Pro Perspectives 3/19/20

March 19, 2020

As you know, we’ve had a massive monetary and fiscal response to this crisis, globally in an attempt to thwart an economic crisis.  That response continues to get bigger, and more global. 

And for the past week, the White House has been executing on a gameplan to moderate, if not contain the healthcare crisis. For markets and society, we’ve had a significant “rate of change” in the situation (from no plan, to a plan with hope).  We’ve gone from “nothing” to “something.”  That’s good news. 

What hasn’t been addressed publicly has been the encouraging treatment options for the virus.  This is likely by design, as they’ve been campaigning to build enough concern among the population, so that they comply with recommendations to “lay low.”  But today, the President, along the FDA Commissioner, finally let the public in on some treatments that have been shown favorable results (anecdotally and in testing) in reducing the impact of the virus and increasing recovery times. 

This is intelligence that has been shared on Twitter for at least the past month, by epidemiologists, virologists and doctors on the front lines. 

Perhaps the most interesting, with lowest barrier to entry, is a drug called Hyroxychloroquine (a malaria and rheumatiod arthritis drug).  And it was the first potential option Trump mentioned today.  It’s an FDA approved drug, but not yet for the treatment of coronavirus.  The FDA is currently looking at the trials. 

On that note, importantly, the bar for FDA approval is significantly lowered for serious rare diseases that have little-to-no treatment options. They look at safety. They look at efficacy (does it work?). By rule, the FDA must give a lot of flexibility on the latter (i.e. if it’s safe, they are inclined to approve it).  And given the long history of the drug, the understand the safety already.  It is considered to be safe, but dosage is critical to the safety, which the FDA is studying now.  Expect this to get approved quickly for use in the U.S. 

It has been used in China, South Korea, Japan and in Europe, with anecdotal success.  And there is research being produced on it, almost daily.  

This is good news for markets.  At this stage, to put a floor in sentiment, we just need to see a viable path to a return to normalcy (regardless of how long).  That takes the worst case scenario off of the table.  These treatment options would offer that. 

In the meantime, the Fed needs to, and continues to, fix broken markets.  They had to step in and backstop money market funds last night (as they did in the financial crisis).  They are continuing to battle to stabilize the Treasury market.  And, in doing so, they had to reopen dollar swap lines with central banks around the world today.

Here’s what that means: The Fed agreed to give foreign central banks U.S. dollars at a determined exchange rate for the currency of the respective foreign counterpart. And when the swap ends, the two central banks simply repay the same quantity of currency back. There’s no exchange rate risk and no impact on the demand for currency in the open market. 

This dollar liquidity solution was a very key step in repairing stress in the global financial system back in the GFC.  When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world’s primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad. 

By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And removed the fear associated with having limited access to U.S. dollars. This should be a big step, for the Fed, in resolving the issue of rising market interest rates (namely the U.S. 10 year yield).

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