COVID-19: March 18, 2020

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S1: This ad free podcast is part of your slate plus membership.

S2: How low? And welcome to a very special midweek episode of Slate Money Covered. This is a Wednesday short episode just to try and stay on top of all of the crazy.

S3: I’m Felix Salmon of axios. I’m here with Emily Peck of HuffPost. Hello. I’m here with Anna SHYMANSKY of Breakingviews. Hello. We’re gonna talk about fiscal policy. We’re going to talk about monetary policy.

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S4: We’re going to talk about helicopter drops. We’re gonna talk about bailouts, all of that in a single segment. And then back for our regular full length episode on Saturday.

S3: OK. So this is going to be a super fast turn around things so we can actually for the first time everyone sleep money. Talk about, oh my God, what are the markets doing today? And then today means today as of today, which is Wednesday, the stocks are down, the bonds are down, everything is down, which means this is something which we’ve been seeing for the past few sessions and that like we are back to positive correlations between stocks and bonds. Like when when the stocks go down, the bonds also go down. It’s not like that flight to quality that we used to see at the beginning of this crisis when the stocks would go down and the bonds would go up.

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S5: Right. Partly what we’re seeing is that people really want cash, essentially. Right now, people are selling off anything to get cash. And one of the things you often see in a crisis is that it’s not only like the dodgier things that sell off. It’s actually the higher quality things, because if you don’t have to beat a margin call, you’re going to sell whatever you can. That can get a good price. That’s what I’ll often you’ll see, like gold will sell off. But why is gold selling off? In theory, that should be doing well. So that’s obviously one thing you’re seeing.

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S3: So let me let me stop you right there and just ask you. Firstly, when you’re talking about margin calls, is there a bunch of leverage in this market? There are a bunch of like people who, you know, who are sure or who are long and having to make margin calls or whatever it is like. Is that a dynamic? Because I kind of get the impression that really this is just a crazy repricing rather than a sort of technical thing.

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S6: I think it’s a combination of both. I mean, I you’re you’re right. That part of it is also just everybody’s rebalancing anything with even a little bit of risk. Everybody’s fleeing from. So that’s definitely a big part of it. But you also always have the technical side like there is. There’s always a significant amount of leverage. And it’s not the same thing as 2008. Like this is not the same thing as 2008. However, that doesn’t mean you don’t have a lot of people who need to raise cash.

S7: I wouldn’t say. Isn’t the other piece of this because I was having trouble understanding it and then it kind of clicked in. Like you said, everyone needs cash, especially businesses who don’t have money coming in. So they’re going and tapping lines of credit they hadn’t been using before. And then the banks are giving them the cash. Then the banks don’t have the cash. And essentially, like a company like Boeing, for example, is facing a real cash crunch. Like that’s like adding pressure to the system.

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S3: So the banks actually do have the cash. This is the first thing that happened was that the Fed came in and the Fed basically went along to the banks and said, go ahead and lend as much as you can to as many people as you can as cheaply as you can. We’re not going to worry about your capital ratios very much. We’re not going to be regulating like, is this good lending or bad lending? We are just going to make it as easy as possible for you to lend out money. So the you know, obviously, if I’m a bank, if I’m one of bowings banks, I’m going to worry that there’s going to be a default because Boeing might not be able to pay me back. But, you know, assuming Boeing still has a positive valuation, I can still lend to Boeing as a bank. And I’m basically okay on that front. That’s the Fed’s side of things. And, you know, then on top of that, you have the fiscal side of things where Boeing and everyone else is going up to the government and saying, I want to bail out and we can talk about that if we want to.

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S8: Yeah, basically, everyone needs. Everyone needs Carson. Everyone’s trying to get it in different ways.

S3: And that bit of the company’s needing cash does not explain what Anna was talking about, which was the price of gold going down or stock market going down or something like that, because the companies don’t have massive stock portfolio or gold portfolio that they liquidate when they need cash.

S8: It’s just that this is all those people are selling what they own to get the cash because they don’t want to be in any kind of risky anything. They just want money.

S3: I think if you’re a small business owner, perhaps, or more to the point, if you’re someone who just got laid off, then you’re like, I don’t need a bunch of stocks for the long term. I need money for the short term. And so you sell stuff. I’m not sure how much that really explains the selloff, though. One thing I do think that explains what’s going on in the bond market, especially the Treasury bond market, is that when everything was monetary, when it was the Fed coming in and injecting trillions of dollars of new liquidity into the market, that naturally brought interest rates down, the cost of money goes down when the amount of money goes up. And now what we’re seeing is much more expectations of a big fiscal response, like the government actually spending lots of money, like a trillion dollars or more. And if the government spends luvs or an extra trillion dollars, it’s going to have to borrow that trillion dollars. And at some point. The amount of money that the government borrows is there is this sort of constraints of how much people are going to be willing to lend or how much interest they’re going to require in order to lend. And there’s even possibly a tiny little hope that if we inject this much money into the economy directly from the government, it might cause inflation. And so we’re seeing that the 10 year bond go back over like one and a half percent. It was less than half a percent this time last week. And that could possibly be like a tiny little healthy sign that this could be what the economy needed to get some inflation bad.

