Following our interim email update last month the Federal Reserve charged headlong into the financial system very fast and very big. While we predicted a quick rate reduction, the Fed instantly dropped its target rates to zero and additionally announced massive liquidity facilities to flood the banking system with cash. At the same time, we made the prediction that given entrenched partisanship, it would take Congress many months to respond with the necessary fiscal stimulus. But lo, within two weeks, Congress unanimously passed not one, but two stimulus packages totaling over TWO Trillion dollars for small business, corporations, and remarkably, also for American workers and consumers. The Fed again then followed that up with additional massive funding facilities for the U.S. Treasury, the corporate bond markets and even more recently for small business and state and local governments, all while Congress continues to press forward with additional rounds of fiscal stimulus. The amount of money authorized to be printed and pumped into the economy is relatively irrelevant because the Fed and the Treasury acting in concert will provide all the funding the affected areas of the economy can possibly absorb, and they will continue to do so until the epidemic wanes and the paralyzed sectors begin to revive.

There has been no talk of rescue funds for the stock market which suffered its steepest decline in history, but, there never really is a need for such as the stock market is always the eventual center of gravity of funds when the financial markets are healthy. And the stock market rebounded accordingly upon the mere announcement of the economic rescue measures. Overall, the broad market as of now, has erased one to two years of gains but is still recovering. Amazon and Microsoft have returned to their levels of early February. Far be it from the stock market to resist massive liquidity entering the economy. It is still too early to tell whether the speed and ferocity of the rescue funds entering the economy are sufficient to mitigate the speed and ferocity with which the economy grinds to a halt.

The reviving stock market at this point signals that the rescue funds will more than help, but the current extreme volatility of the market is itself an indicator that the longer term outlook is clearly uncertain. Given some of the predictable extreme prognostications from the punditry of another Great Depression, it is safe to say that the economy and the financial system entering this epidemic were much healthier, and the vast monetary and fiscal measures being enacted are the precise opposite of those that lead to the depth and duration of the Depression. The Depression was a collapse of the leveraged banking system and money supply. The current problem is simply a workforce that is not fully enabled to work. More money cannot help this, but it will help very quickly, when the workforce is freed to fully return.

Today’s uncertainty focuses on the prospective duration of damage that the epidemic will cause. This picture too will become more clear in coming weeks. To their credit, the Fed and the Treasury moved fast and big knowing that they can mop up any excesses funds or any inflationary pressures of their actions after the economy begins to return to health. The lessons of the ’08 – ’09 sub-prime mortgage financial meltdown are apparently not unheeded and are literally being put into practice in bipartisan fashion very quickly. Inflation is not likely to become an issue for some time. For now, the consumer price indices are declining as unemployment soars.

We remain cautious and vigilant. We continue to maintain significant cash balances in most accounts. However, we recently invested some cash in a diversified mutual fund after the market collapse and as it began to recover. We do not anticipate making other targeted or strategic portfolio changes until the economic outlook becomes much more clear. Please also remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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