What is the next US economic stimulus package going to look like?
It looks like there is going to be a lot of horse trading between the Republicans and Democrats. It is hard to believe this will be enough. It is not satisfactory to the Democrats. So we are going to have a very active and lively debate as to what the package should look like. Let us face it: we are headed towards a very near-term deadline on the supplement to jobless benefits on July 31. So they do not have much time to come to an agreement. They are far apart now. The Republicans want $1 trillion, the Democrats are for around $3 trillion. And there is even a little bit of a split within the Republican Party itself. So we are going to see lot of horse-trading. We will be following that closely from a markets’ point of view. Markets would like to see a little bit bigger package than $1 trillion.
What are the expectations from the Fed policy? It has already said it would extend the lending programme till December 31?
It is clear that they are going to continue to be supportive. They are not going to back away from that commitment in any way. So it is not at all a surprise when they said they were going to continue with their commitment. I think most Federal Reserve governors recognise as also most economists that although we have had very dismal economic results in March and April, and that will show up in the second quarter GDP report that we will have in a couple of days. We will see a number that is minus 30 to 35%, the largest decline by far in any quarter since we started these numbers in 1947. Everybody senses or recognises that we are starting to see better numbers on the employment side, and we are seeing better numbers right across the board. So there is an appetite to continue to support the economy. We will see that in a stimulus ultimately when it comes out of the negotiations between the Republicans and the Democrats. We will also see continued commitments to lending by the Federal Reserve. It is not over yet. Things are getting a little bit better, things are improving, we are looking at better numbers. But everybody is worried very much about the sort of staggered rollback of the reopening that we are seeing in the US.
What is the kind of impact you see on the economy because of the staggered rollback of the reopening?
While the earnings season has been very good in some ways, but earnings for the second quarter are not very consistent with the numbers that we are going to see on the economy for the quarter. They are going to be down about 40% to 41%, and that is bad news. McDonald has had a very sharp decline in profit, but we also got bad news from 3M, from Harley Davidson, from Pfizer, whose earnings were pretty dismal. Having said that, 80% of the companies have announced earnings that are better than expected, and about 68% of announced revenues have been better than expected. Those are better than the numbers we ordinarily see. So I guess behind every dark cloud, there is a little bit of a silver lining. You got to look really hard to see that silver lining.
But believe me the economy for the second quarter is down 30-35%, earnings down 40-41% for the second quarter. These are very dismal readings. The real important issue is not so much the second quarter. Let bygones be bygones, the real question is what are we going to see in the third and fourth quarters, and to what extent will the rollbacks of the reopening affect the economic and earnings numbers in the third and fourth quarter? That is the issue for investors right now. That is the big issue and it is full of unpredictability.