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Issue #685: Can The Fed Fix This?

Issue #685: Can The Fed Fix This?

Mar 2, 2020
Marty's Ƀent

Issue #685: Can The Fed Fix This?

As I'm sure you freaks are aware, there is a virus scare sweeping the world at the moment. I have been on record the last few weeks admitting that I am supremely confused about COVID-19.

Should we be worried? Is the media overreacting like they have in the past with similar "outbreaks"? Is this our Spanish Flu? Is it silly that we're fretting over this when 250,000-440,000 people die in the US every year from medical malpractice and another ~650,000 die from heart disease?

Your Uncle Marty simply doesn't know. He is but a lowly newsletter peddler who finds solace in the fact that life is unforgiving and when it's your time to go, it's your time. If "my time" comes because of this virus, so be it. It's been trill, freaks.

One thing I can speak to however, is the ripple effects that the virus hysteria is having on the global economy. Fear is spreading and it seems to be affecting growth. Whether it be an overreaction or prudent caution, government officials everywhere are quarantining large swaths of individuals to their homes, companies are beginning to tell their employees to stop traveling (and will probably start making them work from home), and school districts are beginning to stop kids from attending their local indoctrination camps. All to help prevent the spread of the virus.

This isn't good for a global economy on the bike. The continued success of our financial system depends heavily on constant growth. If the world enters an extended collective quarantine growth will grind to a halt. And it seems that the grinding has already started:

The virus seems to be one of those elusive Black Swans that everyone loves to talk about. Coming out of nowhere and throwing a wrench in "The Plan". Since "The Plan" put forth by the people in charge is growth at all costs, it seems that they are looking to the Fed and its cohort of central banks around the world to step in and "fix" this problem with liquidity and lower rates.

Hong Kong has already jumped ahead of the pack by offering helicopter money to its citizens in the wake of mass quarantines and business shut downs. And it seems like every fintwit and their mother is expecting Chairman Powell to cut interest rates by half a percent during the next FOMC meeting on the 18th. Some are even calling for him to make an emergency cut much sooner.

The question that lingers in my mind is, "Can central banking really save economies during Black Swan crises like this?" Can the powers that be fix an extremely complex problem by pulling some monetary levers? Your Uncle Marty is skeptical. Especially considering those who will be affected most by quarantines, a stoppage of supply chains, and kids being forced to stay home are at the bottom of the financial totem pole and they do not possess the financial assets that benefit most from dovish Fed policy. And central banks can only provide helicopter money for so long before hyperinflation becomes a problem.

It feels as if we are entering unchartered territory. Everyone and their mother seems to be certain that the Fed and its cronies are going to step in and "fix" this problem caused by a virus. When public opinion among the elites of media and finance is this aligned your Uncle Marty tends to think he should take the other side of the bet.

In this case, I bet the Fed does in fact attempt to step in and "fix" the problem with aggressive rate cuts and potential handouts, but they prove to be ineffective. This virus hysteria is doing an incredible job of highlighting the fragile nature of our global economy and supply chains. The consolidation of our most critical supply chains to very few areas with the lowest labor costs for short-term balance sheet gains is proving to be a massive systemic risk in the long-term. This tradeoff is making it so the US and other parts of the world will be unable to import basic goods for their citizens in just a few weeks. And there is no fallback since we have decided to move most of our manufacturing outside of our borders.

This is a problem that cannot be solved by the tinkering of interest rates. This is a structural problem that can only be fixed by making our economy more anti-fragile by diversifying supply chains so that everything doesn't grind to a halt because we've centralized the root of our supply chain in a few countries.

The next few weeks should be very interesting.

Final thought...

Great time to remind you freaks to make sure you're getting your push ups in.


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