• Nate Baim, MBA, CFP®

Will the Fed Save the Day?


Enjoy this week's edition of the Planner's Beta


Beta (n) - climber's jargon that designates information about a climb This digest's purpose is to share observations, ideas, and treasures found this week which you may also find insightful. Sharing does not mean it's an endorsement. I am endorsing the pursuit of knowledge and exploration.



Lessons Learned as an Investor

Sometimes you need to play the game to understand the game. Watch this video to

hear about my first experience as an investor.



Fed says 'full range of tools' in play to counter pandemic (AP) - The Federal Reserve Chairman, Jerome Powell, stated the central bank would use its "full range of tools" to provide stability to the U.S. economy. Furthermore, the Fed expects interest rates to remain low through 2022. In 1977, Congress tasked the Federal Reserve to promote price stability and maximize employment. To reach the goals of this dual mandate, the Fed controls liquidity in the banking system by purchasing and selling debt securities. When the Fed buys securities, they are pumping cash into the economy. When the Fed sells securities, the central bank is taking money out of the system. Currently, the Fed is on a buying a spree, pumping cash into the system. In theory, all this cash in the economy makes money more available, and thus lowers borrowing costs. Lower interest rates, in turn, allows companies to borrow at cheaper rates and have the cash to keep people employed. The statement released from the Fed last week communicated they would use all of its tools to fulfill its mandate. Mr. Powell will testify before Congress this week. Expect the Chairmain to receive a lot of questions from legislators surrounding the efficacy of monetary policy, whether the Fed can contain the recession, and how government spending can get the economy back on track.


What the Fed's coronavirus policy means for mushrooming 'zombie' corporate debt (Yahoo Finance) - Many companies are facing significant revenue constraints, which means they lack the cash to keep their businesses operating. So, many corporations are issuing debt to attain the funds necessary to keep their enterprise afloat. It is estimated approximately $1 trillion in corporate debt was issued last month. However, there are fears, that due to central bank policy, distressed firms which should fail, will not fail. The argument states that poorly managed firms now have easy, low cost, access to funds to remain open. But under normal circumstances, these companies would not be able to attain capital because they are not providing a profitable service. In essence, these companies become zombies - something that is dead but still walking. Such companies can drag down the economy. As an investor, it's essential to understand if your portfolio is exposed to any of these distressed companies.


Five charts that track economic recovery in the U.S. (CNBC) - These five charts illustrate the severity of COVID-19 for restaurants, airlines, and leisure companies. The data shows we may be traveling more since late March. However, restaurants and hotels are significantly under-booked. To my surprise, mortgage applications have recovered. It will be interesting to see how industries change their business models in response to coronavirus.


Quote of the Week

"There is no harm in being sometimes wrong - especially if one is promptly found out." - John Maynard Keynes

 

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