An outcome from the drastic action taken by Fed to prevent a stock market crash.

7 March 2020

Dear Fellow Investor,

Since 10 February 2020, the Dow Jones in only 11 days and other world indexes have lost over   9 trillion USD of wealth from stocks. This is more than the GDP of many countries.  This will be devastating for pension funds, the world economy and Trump’s re election and if this continues it could lead to a world wide recession or worse depression.

One hour before the Friday market close as the Dow dropped over 1000 points, March 6 the Boston Fed President, Eric Rosengren, made a speech in which he said, in light of the Coronavirus and the possibility that the 10-year US government bond yield could fall to 0%, "We should allow the central bank to purchase a broader range of securities or assets.  Such a policy, however, would require a change in the Federal Reserve Act."

The Federal Reserve Act was changed in 1932, 1945, 1965 and 1968 to enable the central bank to create more credit whenever the need arose.  It would not be at all surprising to see it changed again now to allow the Fed "to purchase a broader range of securities or assets" to prevent a stock market crash that would be sure to hurl the United States and the rest of the world into a severe recession or depression.

The stock market rebounded 800 points  off its lows on Friday after his remarks.  His speech may push stock prices higher still on Monday, although that is uncertain given the speed at which the virus is spreading. 

The Fed has been driving the economy by pushing up the stock market and other asset prices since 2008.  If asset prices crash now, the impact on the global economy could be devastating.  It would be naive to believe the Fed will not fight to prevent that from happening.  Rate cuts and even more QE won't be enough.  

Therefore, investors should not be surprised if the Fed takes drastic action to prevent a stock market crash.

As reported by Richard Duncan economics.

As an investor, I always follow price and its relation to volume. The last 7 days of price action show ultra high volume and wide price spreads. This reflects climactic action, extreme fear and panic as many uninformed and fearful traders  sell near the low. 

On the other hand, professionals are buying as price has congested and risks are relatively low. There are 2 likely outcomes: a V shaped recovery or sideways recovery action.  

My bet is recovery.  The US Federal Reserve holds the levers of financial  power and they will do Trump’s bidding to make sure he wins re election.  This will indirectly benefit Asian markets including Hong Kong, Singapore and Malaysia.   

Some of the world’s biggest pharma companies including Gilead Life Sciences-  who invented the vaccine for Hepatitus C and Aids are working full steam ahead for a Covid19 vaccine.  They are in the 3^rd month of human trials in China and may have some positive results in another month. Trump just signed Friday an 8 USD billion aid package to tackle the virus issue.  They are not resting and the US and China governments and private industry are taking positive concerted action.

Invest well and grow your wealth

Bill

Critter of the week is a lucky wildcat.