Morning Notes — Narrative

There are more than two sides to every story, but we’d stay focused on liquidity dynamics. Again, the current recession is the result of a completely exogenous shock with no bad actors to blame and therefore, no moral hazard in the policy response that has been larger and more proactive than any time in history. I don’t want to dismiss the contribution of fiscal stimulus, but the monetary response is unconstrained. The Fed has specifically said there’s no dollar limit and no danger of running out of ammunition. Past recessions almost always involve stretched consumer credit and weakness in the banking sector. That’s not the case today, which means the transmission of monetary stimulus to the economy is far more efficient than it’s ever been. Money supply away from banks has already increased by ~$2.5T and the most intense phase (many announced Fed liquidity facilities are just getting started) is yet to come. The cash needs to go somewhere and as uncertainty recedes, investors will be left with deposit rates at zero, bond yields below 1% and equities where the math can easily work to nominal returns close to 9%.