The debate over the “right policy mix” to combat the pandemic-driven economic disruption in the US will continue to take center stage in the months to come. I believe fiscal policy, in coordination with monetary policy, can put us on a path to reflation, and I would highlight three keys:

1. Near-term fiscal spending — With fiscal spending, the first priority is preventing a deeper recession (see my recent note, “US recession and the fiscal imperative”). Given the nature of this crisis, which resulted in a sudden shutdown of activity, the economic objective is to address cash-flow problems faced by consumers and companies. Thus, the government has spent on expanded unemployment benefits, direct checks to consumers, small-business grants, and paid sick leave. I think the reflation outcome will hinge on…

Fundamentals in some segments of the municipal bond (muni) market will likely be put to the test by the COVID-19-induced economic slowdown. However, we believe this challenging market environment creates opportunities for fundamental research to select strong credits that can weather a downturn. For investors with a long-term horizon and the ability to withstand some short-term volatility, current muni valuations may offer an attractive entry point.

How will COVID-19 impact muni fundamentals across sectors?

Some credits and sectors, such as transportation, health care, and special tax bonds, should feel a more immediate impact from the decline in revenues and the halt in consumer activity. Meanwhile, sectors such as property-tax-backed local general-obligation bonds, water & sewer bonds, and public-power credits will likely see minimal credit deterioration. The pace of ratings downgrades may accelerate in…

Managing the coronavirus in India and its impacts on climate policy

Complex and dynamic, India faces unique challenges from both the current public-health crisis and looming climate-related risks. In this 20-minute audiocast, we explore how India has managed the coronavirus thus far, and we look ahead to how its response may shape its climate policy. Finally, we consider the many investment risks and opportunities these issues represent.

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There are two types of climate-related financial risks: physical and transition. Physical risks refer to the manifestations of a changing climate that may be acute, like hurricanes, floods, or wildfires, or chronic, like water scarcity, sea-level rise, extreme heat, or worsening air quality. Transition risks are every bit as important to understand and may be just as costly to companies and investors over time. We’ll write a lot more about physical risks and our collaboration with Woods Hole Research Center in future posts, but for now, let’s break down transition risks.

Transition to what?

As economies decarbonize to lower greenhouse gas (GHG) emissions and slow the global warming trend, companies will feel the effects of the “transition” to this lower-carbon world, presented with multifaceted financial pressures, as well as opportunities to…

Here are some of my thoughts on the “negativity” that crept into markets last week, particularly the resurfacing of negative US government-bond yields — spurred by federal funds futures for January 2021 dipping into subzero yield territory — and the somewhat more bearish note struck by last week’s equity sell-off:

Is the Fed going to go negative? Negative.

I listened to US Federal Reserve (Fed) Chair Jerome Powell speak last Wednesday at the Peterson Institute for International Economics. He was emphatic that negative interest rates are NOT part of the Fed’s tool kit. Powell reminded the audience that the Federal Open Market Committee (FOMC) unanimously rejected the idea of negative rates, as stated in the minutes from its late October 2019 meeting. The FOMC’s rationale is clear and has been consistent:

• The Fed is implementing a wide array of measures to provide credit, which have been swift and forceful and should work to prevent liquidity problems from becoming solvency problems.
• The efficacy of negative rates is “mixed.” (Read: Look at Japan.) The issue is that negative yields tend to punish…

To me, one of the striking features of the current US stock-market rally is that many investor sentiment and positioning indicators have stayed depressed, even as equity prices have surged. (Some indicators have risen of late, but the ones I pay the most attention to have not.)

To a degree, the weak sentiment is understandable, given the massive blow that COVID-19 delivered to the economy and financial markets. It’s also quite plausible that the recent spike in unemployment could have adverse economic knock-on effects, potentially causing equities to reverse course. On the other hand: 1) we may have reached a nadir in growth; 2) the market itself bottomed seven weeks ago; and 3) the US policy response to the crisis has been swift and aggressive. Perhaps the market won’t…

Pervasive technological innovations like automation, 5G and artificial intelligence continue to transform nearly every sector of the economy. Mobile payments and digitisation are still rapidly disrupting and democratising the financial sector. Ageing populations and accelerating drug innovation are persistently expanding health care opportunity sets. And with the market’s recent volatility, we think investments in many of today’s most compelling long-term themes are offering historically attractive valuations.

In other words, the future is on sale.

Global investment themes such as these can represent exponential growth opportunities, but they often go underappreciated for extended periods. This is largely due to the difficulty of comprehending and discounting the meaningful changes they can usher in over time. We believe it is vital to look…

As detailed in a “Fed series” penned by my colleagues Amar Reganti and Caroline Casavant — most recently, Corporate credit and monetary financing: A new era in Fed policy — the US Federal Reserve (Fed) has adopted a “whatever it takes” stance to support the ailing US economy amid the ongoing COVID-19 crisis. In broad terms, the extraordinary steps taken by the Fed over the past several weeks include (but are not limited to):

• Conventional monetary easing (i.e., cutting interest rates to the zero lower bound);
• Regulatory guidance designed to encourage banks to continue lending; and
• Large-scale asset purchases, both on and off the Fed’s balance sheet.

While many of the tools the Fed has unveiled harken back to ones used during the global financial crisis, its off-balance sheet purchases go well beyond…