.” So the rate cut had the opposite effect as intended.”

It’s this kind of financial news that will never make the big headlines on the mainstream media. It’s either going to be anti Trump rhetoric, or a general observation about the virus itself. But sometimes in our lives, and on a macro scale, sometimes we intervene without enough information and make the problem worse. The action of the Fed about a week ago seems to have exacerbated the problem instead of stabilizing it. These are going to be the long term effects that we’re going to see mortgage rates continue to plummet. On the plus side, money will be cheap for a while. However on the investment side, it will all but eliminate the typical safe havens in diversified accounts. When a client has a low risk tolerance, the typical response is to put some money in stocks and bonds, but with the approaching negative interest rate, like they have in Germany, those safe havens may be wiped away by inflation alone. The lasting legacy of the Corona virus could be that it hurt the average American’s wallet health more than their physical health.

To your creation and potential,
Kevin Prendiville