Lyrically Speaking: For What It’s Worth

There’s something happening here.
What it is ain’t exactly clear.

“For What It’s Worth (Stop, Hey What’s That Sound)” was written by Stephen Stills. Performed originally by Buffalo Springfield in 1966, reworked by Billy Porter in 2020

An ongoing pandemic, purposeful social unrest, numerous hurricanes and tropical storms, epic forest fires, giant windstorms, massive unemployment and global economic uncertainty – 2020 has already been a year filled with more difficulty, disappointment, and despair than any other in recent memory.  And we still have 4 more months and a very contentious Presidential election ahead of us. 

At the end of last year, if you took “A Random Walk Down Wall Street” or ran a Monte Carlo simulation identifying all the possible scenarios for 2020, would it have predicted the outcomes we’ve seen thus far: an ongoing pandemic and global economic uncertainty and the equity markets at all-time highs? Probably not. So, if anybody says they have a crystal ball or some certainty around macro outcomes for the future, that just isn’t realistic.

The key to managing in uncertain times with uncertain outcomes is staying nimble and focusing on the things where we have the highest degree of conviction:

1. The Fed stands at the ready with liquidity

Federal Reserve Chairman Jerome Powell has said he will ensure there’s ample liquidity in the system to stabilize the economy. That is a very powerful message, which many investors continue to miss and, instead, get distracted by the minute-to-minute moves in markets. The Fed is going to be there with lower overnight rates. It has a lot of other tools in its toolbelt – even for longer term borrowing rates, which we’ve seen before. We can take a lot of comfort in that. In short, “Don’t fight the Fed.“

2. What the Fed learned from the financial crisis

In the last decade, we’ve witnessed a great re-envisioning of the role of the Fed. Former Fed Chairs Ben Bernanke and Janet Yellen showed us all we need to know about “creativity” at the Fed.

Prior to 2008, the Fed was unwilling to take preventative steps to stave off the global financial crisis. In hindsight, there were a lot of things the Fed could have done that likely would have made the impact a lot less devastating, particularly at the end of 2008.

They’ve learned from that, which is why the Fed has been very quick to pull the trigger now. We saw that in March, when the Fed stepped in to make sure the markets were liquid. Although there has been a lot of criticism about the Fed bailing out the banks at that time, the reality is banks are critical suppliers of liquidity to the market. If market liquidity freezes, then all bets are off – and that’s what we learned in 2008.

3. Companies are strengthening their balance sheets for whatever lies ahead

Another important move we’ve seen, especially in the past several months, is that a lot of companies are taking this opportunity to refinance themselves or to put more equity underneath them. They’re better prepared for whatever uncertainties lie ahead – and whatever the outcome is going to be, both politically and with the coronavirus. At Cowen, we’ve been very active as strategic advisors to our clients, helping them weigh the alternatives and select the best ways to access capital.

4. SPACs: the overnight sensation that’s 25 years in the making

As companies seek to increase their access to the public markets, special purpose acquisition company (SPAC) transactions, which have been around since the mid-1990s, have emerged as a viable and meaningful way for private companies to go public. SPACs now account for one-fourth of the entire U.S. IPO market. There have been more SPAC and biotech IPOs in this year than maybe in any other year – and Cowen has been active in both, even before this crisis. I certainly don’t see this changing, regardless of the political climate. At the end of the day, companies need to ensure they are resilient and sustainable – and the best way to do that is to get access to capital.

5. Consumers are squirreling away money

The savings rate among consumers is increasing. Consciously or unconsciously, consumers are stockpiling cash and improving their own “balance sheets” – just as companies are doing. I view this as very positive because, at the end of the day and however this plays out, people need to be able to provide for themselves and their families and continue to live their lives.

6. More stimulus is needed – no matter who occupies the White House

The economy has been more resilient than most people expected, largely because of government payments to individuals, which have kept consumer spending buoyant. Although the economy has been down significantly, it’s nowhere near as bad as people thought it could be.

That said, we are nearing a “fiscal cliff” as the Congress may not be able to agree on the next stimulus plan before the election. But rest assured, more stimulus will come because it is needed – regardless of who is in the White House or the political makeup of the Congress. Where that stimulus goes may be different depending on who is in control, but it will come in the form of infrastructure spending to rebuild the U.S. industrial base or to focus on sustainability/climate change or both!

7. Higher taxes are inevitable

With more stimulus needed, there will likely be some reckoning at some point around higher taxes. Otherwise, how are we going to pay for all this? It is not a matter of if, but a matter of when, regardless of the political landscape.

8. US-China relations have been permanently altered

Regardless of who is in the White House and who is running Congress, US vs. China is a central global macroeconomic theme for the foreseeable future. With telecom infrastructure and cybersecurity on the minds of public officials, it is hard to see that changing radically any time soon. As such, we can expect incentives for American companies to bring critical jobs and supply chains back to America or, at a minimum, to places that pledge alliances to American foreign policy. Make no mistake, this is The New Cold War and it will dominate the global economic narrative for at least the next decade.

I am definitely putting myself out there by writing my thoughts in between the Democratic convention and the Republican convention.  Let’s see how many of these 8 still hold up after next week.

For what it’s worth…