Never Let a Good Crisis Go to Waste

Steve Saretsky -

These are undoubtedly difficult times, we are witnessing the largest public health issue of our lifetimes. As a result, this is morphing into the largest economic event we have ever faced. It is unsettling news, but something we must be brave enough to face head on. It may be convenient and perhaps less painful to look away, but it certainly won’t help us towards solving tomorrow’s issues. And so, we must first get a grasp on what is happening, right here, right now.

As of April 17th, a staggering 7.5 million Canadians have been approved for CERB (Canada Emergency Response Program). That’s nearly 40% of the entire labour force. It’s a depressing statistic that underlines the severity of the economic destruction underway. On a more positive note, it shows just how quick and responsive our Government has been. Money is getting to households, providing a necessary safety net and mitigating some of the hardships.

We are all flying blind right now, including our policy makers. Governor Stephen Poloz, in his final monetary policy report before he steps down, offered no official projections for second quarter GDP. Instead, he merely offered a wide range of outcomes, suggesting GDP would contract anywhere from 15-30%. For many households and businesses, survival is the name of the game right now.

We’ll start to get a glimpse of how Canadian businesses are coping, with about 10% of companies listed in the TSX set to report this week. Canadian corporations had unfortunately positioned themselves rather poorly for an exogenous shock, particularly of this magnitude. Corporate debt to GDP has exploded over the past decade, growing from around 80% of debt to GDP to nearly 118% today. That rapid pace of borrowing has now become an issue. In order to help contain corporate credit spreads from blowing out, the Bank of Canada has expanded their asset purchases to include $10 billion in high-grade corporate bonds.

Of course, the purchasing doesn’t end there. In fact, the Bank of Canada has shown little restraint in highlighting its willingness to support the markets. The Bank of Canada will now be buying 40% of all treasury bills auctioned by the Federal government, up from 25%, in effect directly creating money for the government. It will also snatch up $50B in provincial bonds to help with funding pressures. Support appears to be “unlimited”. Thus, joining a chorus of other central banks in ensuring there will be no shortage of buyers for financial instruments. The buyers of last resort have become the buyers of permanent resort.

Whether these are the appropriate measures or not will be debated for years to come. One thing we can’t argue is that policy makers have thrown the kitchen sink at this, and hopefully it will alleviate some of the pain. I suspect in the future will refer to life events as pre-virus and post-virus. The rules of the game have been forever changed.

Let’s hope we can eventually re-build a better way forward when we come out the other side . As the saying goes, never let a good crisis go to waste. We are all in this together, whether we like it or not.

Three Things I’m Watching:

1. Corporate bond yields were under pressure in Canada, hence the recent intervention from the Bank of Canada.

2. Interac debt transactions have plunged in Canada, suggesting not only has spending likely fallen, but consumers are relying on credit cards.

3. If there was one picture to perfectly summarize the Canadian economy it would be this.

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The Saretsky Report. December 2022