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S5: I mean, that’s all possible, although I do think a lot of this is not quite that rational and it is just a combination of panic and unwinding positions because you are seeing weird things in the market in terms of like the difference between treasuries and cash.

S6: The difference between one type of treasury and a different type of treasury. And a lot of this was because before we went into this crisis, you had a lot of large funds that were kind of trying to play off that difference between like on the run and author on Treasury.

S9: Oh, my God. You’re reminding me of LTC em. Is that true? It’s true. It’s totally true. Exactly right. Exactly right. Everything that’s old is new again.

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S6: So you’re getting just a lot of factors happening here. And I think also we’ll probably see until we start to see the actual real crisis, the health crisis, until you start to see the U.S. getting a handle on that. I bet every day you’re going to just get these massive swings back and forth because there’s just no sense of a bottom. Everybody’s just repositioning. Whatever happens one day, then you’re going to have people reacting to that significantly the next day. So I don’t know how much reason you can draw from what we’re actually seeing.

S3: What one question I do have is why does the stock market go up a lot? Like we’ve had a couple of days where the stock market has gone up by like 6 percent or 10 percent or some like massive amount, which doesn’t really fit with the idea of everyone’s wanting cash in is panic selling. So what explains the days when we get massive updates can be a combination of a lot of things.

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S10: I mean, it can be repositioning in your like portfolios if if your equity portfolio drop down in value quite significantly. And so then you actually are going to respond and you’re going to purchase more equities. It can be also things like short covering it. You know, it can also be if you have it. I mean, in theory, if I was going to buy it as a stock at 80, why wouldn’t I buy it at 60? You know, in theory, that’s how the market should react.

S3: I just I guess what I’m wondering is like in a normal market, you get all of these dynamics. Some people are wanting to raise cash. Other people are wanting to, you know, short cover or buy when it’s low or whatever. And those people trade with each other and they you have a fish efficient price discovery and you kind of work out what things are worth. And in this market. Like one thing seems to happen one day and then the opposite thing seems to happen the next day and they don’t understand, like what determines like which day is which.

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S6: I mean, that’s a very, very good question. I mean, I would say like anything here, it’s just a combination of multiple things. You have technicals you have and also some actual news like you. There it is possible that when you get certain bits of news, like I do think the market responded somewhat well yesterday, by which I mean Tuesday that the Fed came and said that they were going to go into the commercial paper market because that had been a really big concern that that had been jamming up. And so I do think that there was some actual positive response to that. Now, obviously, the next day we’re seeing, again, a negative response. And so is that because of any other news we heard or is that just because certain positions that people took yesterday then caused them to have to then then caused them or their counterparties or someone else to have to take another position? When you get into these crises, you just tend to get these weird volatility spikes. And it almost always happens in every crisis for a certain period of time. It just up and down, up and down. And there’s not a lot of reason behind it.

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S3: One thing which is certainly true is that there’s just way more known unknowns than there normally are in the market, not and both on the government side and on the epidemiological side. We have no idea how bad this medical crisis is going to get. And we also have no idea, like, you know, what the fiscal response is going to be. We still don’t really know, for instance, whether this idea of just sending everyone a thousand dollars or maybe a few thousand dollars, maybe a three thousand dollars. And these are real amounts of money. Every thousand dollars you send someone is $250 billion dollars. And, you know, even in twenty twenty like 250 billion dollars is a lot of money.

S4: And so these massive fiscal things are so up in the air right now that the market, I think rationally can be just about anywhere. So I think you’re right that what that’s just a massive amount of unknowns and people are doing their best to try and position themselves to something which they just have no idea what it’s going to be. There aren’t a lot of, you know, crystal bulls out there now.

S8: Exactly. I think I think the the stimulus package is going to be really, really important and key to all of this and determining what it looks like. And I don’t know if I’ll regret saying this, but I was sort of heartened yesterday when the nation said they would spend a trillion dollars on a stimulus package, because it seems like the thing to do right now is to throw money at this problem and see what works, like pull out all the stops, like do whatever it takes, send out the checks, beef up unemployment insurance, beef up food stamps, tell people that’s okay if they miss a mortgage payment, tell landlords not to evict people like do all the things like you can’t do too much.

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S6: Now, I think I think you’re totally right because I mean, I think even even, you know, if I’m if I’ll be like the unethical person over here doesn’t care about people, it’s just because markets we’re just not sure about like if right now we have two major issues. We have an issue with the plumbing of the market that we need to make sure remains smooth. And then we have the demand issue. And it’s a little bit easier for the Fed to affect the first problem to like just kind of make sure that things continue to run effectively as much as they can. The second one’s harder and the second one requires a fiscal reaction.

