Corona 3 Implementation Starts

Update 427: Corona 3 Implementation Starts
Money Out When? Stimulating a Dead Horse?

The incredible shrinking and increasingly virtual U.S. economy is being transformed by the coronavirus into something we have never seen before and increasingly hard to spot. Ten million jobs have vanished in under two weeks and the famous flattening of the curve is still hard to see. 

As we enter an even crueler month, hope is reposed in Corona III, the massive relief measure designed as a policy ventilator for those in critical economic condition. Will it work? How fast? These are the questions of the hour, addressed below with a quarter-end market wrap. 




Last week, 3.3 million Americans filed initial jobless claims, quadrupling the previous record. On Thursday, that record was shattered again with 6.6 million new claims reported. The $2.2 trillion in the CARES Act signed last Friday has been authorized, but the economy won’t absorb the funds immediately. How quickly individuals and businesses can receive and make use of the funds depends on program design and the efficiency of relief delivery.

Below, we analyze the timing and delivery of the CARES Act programs and the potential absorption rate of the recipients. We also review the performance of key sectors in the market as a brutal Q1 comes to a close.

Individual Assistance and Automaticity

The CARES Act provides economic assistance through expanded unemployment insurance and direct cash payments, two programs that were also in the 2008 stimulus playbook. But the unique nature of our current economic shock is testing these policies.

  • Unemployment Insurance (UI): UI automatically stabilizes the economy during downturns, putting cash in the hands of people who need it most. The CARES Act expanded UI by providing individuals an additional $600 per week for the next four months, making regular UI benefits available for an additional 13 weeks, and opening the program to those who are not normally eligible (gig workers and the self-employed).

    Ten million new claimants are stressing states’ UI systems beyond capacity, delaying the absorption of these funds into the economy. In the past two weeks, Connecticut received the number of claims it normally processes within the entire year, creating a five-week backlog. The system is not designed to operate at this level.
  • Direct Cash Payments: Yesterday, Secretary Mnuchin said the $1,200 cash payments would reach most recipients within two weeks. The 60 million Americans who already have bank data on file with the IRS from 2018 and 2019 tax returns will receive the first disbursements. But many of the neediest Americans, including the 14.1 million who are unbanked, lacking this automaticity, might have to wait until September to receive a check in the mail.

    The 2008 tax rebates provide the most recent data for how Americans might ultimately use the $250 billion in direct payments. Per the Bureau of Labor Statistics, the primary uses of the 2008 rebates were: paying off debt (49 percent), spending (30 percent), and savings (18 percent). With economic activity at a mandated standstill in much of the country, the current payments will likely have lesser stimulative effects through spending than in 2008.

Small Business and Red Tape

Starting today, small business owners can apply for a largely-forgivable loan from the Small Business Administration’s (SBA) new Paycheck Protection Program (PPP). The PPP is designed to get money to small businesses quickly, enabling employers to pay overhead while keeping employees on payrolls. But concerns remain about how long it will take for business owners to receive PPP funds.

First, there is the question of administrative capacity for scaling a program of this size. In 2019, the SBA loaned roughly $23 billion to small businesses through its flagship 7(a) program. That is 6.5 percent of the loan volume that the PPP seeks to disburse over the next few weeks. 

While the PPP circumvents much of the SBA’s bureaucracy, banks responsible for processing applications and disbursing funds do not have guidance on how to verify borrower information. On Tuesday, the Treasury announced that banks will bear responsibility for fraud and misuse. Lenders are balking at this prospect. Yesterday, JP Morgan Chase stated that it will “most likely not be able to” participate in the program.

Additional verification steps will create a lag of weeks, or even months, between applying for loans and receiving them — too late for many small businesses.

Corporate Assistance: Stimulus vs. Bailouts

Large corporations are well-positioned to receive funds expediently from the CARES Act’s $454 billion general lending fund. The Federal Reserve will deliver the assistance through lending facilities backstopped by the Treasury. 

The Fed can leverage the $454 billion 10:1, so over $4 trillion worth of liquidity (roughly 20 percent of GDP) may be injected into the economy. With little guidance on how or to whom the funds will be dispersed, the Treasury will push these loans out as fast as possible, benefiting businesses that used similar facilities in the 2008 financial crisis and have experience accessing the Fed’s resources. Funds may go out quickly, but nothing ensures that they are absorbed efficiently or reach the areas of the economy where they will be most effective.

The aviation industry will receive $58 billion in cash grants and loans. Instead of navigating a complex loan application process, the companies negotiate directly with Wall Street firms partnering with the Treasury. Will bailing out the aviation industry stimulate the economy today, as the industry lacks demand for the foreseeable future? This bailout may have been informed more by politics than sound fiscal policy.

