Some of you may have seen or heard of the recent policy action from central banks around the world in response to the significant economic and market impact caused by the response to control the spread of the virus.
The central bank response is one of the biggest stimulus packages we’ve ever seen and the right response in these trying times. Unfortunately the response came about 2 weeks too late, with central bankers failing to heed warnings and learn from the mistakes made in the past in terms of acting too late. I can’t help but be astonished and just plain angry at their delayed response – ie. a lot of the extreme market events we’ve seen in the last 2 weeks could’ve been lessened or softened if they had acted ahead of time.
The delayed response, whilst now showing signs of assisting markets in functioning more appropriately, will most probably mean they will need to provide even more stimulus at some stage over the next few weeks. The recent response, if levied 2 weeks ago, might have been sufficient.
In addition, governments have been too slow to provide fiscal stimulus. Those that have provided stimulus, ie. the Australian government, have effectively given a Tic Tac to a cancer patient as treatment. Whilst the amount of stimulus required is largely guesswork from here, those more informed are landing at a required amount of approximately 20-30% of GDP (economic growth). To put that in perspective, for the Australian government, that would mean a package of $380 billion to $570 billion of fiscal stimulus, whilst for the US government, it would mean a package of more than US $4 trillion! That number is unlikely at this stage with the most recent reports indicating US $1-1.2 trillion which would involve US $500bn in direct payments to US citizens.
Coming back to the central bank response, a lot of it is quite technical, but the main point of it is to:
Below is slightly longer detail, which I hope is a fairly easy-to-understand summation of the policy response we’ve seen to date:
The Fed (US)
Both central banks and governments now need to stand together and provide support – support to businesses, support to households, and support to investment markets. You can’t have “lock-down” with no support. We expect that support to be forthcoming.
As such, whilst we can’t yet say we’re through the worst of this from an investment market perspective, we do believe those support measures will mean we’re through the most of it.
Parting words as follows:
Don’t touch your face with your hands – the majority of virus transmission to date has been from hand to mouth, hand to nose, and hand to eyes contact. If you’re unwell, stay home, as should normally be the case. And please wash your hands before you handle food.
Author, Chris Lioutas, Director
Insight Investment Consultants
Chris is an independent consultant and is a member of Maxim Private Clients Pty Ltd Investment Committee.
With permission of the author, this article is presented by Maxim Private Clients Pty Ltd AFSL No. 511972
Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972
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