S10: And if you don’t get that, if you don’t have, you all of a sudden have massive layoffs, like that’s the kind of thing that creates something even significantly more than we had in that, you know, the Great Recession. So I agree.

S7: Like both of these are really, really important and it’s starting to get really scary like them. I think marryat this week announced like big layoffs, but I think there’s some confusion about the way they’re structuring them. So it’s not that people are getting fired, it’s that they’re getting furloughed. And then the question is, can they get unemployment insurance? And I think state officials and federal officials need to make sure they can like right away otherwise would be a disaster.

S3: Right. And this is and this is the thing that concerns me is that if you just do a helicopter drop and give everyone a thousand dollars.

S4: That really doesn’t help the married employees who have just been laid off. And it does help me. And I don’t really like I am actually already. Getting more than a thousand dollars just in terms of the spending I’m not doing.

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S9: There’s a home stuck at home.

S3: There’s a bunch of spending that I would normally do. Going out to restaurants, plays and all the rest of it. And I’m not making that spending and travel. And so long as I’m not traveling and not going out to play is not going out to restaurants and not going out to movies like that’s worth more than a thousand dollars to me right there in terms of savings. If you give me a thousand dollars, I’m like, that’s great. That’s what can go over above the thousand dollars I’ve already saved on not going out. So I’m not the best person to give this.

S8: Yeah, I mean the thousand dollars is not.

S3: No, you exacts not so late. I don’t like it on some level. I don’t like the idea of giving everyone $2000. I really do like the idea insofar as we can of trying to target the fiscal response at the people who really need it, the people who are being laid off, the people, you know, where the economic hardship is hardest. The retailers and all of that kind of thing. And it’s logistically much more difficult to do that, but it makes a huge amount of sense to me. While at the same time trying very hard not to bail out the massive corporations, you know, I have no sympathy at all for bailing out airlines, casinos, even the hotel groups like Marriott itself. Like, you know, if you buy equity in those companies, you take a bunch of risk. This is a little tail risk which has turned up the equity. You can go to zero. You will be okay. And we don’t need to support those share prices, which is essentially what a bailout is for those companies like support support their employees, but not the not the parent corporation.

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S11: But yeah, it’s hard, but he’s one of the other way you can. Can you structure it?

S7: I mean, at the end, like I I don’t usually I’m not a fan of companies or corporations at all. But like if you let the airlines if you let Boeing go under, that’s like tens and hundreds of thousands of jobs. So you have to do something to kind of. I can’t believe I’m saying this, but you do have to kind of prop up those companies right now or they’re not seeing any business. And then maybe the thing to do is like force them to agree to certain concessions as as part of your bailout, like like the government did with the auto bailout. Right. They put like fuel economy regulations in place.

S3: Right. So. So but let’s be clear about this, is that when the government did the auto bailout, it did it in the form of a prepackaged bankruptcy. The equity basically went to zero. You’re not bailing out the shareholders. There’s a huge difference between bailing out the companies shareholders on the one hand, and making sure that the company can keep on operating. On the other hand, if a bunch of shareholders lose money and even if a bunch of bondholders lose money, that’s okay, so long as the company itself continues to operate. And I’m not saying that these companies shouldn’t continue to operate. And I’m just saying that you want to be very careful in how you are targeting any kind of bailout cash to ensure that it’s not going to shareholders. It’s not going to bondholders. And it is going ultimately to employees.

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S10: That’s right. I agree with that. And I do think a lot of like, look, you can have some companies like Boing Boing will get bailed out if they I mean, Boeing has a disproportionate economy. They also have all these defense contracts. So Boeing will be taken care of. There’s just no way they won’t. But for a lot of companies that aren’t like the airlines or aren’t maybe hotels or other, basically, I think we’ll need more art. They’ll need bridge loans because it’s not that the companies are themselves like these insolvent enterprises. They’re gonna need money to get through a very rough period of time. And I do think that is a place where the government can step in, because you know what we need right now to do what we can to keep the economy going. I mean, I agree. We don’t want to just kind of help shareholders who bought it too high the price. I mean, that that’s not what the government should be doing. But we what we do want to do is to kind of lower panic keep thing, because what the government what the Fed is trying to do is not trying to do anything about the health panic. They can’t they’re just trying to keep the economy functioning because we’re trying to fight a health crisis. The last thing you need is your economy to be falling apart.

S7: I guess we’ll talk about this more on Saturday, right, guys?

S3: Right. We will come back and revisit this on Saturday.

S9: I do believe there will be more Corona virus to it in our regular episode. I’m just gonna talk about Lebanon and guess we will probably zoom in now.

S2: So come back on Saturday for more Slate Money, a full length regular episode where we might even talk about the rest of the planet as well.