November 2020

It’s a paradox that as we wind down this very difficult year in which the pandemic ravaged so much of our day-to-day lives that the capital markets should close out the year on such a quiet note.  The bond market continues to benefit from the Federal Reserve’s open market buying and we have no expectation that the Fed will reduce their purchases anytime soon.  That’s especially the case given the upward pressure investors have put on 10-year Treasury note yields since early December.  The Fed continues to espouse the no inflation rhetoric citing government measures that show inflation continues to run below 2% in aggregate.  But we don’t subscribe to that view given the upwardly biased pricing we see in everyday goods and services.  Their desire to keep monetary policy excessively loose continues to benefit riskier assets as witnessed in equity prices and credit spreads. 

At the time of this writing medical professionals are administering the covid-19 vaccine to the first eligible patients and the expectation is that a third of the population will have received the vaccine by spring.  That would go a long way to returning life back to normal around the world.  But before that happens it appears we are on the precipice of another worsening outbreak.  Holiday vacations are being canceled, while politicians are mandating stay-at-home orders.  It’s hard not to be reminded of the adage ”don’t let a good crisis go to waste” as New York Governor Cuomo and New York City Mayor DeBlasio threaten ever more restrictive behavior to control the spread.  The repercussions have been sad.  The hustle and bustle of the holidays in New York are non-existent.  On a recent Sunday visit to midtown the sidewalks of Fifth Avenue were sparsely populated, an about face from the typical holiday weekend in New York where it is usually so crowded that passage becomes nearly impossible.  To compound that misery, restaurants in the city are now closed to all indoor dining.  The economic effect is once again likely to be terrible for the region.  We expect that fourth quarter Gross Domestic Product, when it’s released next month is likely to suffer another big downdraft versus the second quarter.  There is hope that Congress, after months of haggling, will finally pass a relief bill to support the millions of workers who are again being thrown into unemployment.  However once that aid is flowing it will need to be funded by even more government debt.  That additional debt which will need to be sold to investors that have shown signs of balance sheet indigestion.  To avoid an unwanted spike in yield the Federal Reserve will need to further expand their balance sheet to absorb the additional issuance.

This year has been trying on all of us and especially on those that were not able to survive the virus.  But the hope is that the vaccine is successful in eliminating the virus and the worldwide economy will return to its normal upward trajectory.  Then it will be the Federal Reserve’s mission to return the Central Bank back to a state of normalcy.  How they achieve that is anyone’s guess.

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