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Market Thoughts - Q2 2020

Earlier this year, I began the practice of sharing thoughts with my family every quarter or two on how I'm thinking about things on a market and macro perspective. I wanted to share my latest thread this month. All thoughts are my own and I welcome any feedback, disagreements, or additional insights.


Hey everyone,

I wanted to follow up on this thread with a few data points to help you think about where we currently stand in the economic cycle. When I wrote in late February, it was impossible to anticipate the events that would unfold over the next few months, but as it turned out, the coronavirus was merely the straw that broke the camel's back. The coronavirus exploded the small cracks beginning to form into gaping holes that, as of today, have largely been filled with seemingly endless amounts of fiscal and monetary stimulus.This cannot and will not continue forever without long-term consequences and second order effects. In a global pandemic the likes of which haven't been seen in over 100 years, it's hard to believe we've seen the stock market crater by 35% in a matter of weeks only to regain its footing and set new highs, while main street is suffering one of the worst blows in decades. This all underscores one simple lesson - the stock market is not the economy. The markets, in the short term, are driven by liquidity (of which there has been ample amounts as of late), and long-term are driven by real economic growth.

Since the government's lockdown response to the coronavirus began in late March of this year, fiscal and monetary stimulus combined have amounted to an estimated $4-$6 trillion depending on how you count the cost of the CARES act and the Federal Reserve's balance sheet expansion. Per the Brookings Institute (emphasis my own):

"On June 10, however, the Fed said it would stop tapering and would buy at least $80 billion a month in Treasuries and $40 billion in residential and commercial mortgage-backed securities until further notice. Between mid-March and mid-June, the Fed’s portfolio of securities held outright grew from $3.9 trillion to $6.1 trillion."

Translation: the Federal Reserve will do whatever it takes to keep interest rates low, monetize (buy) US debt, and support the residential & commercial real estate markets. As Seth Klarman of The Baupost Group recently said in his latest quarterly letter (emphasis my own):

"By maintaining these seemingly never-ending policies and willfully ignoring developing bubbles, the Fed has engineered a strong market recovery even as the unemployment rate tests Great Depression levels. The Fed balance sheet grows larger and larger, and the annual US bud