Show Transcript
Kim Parlee recaps the biggest news of the day including the latest COVID-19 developments, followed by a conversation with Michael Craig, Head, Asset Allocation, TD Asset Management as the Fed brings out a barrage of policy moves to support credit and the economy.
Print Transcript
Hello, everybody, and welcome to the MoneyTalk COVID-19 Daily Bulletin for Monday, March 23rd. I'm Kim Parlee. In a few moments, we're going to be talking to Michael Craig-- he's Head of Asset Allocation with TD Asset Management-- on the massive move made by the Fed this morning. But before we get there, let's just round up some of the news from today.
Markets are in the red again, despite the emergency measures by the Federal Reserve. The Fed is pledging asset purchases with no limit to support credit and the economy, what some are calling QE unlimited. This is essentially unlimited bond buying. President Trump is sending the National Guard to California, New York, and Washington in an effort to ramp up efforts to deal with COVID-19.
The Canadian Prime Minister has said today that nothing is off the table to enforce social distancing. Air Transat has announced it will temporarily lay off 70% of its workforce, which follows Air Canada's layoff of 5,100 workers. Canadian business groups are urging the federal government to pay wage subsidies to avoid mass layoffs. And Canada is becoming the first country to announce it will not send athletes to the Tokyo Olympics. Japan says postponing the Olympics is now a possibility.
All right. For more on what all this news could mean for the markets and more, I'm joined by Michael Craig-- as I mentioned, Head of Asset Allocation at TD Asset Management. Michael, can we just start with you explaining just what exactly the Fed did announce today?
- So the Fed last week previously announced a $700 billion program. Now they're going with unlimited, QE infinity. And they did add a few more things to it. They have announced that they're willing to buy both corporate bonds in the secondary markets, the ones that issued, as well as buying corporate bonds in the new issue market. They're also offering direct financing to small and medium-sized businesses.
So this is a tremendously large announcement, unprecedented, quite frankly. Markets rallied initially off the news, but are now selling off. But ultimately, this is important to start to unlock the credit markets, and that's really the biggest source of stress right now.
- Could you tell me just a bit more about why we're not seeing more of a positive move from the markets? Because you mentioned, this is big. I don't want to put words in your mouth, but from what I've seen, this is about as big as it gets.
- So certainly in the corporate bond market, you're seeing a much more positive response. I think with the equity markets, it'll take a few days until this washes through. And there's also quite a bit of negative selling pressure going through. And the last bit is that there's still the gridlock in Washington on a fiscal package, and so some equity managers will be looking at that.
My sense is the equity market's not going anywhere until the bond markets start to trade properly again. So I'm much more focused right now on the corporate markets. And once that starts to come unglued, I'll be a bit more sanguine towards equities.
- Let me ask you, what are you expecting from the US government side on the fiscal side? We're seeing news that a stimulus package was coming. Then we're seeing that it's getting blocked. It seems that the same old issues that were in place for the US government before are playing out again.
- Yeah. I think they're a bit at loggerheads right now. The Democrats want to certainly focus this on the individual workers, as well as on health care, whereas the Republicans were looking for a bit of a free pass for corporates. I think it's important to realize that I don't think corporate life is going back to normal when this is all said and done. And the corporates who receive large subsidies are going to have-- their discretion on how they operate will be somewhat curtailed.
I would think they're going to get a deal done in a day or two, but I think the Democrats just want to have a bit more oversee. In theory, right now, the current deal as it's structured, Trump could actually go and finance his hotels, and I think Democrats just want to put a bit of a block to that and have a bit more oversight in how these funds are distributed.
It will get done. I'm quite certain about that. The markets will force them to as they continue to sell off, but now we're going to see who gets to do what and how this is split up.
- When you take a look back, or take a look forward, I should say, in terms of where things are going-- and I know it's a tough thing to talk about right now because things are very fluid-- but we heard from Goldman Sachs. They think that US GDP is going to shrink by 24% next quarter. So when you take a look-- I know you've got a range, obviously, of outcomes of things that can happen-- but give me, if you could, the best-case scenario and the worst-case scenario.
- Well, first off, with the drop in GDP, we basically have shut down large swaths of the economy, and so you would expect-- I'm just looking at something here about restaurant reservations have gone basically to zero. So discretionary spending has come to a grinding halt, and therefore, you would expect to see growth collapse because it's been somewhat of a manufactured stop to economic progress.
So that's not surprising, and the markets have pretty much reflected that. The best-case scenario is that we see this virus peak out in the next call it four to eight weeks, infection starts to roll over, quarantines start to be lifted, the National Guard's sent home, and life come back to normal come the summer, and we don't see a repeat of this in the fall. If that plays out, then as much as you're going to see a 20% drop, or 15% drop, or a 25% Q2 GDP, you're going to see somewhat of the reciprocal of it in Q3, as we have a tremendous amount of pent-up demand. People want to go out again, start living their life, consume, et cetera. That's the optimistic scenario, and ultimately, we'd have a recession, but it wouldn't be the end of the world.
A more bleaker prospect is if we do get to the summer or things get a little better, but then the virus comes back full force in the fall or even mutates to be far more lethal. That would be the bear scenario in that, really, we're going into uncharted waters where it's hard to know exactly what that means. But that, to me is-- if there's one thing that keeps me up at night, it would be multiple waves of this, not unlike what we saw in 1918 with the Spanish flu.
