As America Slowly Reopens, Uncertainty and Hope

There is some level of reopening in all 50 states this week. Monday’s hopeful news about a potential vaccine rallied stock and debt markets. The rally may have been an overreaction, time will tell. But, both news items illuminate the situation. Various phases of restarting business is under way, with new guidelines that hopefully will prevent a second wave of infections. We are entering another “new normal” of “cautious commerce” until a medical solution is reached. Economists, politicians, policy makers, business leaders and all of society are grappling with the obvious questions about the speed and shape of the recovery. These issues were very starkly raised in yesterday’s fascinating appearance before the Senate of Fed Chair Powell and Treasury Secretary Mnuchin. First off, the CMBS market was mentioned multiple times. Senators asked about “empty malls” and the securitized loans that back them. Powell was asked by Senator Tim Scott, “Why aren’t you doing more for CMBS?” Senator Ben Sasse asked if the Fed was taking “Too much risk in CMBS?” Powell said he is supporting and monitoring CMBS, which is an “important market” but “not every problem can be addressed”. The Fed is only buying AAA bonds and he doesn’t anticipate any haircuts. After the highly watched 60 Minutes appearance, Powell continued to challenge Congress. He reiterated the tough road for the economy ahead and a potential slowing recovery.  Powell called on Congress for further stimulus and reiterated the limits of the Feds power. It comes down (again) to monetary policy and fiscal policy. With the major shock to the economy over the past few months, many businesses (small and large) and governmental entities (states and cities) are reeling. If the Great Recession was basically a massive credit crisis, today’s issue is a solvency crisis. Powell reiterated that the credit markets are flush with liquidity and there is money to lend. But, many potential borrowers are not creditworthy and/or insolvent. Powell has clearly stated many times that the Fed cannot “make grants”. That puts the pressure back on Congress to provide fiscal aid in order to help with solvency. These policies are controversial as the terms “bailout” and “moral hazard” are likely to come up. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners