Bond guru Scott Minerd, the global chief investment officer of $215 billion in assets Guggenheim Partners, believes the Federal Reserve’s efforts to stimulate financial markets may not be enough to blunt the financial impact of the coronavirus outbreak. He believes the Treasury Department should implement a $2 trillion rescue facility, similar to the Troubled Asset Relief Program that bailed out banks over a dozen years ago, to rescue industry from the pandemic.
On Sunday night, the Federal Reserve announced an emergency rate cut that put interest rates at 0% and announced a $700 billion quantitative easing package. In recent days, it’s also opened up its discount window to banks and begun to offer over $500 billion in overnight reverse repurchase liquidity. According to Minerd, these maneuvers are insufficient to avert a growing economic crisis and he is calling for the Fed, with the approval of the Treasury, to invoke emergency programs from the financial crisis era to stabilize the economy.
“Monetary policy is not designed to deal with pandemics. Monetary policy is designed to provide adequate liquidity to the financial markets to keep them functioning, and I think the Fed is doing a pretty good job at this,” Minerd said in a Tuesday note to clients. He believes the Federal Reserve should invoke its Section 13(3) powers and establish asset purchase facilities, which helped financial markets recover from the 2008 credit crunch.
“Section 13(3) can only be invoked with the approval of the Treasury in the first phase. The second phase would allow for the establishment of programs like the Troubled Asset Relief Program (TARP) and the Term Asset-Backed Securities Loan Facility (TALF), only with the passage of legislation in Congress,” says Minerd. “Given the size of our economy relative to where it was 10–15 years ago, it would probably be appropriate for Congress to pass a TARP-style program of $2 trillion.”
Minerd believes that if the U.S. economy is not already in a recession, it will soon enter one. “My expectation is that there is no economic growth in the near term, that we’ve probably already entered a global recession,” Minerd adds. He estimates that the Chinese economy, which was hit with the coronavirus pandemic first, has contracted more than 15%. “I’ve seen numbers as big as negative 40 percent,” notes Minerd, “Europe is probably already in a fairly severe recession at this moment.”
Without emergency action by the Treasury and the Fed, Minerd foresees enormous risk for the U.S. economy, potentially on par, or more severe, than the 2008 crisis. “The risk is that for the first time since the 1930s we are facing the possibility of a downward spiral into something akin to a global depression. We have at least a 10–20 percent chance that that’s the path we are on if policymakers don’t act quickly.”
A TARP style program aimed at getting credit to big businesses and industries, Minerd says, would be more effective than piecemeal industry bailouts like the $50 billion that has been floated. Companies like Boeing have asked Washington for rescues as big as $60 billion and industries from travel to real estate are beginning to call for emergency financing. “The idea that Congress can address one failing industry at a time—like the airlines now with the $50 billion proposed bailout package—is wrongminded,” he said. “As the economy continues to slow, crisis will start to cascade through many industries, and the problems will come faster and faster.”
Though TARP was distasteful and extremely politically unpopular, Minerd sees potential. “TARP was a money-making exercise for the government. We should get away from the idea that we are bailing people out. With TARP, the U.S. government becomes a distressed investor, and also is helping to sustain the economy and the working class,” he notes.
For investors looking to play the current crisis, Minerd recommends holding their portfolios steady, not due to any great buying opportunity but because the market’s plunge has been so swift and severe the time to sell has already passed.
Says Minerd, “At this stage it would be unwise to make a tactical play to reduce risk, then try to figure out where the bottom is, then get back in. For those types of investors, I think at this point you missed your chance to get out. Investors panic too often and try to do too many tactical trades rather than just sticking with their long-term view. The opportunity to sell risk assets has passed.”
This article originally appeared on Forbes.
