March 27, 2020 | Beware Bullish Bounce Back Enthusiasts

Today as the Bank of Canada follows other G7 nations in slashing its policy rate to the .25% low of the 2008 financial crisis, it also expanded its bond-buying programs to include the recently frozen commercial paper market.  Borrowing costs for corporations at record indebtedness have spiked just as revenues are vaporizing–this is not a good combo.  See the Bank of Canada press release here.

For those who were encouraged by yesterday’s bounce in markets and thinking that bottoms are in and a V recovery is in the works, you might also wish to plan for other possibilities.  The financial challenges at hand are structural/secular and go far beyond containing a virus.  See Nouriel Roubini’s latest Project Syndicate article, here’s a snippet:

While most self-serving commentators have been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the COVID-19 crisis is something else entirely. The contraction that is now underway is looking to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.

…Unfortunately for the best-case scenario, the public-health response in advanced economies has fallen far short of what is needed to contain the pandemic, and the fiscal-policy package currently being debated is neither large nor rapid enough to create the conditions for a timely recovery.

Danielle Park March 27th, 2020

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