Do Not Say You Didn‘t See This Coming

At the beginning of the year, pretty much everyone was caught off guard when a global pandemic of unprecedented proportions in our lifetimes hit the world.  People were frightened.  Office, stores and restaurants were shuttered, markets tumbled and everyone was a bit out of sorts by the changes we were all forced to incorporate into our lives.  We didn’t see it coming.


Luckily for nearly everyone, the challenge was met head on by governments around the world.  Monetary policy opened the taps in a way that made the quantitative easing associated with the Global Financial Crisis look like child’s play.  Governments of all political stripes and at varying levels of jurisdiction stepped up with unprecedented fiscal stimulus (spending) that kept businesses and families afloat while the first wave of the pandemic passed and subsequently eased up.


Despite an extremely broad consensus that easy money begets income inequality – and ultimately social unrest as a result of that inequality – central banks were hailed as heroes.  Markets reflated at a remarkable pace.  Never before in all of capital market record keeping had such a precipitous drop been followed by such a strong offsetting gain.  If anyone were to pull a Rip Van Winkle and look at the investment statements from yearend and then sleep through the next nine months, only to look at their Q3 statements, they could easily conclude that nothing much had happened.


In fact, what had happened was a massive drop caused by an exogenous force followed by a massive gain caused by heroic stimulus.  The mantra of “don’t fight the fed” was repeated over and over.   Those people (myself included) who persisted in “keeping their powder dry” by staying out of markets that were so obviously expensive were made to look foolish for doing so.  The thing about not fighting the fed is that it only works if the fed has ammunition.  This just in: there’s not much ammunition left.


In the September Throne Speech, the federal government made it clear that a second wave of Coronavirus was upon us.  Along with the new wave of infections, there would almost certainly be a new wave of shutdowns.  Solemn promises were made that much of the pre-existing fiscal stimulus would be extended into the New Year.  Alas, however, there was no room left to move on the monetary side.


Everyone knows this is going to get worse before it gets better.  I have a friend in the business at another firm and he was kind enough to send me his newsletter.  We compare notes and share ideas from time to time.  His newsletter was headlined with a tantalizing rhetorical question: “How many waves does it take to sink the economy?”  No one knows.  My guess: two.

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