- All right. Michael, thanks so much for your time today, appreciate it.
- Take care, Kim. Take care of yourself.
- You too.
[MUSIC PLAYING]
Markets are in the red again, despite the emergency measures by the Federal Reserve. The Fed is pledging asset purchases with no limit to support credit and the economy, what some are calling QE unlimited. This is essentially unlimited bond buying. President Trump is sending the National Guard to California, New York, and Washington in an effort to ramp up efforts to deal with COVID-19.
The Canadian Prime Minister has said today that nothing is off the table to enforce social distancing. Air Transat has announced it will temporarily lay off 70% of its workforce, which follows Air Canada's layoff of 5,100 workers. Canadian business groups are urging the federal government to pay wage subsidies to avoid mass layoffs. And Canada is becoming the first country to announce it will not send athletes to the Tokyo Olympics. Japan says postponing the Olympics is now a possibility.
All right. For more on what all this news could mean for the markets and more, I'm joined by Michael Craig-- as I mentioned, Head of Asset Allocation at TD Asset Management. Michael, can we just start with you explaining just what exactly the Fed did announce today?
- So the Fed last week previously announced a $700 billion program. Now they're going with unlimited, QE infinity. And they did add a few more things to it. They have announced that they're willing to buy both corporate bonds in the secondary markets, the ones that issued, as well as buying corporate bonds in the new issue market. They're also offering direct financing to small and medium-sized businesses.
So this is a tremendously large announcement, unprecedented, quite frankly. Markets rallied initially off the news, but are now selling off. But ultimately, this is important to start to unlock the credit markets, and that's really the biggest source of stress right now.
- Could you tell me just a bit more about why we're not seeing more of a positive move from the markets? Because you mentioned, this is big. I don't want to put words in your mouth, but from what I've seen, this is about as big as it gets.
- So certainly in the corporate bond market, you're seeing a much more positive response. I think with the equity markets, it'll take a few days until this washes through. And there's also quite a bit of negative selling pressure going through. And the last bit is that there's still the gridlock in Washington on a fiscal package, and so some equity managers will be looking at that.
My sense is the equity market's not going anywhere until the bond markets start to trade properly again. So I'm much more focused right now on the corporate markets. And once that starts to come unglued, I'll be a bit more sanguine towards equities.
- Let me ask you, what are you expecting from the US government side on the fiscal side? We're seeing news that a stimulus package was coming. Then we're seeing that it's getting blocked. It seems that the same old issues that were in place for the US government before are playing out again.
- Yeah. I think they're a bit at loggerheads right now. The Democrats want to certainly focus this on the individual workers, as well as on health care, whereas the Republicans were looking for a bit of a free pass for corporates. I think it's important to realize that I don't think corporate life is going back to normal when this is all said and done. And the corporates who receive large subsidies are going to have-- their discretion on how they operate will be somewhat curtailed.
I would think they're going to get a deal done in a day or two, but I think the Democrats just want to have a bit more oversee. In theory, right now, the current deal as it's structured, Trump could actually go and finance his hotels, and I think Democrats just want to put a bit of a block to that and have a bit more oversight in how these funds are distributed.
It will get done. I'm quite certain about that. The markets will force them to as they continue to sell off, but now we're going to see who gets to do what and how this is split up.
- When you take a look back, or take a look forward, I should say, in terms of where things are going-- and I know it's a tough thing to talk about right now because things are very fluid-- but we heard from Goldman Sachs. They think that US GDP is going to shrink by 24% next quarter. So when you take a look-- I know you've got a range, obviously, of outcomes of things that can happen-- but give me, if you could, the best-case scenario and the worst-case scenario.
- Well, first off, with the drop in GDP, we basically have shut down large swaths of the economy, and so you would expect-- I'm just looking at something here about restaurant reservations have gone basically to zero. So discretionary spending has come to a grinding halt, and therefore, you would expect to see growth collapse because it's been somewhat of a manufactured stop to economic progress.
So that's not surprising, and the markets have pretty much reflected that. The best-case scenario is that we see this virus peak out in the next call it four to eight weeks, infection starts to roll over, quarantines start to be lifted, the National Guard's sent home, and life come back to normal come the summer, and we don't see a repeat of this in the fall. If that plays out, then as much as you're going to see a 20% drop, or 15% drop, or a 25% Q2 GDP, you're going to see somewhat of the reciprocal of it in Q3, as we have a tremendous amount of pent-up demand. People want to go out again, start living their life, consume, et cetera. That's the optimistic scenario, and ultimately, we'd have a recession, but it wouldn't be the end of the world.
A more bleaker prospect is if we do get to the summer or things get a little better, but then the virus comes back full force in the fall or even mutates to be far more lethal. That would be the bear scenario in that, really, we're going into uncharted waters where it's hard to know exactly what that means. But that, to me is-- if there's one thing that keeps me up at night, it would be multiple waves of this, not unlike what we saw in 1918 with the Spanish flu.
- All right. Michael, thanks so much for your time today, appreciate it.
- Take care, Kim. Take care of yourself.
- You too.
[MUSIC PLAYING]
