For vastly experienced stock market watcher David Shapiro, the $2trn US Government stimulus package is to be applauded. He has little doubt this was the right call – even though it came on top of the promise of even more support from the Federal Reserve. In times of war, he reasons, you spend first to ensure victory and worry later about how to pay for it. – Alec Hogg
David Shapiro joins us after the market – the Johannesburg Stock Exchange – going gangbusters. It did the same last night in New York and the whole reason for this is that the Americans are going to inject $2trn into the economy. David why?Â
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Alec, they’ve learned in the past that where you get disruptions to markets like this, what you have to ensure is stability and stability is liquidity. In other words you’ve got to put money into the hands of companies, into the hands of individuals, so they feel secure and they can continue their business. This is unprecedented. We must understand that we’ve never been in a situation where the whole world is locked down. In other words nothing’s open for business. So it causes a lot of stress in the minds of – not only individuals – but corporate leaders who need to make sure that their businesses continue when this thing turns. And we know it’s going to turn. This is a virus. This is not a financial meltdown. It will pass. But when it passes, we have to ensure that the global economy gets back on its feet again and continues to prosper. The big fear Alec, is that if they don’t do it, if they don’t take action, what can happen is we can go into a depression. In other words – even when we come out of this virus – the world economy is just going to falter and people lose confidence. So this is all a confidence boosting situation to put money into the system. You’re going to ask, where do they get the money? They actually create it themselves. They print it. It goes against all conventional thinking but fundamentally they just print money and they use that money to buy bonds and other assets – this is the Fed’s action – they buy bonds and assets off the market, so if you’ve got bonds and you need money you know that there’s someone that’s going to buy them for you. The Congress policy is actually basically sending you a check. It’s funding hospitals, it’s funding a whole lot of organisations, but fundamentally going to each taxpayer and saying here’s money. Giving them Monopoly money to go and spend.
Just explain that please David. I don’t think we understand this in South Africa. The government sends you money instead of you sending it to them?
Exactly. Like social grants in a way. It’s almost like a social grant.
Do they send everyone the same amount of money?
I think so, I haven’t seen the details but I would imagine so. If you’re a registered taxpayer – whatever your situation – I don’t know how they’re going to work it out because we haven’t seen full details of the package, but I still think it has to be signed by Trump and it still has to go through a few regulatory processes, but to a large extent it’s going to companies like the airlines, like a lot of travel companies, leisure companies – those that are feeling the stress – and say here’s money. Here’s free money to you. In terms of corporates they probably have to repay it somewhere down the line on very favourable terms, but one of the big elements of the package is actually giving you money.
So the stock market celebrated this, I suppose for obvious reasons that there’s going to be more money in the system and the prices have come down so far, but is it a sustainable rally?
No, that’s the point. Is this just a rally in a bear market – in other words in a stressed market – and what we need to do now is put that money to use. I think the next phase of this is that we have to see hospitals or the health care services, public health services coming out with statements now – and you can’t make these up – they’ve got to be truthful, if we get peak infections we can handle them, we’ve got enough ventilators, we’ve got enough nurses, doctors, we’ve got enough beds and that will start to give comfort that this will be overcome. The next part is getting on top of this virus. I think we’re exhausted where it comes to the news of deaths and cases. That’s out the way, that’s now spilling over, but we have to see that we’re beating this thing and then this will be a genuine recovery. But I’m with you in that respect I’m a bit nervous. I’m very cautious before we can start to call the turnaround. So we’re still in very fragile territory.
436,000 confirmed today and nearly 20,000 people have died, a third of them from Italy, but the point here – relative to this conversation – is that there are now 192 deaths in New York City. So it appears as though the penny has dropped from a humanitarian perspective. there’s no question that Trump understands the economy and that the economy needed this injection in the way he sees the world, but now with 192 deaths in New York City and it’s rising exponentially, is that going to be the next focus? It’s interesting that New York has been concentrated with the cases from the United States, outside of that – as mentioned – New Jersey’s 3,500, California 2,500, Washington State 2,500, much smaller numbers once you get out of New York. This $2trn that’s been injected into the economy David, I’m still trying to get my head around it. The scale of it. Was it like this in the Great Financial Crisis?
Neverand they learned the lesson that they were too conservative and in hindsight that they should have upped the packages, so this time they were not going to be caught out. That’s why Europe has been behind because Europe was very conservative. At the time it was a much different crisis. Remember in 2007, 2008, 2009 the banks had no money and they were under pressure because they were holding onto all this toxic debt and they needed bailing out. Bernanke, Tim Geithner, Paulson whoever, put a lot of money in and almost insisted that banks recapitalise which put America ahead of the rest of the world, particularly Europe. This time there is no bank crisis, but they didn’t want the system to be short of liquidity – money – in other words circulation of money. And that’s why they’ve gone all out and then they’ve even said that if it doesn’t work they’re going to put more in and they will. A lot of these packages have been directed. There was a fight because – typical of Democrats versus Republicans – there were certain sticking points, they didn’t want certain corporations to get the money because they were scared that they were going to buy back their shares and not buy hospital beds. That kind of negotiation, but I think this time there’s a social understanding and I think the businesses realise that the money has to be put to good use.Â
How did it come to a figure of $2trn?Â
No one knows.
Sounded like a good idea.
I think they put numbers there, I’ve still got to go through the whole package and find out what it really does mean and who’s going to benefit from it, but they also had to show markets that they were trying to do whatever they could. This is all directed at the recovery. Yes, some of the money is essential now, but they have to insure that they win the recovery, that the US economy doesn’t falter once things get back to normal. So it’s unprecedented. As I’m talking to you now I see that the S&P is up about nearly 2%, the Dow is up 3% again on top of yesterday, it’s a good sign, we’ve got to beat the virus. They’ve got to beat the psychology around the virus. In other words, you’re getting on top of it and you’re going to win. If they lose that battle then I’m afraid we can sink into a bear market and a proper recession.
