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Trump and the Fed are Weak against COVID-19

March 14, 2020

Sometimes one has to take a literary license to formulate what really happened at the back doors of the White House. I believe Trump was ranting and raving about his stock market going down and everything hinging upon his reelection that required markets to continue climbing. Perhaps the real truth is Trump took a fit and told the Secretary of Treasury, Steven Mnuchin, to give Pelosi whatever she wants. In his own mind, Trump was formulating his own idea with respect to his legacy that he couldn't let the swamp down, even if that meant canceling his rallies due to COVID-19.

 

"We just don't think they are giving enough. We don't think the Democrats are giving enough, "Trump said, despite Capitol Hill Republicans framing the differences as largely technical. "We are negotiating. We thought we had something, but all of a sudden they didn't agree to certain things that they agreed to. So we could have something, but we don't think they are giving enough. They are not doing what's right for the country."

 

Trump is not thinking about the good of the nation. He's only thinking about the stock market and how much it would cost to bail him out. COVID-19 tightened liquidity through the supply channels that primarily manifested through the reduction of consumer confidence and consumer demand. Many insurance corporations and banks have large exposure to the mortgage market. Unfortunately though, most of these are poor quality mortgages. A robust and rising stock market coupled with rising home values increases sublime net worth that arbitrarily seeks excessive yields rather than stability.

 

The least sophisticated borrowers seek to play the markets for better returns rather than paying off their mortgages. America plays a prominent role in the global boom and bust cycles. For example, the railroad boom, canal boom, minteral boom, financial boom, dotcom boom, and the stock market boom all originated in the US. However, the sequence of boom and bust cycles keep getting bigger. Normally the financial carnage is followed by social bailouts of public money. There is a greater integration between housing finance and capital equity markets that is widening and intensifying the systemic risks plaguing global growth.

 

The way the COVID-19 virus is playing out in global economies may give the next boom and bust cycle a personal name; the Trump Boom & Bust Era. The Fed interest rate cut and trillions of dollars of bailout money had to do with consumption in order to keep the economy going. However, no one is talking about the real motive in how the housing appreciation will go against their modus operandum of surviving the virus. Wealth is not causal to consumption. A decline in housing prices is interpreted as a symptom of future slowdowns in consumer spending. Housing as an asset can be used as collateral or to simply play the stock market.

 

Indeed, the Fed cut and its substantial bailout of banks would relax credit constraints on mortgages. However, COVID-19 will substantially decrease the US housing market simply because Americans continue to have fear in purchasing large assets. As the virus slowly permeates through the global economy, a regression of consumption growth becomes the conditional variable that deteriorates the housing market. If consumers feel that they may catch the virus, why should they focus on purchasing a new home? If one is sick, you can not pay your mortgage.

 

If the virus complicates the construction industry and increases lead times for critical building infrastructure, it will send a clear message to consumers that there will be a significant price depreciation in housing. Higher housing prices creates an expectation for capital gains. After all, without capital gains there is no consumption. If more US citizens get sick with COVID-19, then allow them to bargain with their insurance providers or banks to sustain late payments.

 

Trump is the biggest cheerleader of a rising stock market. He wants the Fed to continue to cut the discount rate the Federal Reserve charges banks overnight. Normally when markets lose upwards of $7 trillion, banks are temporarily short of funds and need more time and capital to purchase stocks to replenish their wealth as long as the market rises. With extreme market volatility, institutional herding increases substantially because of the interlink of dispersional shock.

 

Institutional investors tend to sell more actively when markets drop sharply because of Trump's extreme stupidity and volatile behavior. That means the global economy can not play the role of stabilizing the confidence and morale of the American consumer.

 

Even with Trump's asinine bailout and Pelosi's agreement, the virus is not going to make investors optimism to make future consumption plans. It was Trump that labeled the virus a hoax. We were the first ones to tell the World Health Organization to call it a pandemic before it was too late. We wanted valuable resources to go to the people, including the swamp that Trump so dearly loves. The United States needs a national effort fronted by a national leader who is willing to tell the American people that all lives are important, whether rich or poor. Therefore Trump, stop giving the money to the banks, to the markets, and the cruise ship industry. Remember, Italy and the UK decided to include drugs and prostitution as part of their GDP. Let the market rise Trump, let it rise.

 

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