Meanwhile in the Markets

Perhaps because the crisis does not stem from problems in the financial sector as it did in 2008 or perhaps because falling prices offer tantalizing buying opportunities, the capital markets have been slower than the real economy to realize losses. Still, Q1 saw the Dow drop 23 percent and the S&P 500 drop 20 percent — the worst quarterly performances for the indices since 1987 and 2008, respectively. 

Good riddance to that quarter, which ended Wednesday. But unfortunately, the prognosis is even worse for Q2. In this context, which sectors and firms are the “winners” thus far, and which are in more critical condition?

Sectors Performing Well:

  • Tech: Only 32 stocks in the S&P 500 saw gains in Q1, with the tech industry accounting for 36 percent of them. Citrix Systems, a cloud services provider, was up nearly 28 percent in Q1.
  • Pharma: Unsurprisingly, the best performing stock in the S&P 500 was a company seeking a cure to the coronavirus. Healthcare and pharma are one of the few sectors that, unfortunately, are unlikely to see demand dip anytime soon.

Sectors Performing Poorly:

  • Financial Sector: Few financial stocks performed well during Q1. While institutional investors fled to safety in bonds and money markets, amateur individual investors perhaps on the advice of Larry Kudlow to “buy the dip” — are the ones who stayed in the equity markets.
  • Energy: The oil industry has been hit hardest by the crisis, as it faces both reduced demand from consumers and a supply shock from Saudi Arabia and Russia. Of the 50 worst-performing stocks in the S&P 500, 19 came from the energy sector. The downturn in oil prices has already prompted widespread layoffs across the industry.
  • Manufacturing: Per the Institute for Supply Management, the manufacturing sector contracted during March, as factory orders hit an 11-year low. Manufacturing workers are experiencing mass layoffs — GE announced 2,500 aviation layoffs last week.

Implementation Matters

The early stages of the CARES Act rollout show that it’s not just the grand total of an economic relief bill that matters. How quickly the money can get to recipients who need it is also a critical factor in any economic relief bill. As the debate over Corona IV begins, Congress should consider not just the price tag of the next bill but also if their programs will actually reach those who need it before it’s too late.

19 thoughts on “Corona 3 Implementation Starts”

  1. I’m impressed, I have to admit. Seldom do I encounter a
    blog that’s both educative and entertaining, and let
    me tell you, you’ve hit the nail on the head. The
    problem is something that not enough people are speaking intelligently about.
    Now i’m very happy that I came across this during my hunt
    for something relating to this. asmr 0mniartist

  2. I want to to thank you for this good read!! I absolutely enjoyed every
    little bit of it. I have you saved as a favorite to look at new stuff you post… 0mniartist

  3. Hey there I am so delighted I found your blog page,
    I really found you by error, while I was browsing on Askjeeve for something else,
    Anyhow I am here now and would just like to say thank you for a tremendous post and a
    all round entertaining blog (I also love the theme/design), I don’t have time to go through it all at the
    minute but I have book-marked it and also added in your RSS feeds, so when I have time I will be back to read much
    more, Please do keep up the fantastic work.

  4. Pretty component of content. I just stumbled upon your website and in accession capital to assert that I acquire
    in fact enjoyed account your blog posts. Anyway I’ll be subscribing in your feeds and even I success
    you get right of entry to consistently rapidly.

  5. Hey just wanted to give you a quick heads up.

    The words in your content seem to be running off the screen in Firefox.
    I’m not sure if this is a formatting issue or something to do with browser compatibility but I thought I’d post to let you know.
    The style and design look great though! Hope you get the problem resolved soon. Kudos

  6. whoah this weblog is great i really like studying your articles.
    Keep up the good work! You realize, a lot of persons are searching around for this info, you could help them greatly.

  7. Hi, I do believe this is an excellent web site.

    I stumbledupon it 😉 I may revisit yet again since i have bookmarked
    it. Money and freedom is the greatest way to change,
    may you be rich and continue to help others.

  8. Hey I am so delighted I found your web site, I really found you by accident, while I was
    searching on Aol for something else, Nonetheless I am here now and would just like to say kudos for a marvelous post and
    a all round entertaining blog (I also love the theme/design), I
    don’t have time to look over it all at the moment but I have bookmarked it and
    also added in your RSS feeds, so when I have time I will
    be back to read a lot more, Please do keep up the great job.

  9. Greetings! Very useful advice in this particular post!
    It’s the little changes which will make the most important changes.
    Thanks for sharing!

  10. Hurrah, that’s what I was seeking for, what a information! present here at this weblog, thanks admin of
    this web page.

  11. It’s actually very complex in this full of activity life to listen news on TV, thus I
    simply use the web for that purpose, and get the most up-to-date information.

Leave a Comment

Your email address will not be published. Required fields are marked *