5 Reasons Fed efforts are Unlikely to stop market fall

Hey, It’s been 30 years since I majored in economics and 28ish years since I got my MBA/MPPM from Yale so my finance skills may be a bit rusty, but I fail to see how lower interest rates will rescue the plunge in equity prices.

First, let’s look at the theory about why cheap capital might help (over-simplified):

1. businesses will borrow, stimulating investment and production including hiring
2. consumers will refi mortgages and lower their cash needs redirecting disposable income into spending

Now let’s look at the reality

1. Large Businesses: Airlines, hotels, and larger businesses generally don’t benefit from cheaper capital if they don’t believe consumer demand is there.  It’s not.
2. Small businesses are disproportionately hit by the current and predicted downturn. They WILL NOT borrow because
   • banks are unlikely to give them a good rate due to the higher risk profile due to economic instability
   • small business owners are generally forced to sign loans with personal guarantees. When they are optimistic about the future they will sometimes take those loans. In this era of uncertainty, they won’t. They will lay off employees, cut costs and postpone capital expenditures (the big businesses and other small business lose that revenue AND consumer spending drops as layoffs happen)
3. Even if banks drop rates on refi, HELOC and new mortgages (I don’t think they will), they will likely tighten underwriting requirements due to the possibility that the lender loses their job or has a business impacted by the economic contraction.
4. Most larger capital intensive projects, including commercial and residential real estate, as well as factories are built with the idea that there will be a robust market for the resulting project. If that demand is not forecasted then the cheaper capital does not change investment behavior.
5. Lower cost of capital to buy equities assumes that equities are undervalued. Since an equity price is supposed to reflect the NPV of the future EBITDA or free cash flow of the business (generally speaking), a contracting economy suggests equity prices should be lower proportionally. To me that suggests equity prices bottom out at prices 3-4 years back, 2017 perhaps.  That’s a considerable fall from even today’s already reduced market capitalization.

What to do then?  Wait 6-months for the virus curve to flatten out and then invest in infrastructure. Part of that infrastructure would be green energy.  How about a trillion dollars in solar farms, wind deployments and R&D.  I’d include nuclear in the category of green. Many who haven’t looked at the science may disagree due to irrational fear, but the tech for containment vessels is amazing now. And waste levels are far lower and zero carbon footprint. 😉 Fusion research is also a big area of interest to me and if the scientists crack it not only is there cheap electricity but easy hydrogen from electronlysis to power vehicles.  Electricity from fusion can even be used to harvest carbon from the atmosphere.