In addition to the coronavirus and its implications, the U.S. dollar is the big issue – ideally the dollar needs to weaken relative to emerging market currencies.
Suggest watching both FRA Roundtable Insight podcasts from last week, with Dr. Lacy Hunt and with the 4 Horsemen: David Rosenberg, Yra Harris, Peter Boockvar and Jim Bianco. We will likely see both demand shock and supply shock effects from the coronavirus ripping through the economy and financial markets.
Of particular note, there is record low unemployment in the U.S. but if demand shock effects hit, this number will grow dramatically, and we will then likely see a significant level of liquidation of all kinds of asset classes.
Also of particular note is the 25 year low in the Bloomberg Commodity Index, this is all pointing to a potential deflationary scenario, and if the Fed cuts interest rates in an attempt to weaken the dollar (strengthening emerging market currencies and commodity prices), it could have major political fallout with U.S. Presidential candidate Bernie Sanders then likely to call out how the Fed and current Administration only care for the “financial class”.
Flexibility is warranted in central bank policy and any interest rates cuts by central banks should be prefaced with “economic precaution” wording to minimize misunderstanding of changes to monetary policies.