Unfortunately, the last four months have brought quite a bit of turmoil. U.S. unemployment numbers were at a historic, record low of below 4% for 23 consistent months, only to be destroyed by a nationwide stay-at-home order that decimated our workforce. It is estimated that over 36 million people lost their jobs between the end of March and the beginning of June, and our unemployment rate is the worst since the Great Depression.* In fact, the currently horrible economic numbers can only be compared to those experienced during the 1930s.
Although there are some similarities between the ‘30s and the numbers we’ve recently seen, there is one significant difference – and that is the involvement of our Federal Reserve and Congress. During the Great Depression, government entities were very hands-off and let the forces of capitalism play out. Companies failed, many individuals taking too much filed bankruptcy, and families were left to fend for themselves with no governmental support. That is a stark contrast to our current situation. Upon forcing Americans to stay home and causing over 30 million citizens to lose their jobs, the government stepped in and passed a bill that could cost taxpayers up to $8 trillion. Not only that, Congress, led by Nancy Pelosi, is trying to pass another $3 trillion in stimulus “just in case” there is a second coronavirus outbreak. What most people don’t realize is that the Federal Reserve made a historic move during the market downturn in March. For the first time in U.S. history, the Fed started buying corporate bonds. This is an unprecedented step toward trying to stabilize the corporate bond market and hold off a panic-selling situation.
I believe this situation is a continuation of the policy decisions made during the financial crisis of 2008 and 2009. During that crisis, the Federal Reserve and Treasury Department had a choice. They could let our financial and banking systems crumble and fail, possibly crippling the fiat monetary system going back to 1971’s de-linking of the U.S. monetary policy to gold. They made the decision to use taxpayer funds to inject liquidity into the banking system and keep it from failing, and in doing so, pushed off another Great Depression. These taxpayer-funded bailouts are being used all too often now as a crutch, creating a false sense of security in the equity and bond markets. Essentially, Bernie Sanders is right: if we don’t let U.S. companies and banks fail when they are poorly-run and use bankruptcy laws to rid the system of bad actors, what we end up with is corporate welfare for the rich.
Back in March, we encouraged our clients and MCM readers to look at the risk in their portfolios, and we stress a risk management approach be used even more so now into mid-summer. The capital markets are experiencing unprecedented risk and we are in uncharted territory. We don’t know exactly how this is going to turn out, and unfortunately, much of the economic activity is going to be based on this global pandemic and our Governor’s policy decisions. It is said that “with much risk comes great reward,” but I caution investors on taking excessive risk in this environment. Make sure that your portfolio is positioned to take advantage of opportunity without overexposure to possible downside risk. Remember, tough markets don’t last – tough investors do.