Here are the realities of our slowing economy

When it comes to investing, there are always lessons to be learned, or relearned. That’s especially true now as we cope with the worst economy we’ve encountered since the Great Depression.

Here are some of the realities I’ve observed over the past three months, since the stock market plunged in March as the world suddenly came to grips with the grim human and economic toll of the coronavirus.

Low interest rates will last forever OK, forever may be too strong a word, but we’re not going to see rates rise any time in the foreseeable future. Governments won’t let it happen. Countries around the world have spent trillions trying to maintain some semblance of financial stability.

In late April, the parliamentary budget officer estimated the federal deficit could soar to an unheard-of $252 billion this year.

More recently, private studies have projected it could be as high as $400 billion.

Multiply that by the many stimulus programs around the world and you’ll immediately understand the devastation on public finances of even marginal interest rate increases. If debt servicing costs were to rise significantly, an era of massive government defaults would follow. That can’t, and won’t, happen.

This means that the golden age for borrowers that began after the financial recession of 2007-2009 will continue for many years to come. Home mortgages will be at historical lows. Automakers will offer zero per cent on their loans in an effort to revitalize the industry. Even credit card companies may be pressured to reduce their rates, although they’ll fight every step of the way.

The flip side will be a nightmare for savers. If you think interest rates on GICs and savings accounts are low now, wait until you see what’s coming. The Royal Bank is currently offering 1.8 per cent on a 10-year guaranteed investment certificate.

That may look like a bargain a year from now.

Investors are incurable optimists After the markets plunged in March, it looked like we were going to be in the hole for a long time. That hasn’t happened, at least not yet. Stocks have strongly rebounded, even though the pandemic is worsening in many parts of the world, including the U.S. Amazingly, in the midst of all this, Nasdaq hit an all-time high.

Anecdotal evidence suggests this surge is being driven by Main Street, not Wall Street. Many of the commentaries I read from financial professionals warn of a long recovery ahead, which central bankers are echoing. Unemployment remains at Depression-era highs. Global growth is projected to be at -6 per cent this year.

But the stock market keeps rising. Why? Apparently because there’s not much choice. The markets or the mattress seems to be the rationale.

I worry that this is going to end badly. Markets recovered briefly after the crash of 1929 but then went into their worst dive in history. We can only hope that history doesn’t repeat.

The U.S. Federal Reserve is printing money at an unprecedented rate and using it to prop up any sector of the financial industry that needs help

Don’t fight the Fed

One of the reasons we may avoid the 1930’s scenario is the aggressive action being taken by the U.S. Federal Reserve Board and, to a lesser extent, the Bank of Canada.

After the financial crisis, it was generally assumed the Fed was out of ammunition and would be virtually helpless if another crisis hit. On the contrary, the Fed has come up with ways to boost the economy in ways no one had even dreamed possible.

Essentially, the Federal Reserve is printing money at an unprecedented rate and using it to prop up any sector of the financial industry that needs help. Quantitative easing was originally confined to the purchase of U.S. Treasuries. It has now been extended to mortgage-backed securities, investment-grade corporate bonds, and state and municipal bonds. The Fed also developed a range of other programs to provide credit to municipalities, employers, consumers and businesses.

I have even seen some speculation that the Fed might extend its quantitative easing program to blue chip stocks, should the need arise. There seems to be no limit.

A few years ago, all this money-printing would have been viewed as a prelude to hyperinflation. But inflation is the last thing on anyone’s mind right now. Keeping the economy afloat is job one. So far, the plan seems to be working.