The $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act was a “very good start,” but more U.S. stimulus initiatives are still urgently needed, according to Ernesto Ramos, head of equities at BMO Global Asset Management.
The additional funds that have been proposed by Congress and the Trump administration for the Paycheck Protection Program would certainly “help people get through the next few months,” Ramos told ThinkAdvisor. (On Thursday, Democrats blocked an attempt by Senate Majority Leader Mitch McConnell to add $250 billion to the Paycheck Protection Program, saying the small-business loan offering needed “fixes.”)
Meanwhile, “Trump’s push for a $2 trillion infrastructure bill is a very good idea because it creates a sustainable increase in aggregate demand” and also stands to provide a “multiplier effect” for the economy, said Ramos, who leads the portfolio management and research teams for all equity strategies at BMO Global Asset Management in the U.S.
Another $1 trillion to $2 trillion in total fiscal stimulus is needed “to make up for this gap” we now have in our $20 trillion economy amid the countrywide shutdowns that “I only assume [are] going to last for about four months,” he said. Just how much is needed is going to be based on how long it takes for the crisis to be substantially resolved, he noted.
In the meantime, the U.S. needs to build more facilities and manufacture more medical equipment to overcome the crisis — and “let’s maybe fix our roads while we’re at it,” he said. The infrastructure money could also help “keep people employed with a paycheck and with health coverage” because if the government awards contracts to build facilities in the U.S., “those companies will take that money and hire people,” he noted.
Right now, the unemployment benefits that were included in the CARES Act are going to help many Americans get through the next few months, he said. However, he added: “I think the next step is to do a real government intervention” to boost the infrastructure and stimulate job creation.
Citing vast nationwide outlays for the war effort during World War II, he suggested that “we are at war with a disease, so let’s just create our own version of a munitions factory” — but instead of weapons, build more hospital beds, ventilators and other equipment.
Then, when the coronavirus threat is under control, “let’s figure out how to fix our bridges and roads and so on that are in dire need of repair … until this economy has enough of its steam” back to sustain itself, he said.
The Federal Reserve, meanwhile, can do more also, he said. “We have seen a massive amount of monetary easing — the likes of which we have never seen,” he noted.
But he added: “It’s clear that they can do more. The only thing that can stop the Fed is their own appetite to grow their balance sheet. And they’ve indicated by their actions that appetite will be as big as it needs to be.”
Will This Global Recession Become a Depression?
Ramos went on to predict that current global recession will end up being worse than the 2007-2008 global financial crisis. But it won’t turn into a depression because of lessons that were “learned from the last depression, which were that the last thing we want to do is tighten the purse strings and look to balance your deficit,” he said. “It’s clear to every central banker and every government leader that fiscal stimulus needs to be a huge part” of our efforts to deal with the current crisis, he noted.
However, he predicted “the unemployment rate is going to get pretty darn high — probably exceed that of the great financial crisis” of 2007-2008. And that is why it is so important that the next part of the federal stimulus initiatives “needs to come in and help those people that have been permanently displaced” from jobs, including restaurants that will not survive this crisis, he said.
One Investment Solution
Despite the sell-offs at the height of the market turmoil last month, BMO has seen some new investment in recent days, Ramos said. “We’re beginning to see people feel a little better about the market and putting money back to work,” he pointed out.
The BMO Low Volatility Equity Fund that Ramos manages provides one way for investors to “stay exposed to the equity market [but] do so in a defensive way,” he said. It is a “pretty good vehicle for people who are not the massive risk-seeking types, but who want to dip their toe in the water with the equity market … but want to protect on the downside,” he said.
With the fund, BMO looks for companies to invest in that “have strong balance sheets so that they can withstand a potential protracted recession and loss of demand on the product side, but will come out and ride out a prolonged downturn without having to tap credit markets,” he explained to ThinkAdvisor.
As with the other BMO funds he manages, he is “scrutinizing the balance sheets” of companies included in the fund now, he said, conceding: “We were willing to take on more balance sheet risk five weeks ago than we are today.” But he said “that’s really the only shift in focus that has been precipitated by the coronavirus” with the BMO Low Volatility Equity Fund. BMO has “made changes” to the fund since the crisis started to “make sure that companies with weaker balance sheets are replaced by companies with stronger balance sheets in general,” he said, but declined to identify the specific changes made recently.
“We are in the process, right now as we speak, of assessing the risk profiles of the portfolio and making sure that, because of all the changes in the marketplace in the last four weeks, we feel comfortable with the positioning of every single one of our holdings” in terms of the risk and return they offer, he added.