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Contacts: Jo Morello, 941.587.8290 (cell); 941.351.9688 Sheryl Vieira, Caldwell Trust Company, 941.493.3600 Dr. Manuel Johnson, former vice chair and governor of Federal Reserve Bank, recommends patience with coronavirus and stock market during Caldwell Trust Company meeting. VENICE, FL: In a wide-ranging meeting with the board of directors and staff of Caldwell Trust Company on Friday, February 28, Dr. Manuel Johnson, former vice chair and governor of the Federal Reserve System, said he saw no need for investors to panic over a potential coronavirus pandemic. R. G. “Kelly” Caldwell Jr., CEO/president of Caldwell Trust Company, had arranged the session with Dr. Johnson long before the coronavirus became known as a serious threat. “Doctor Johnson’s visit couldn’t be more timely,” he said as he introduced the prominent economist and longtime Caldwell advisor. Dr. Johnson discussed the coronavirus disease in terms of its financial impact. He also reviewed other major factors affecting domestic and global economies. Even as he was speaking on Friday, the three major economic indices were chalking up record one-week losses, their worst since 2008. The Dow dropped over 3,500 points, or 12%, while the S&P lost 11.5%. Dr. Johnson, co-chairman and senior partner at Johnson Smick International, Inc., is no stranger to economic upheavals. “The last time I spoke during a crisis was in 1987, when I was giving the keynote address to a meeting of the American Stock Exchange. That was the day the market crashed, falling 22%, a record for a one-day drop.” Referring to the event, Kelly Caldwell said, “Dr. Johnson played a key role in preventing systemic economic damage during the stock market crash of October 1987, and in coordinating international monetary policy by the Group of Ten major industrial countries.” Coronavirus and the economy “We’ve been through other varieties of coronaviruses before but this disease has been a real shock to the system because it’s highly transmissible, human to human.” He noted that it’s often compared to the flu, although so far deaths from flu far exceed those for coronavirus. “The major issue is communication,” Johnson said. Possible spread of the disease and its prognosis have not yet been established and the stock market hates uncertainty. “There’s been rampant speculation in the financial market. The question is, does this change the fundamentals? “We’ve been in an expansion for the past ten years, the longest-ever expansion period in U.S. recorded history,” he said. “Expansions don’t just die. There’s always an event involved. For example, the ’08-‘09 recession was generated when the housing bubble burst.” He’s not convinced that the coronavirus poses a similar degree of threat. “There will be short-term effects if people can’t go to work, can’t go to school, can’t travel, can’t get manufacturing supplies,” he said, adding that people facing such disruptions are less likely to spend. But he's not dismayed by the coronavirus threat. “Don’t panic because today the economic fundamentals in the U.S. are good,” he said. One exception might be the debt build up since the economy would be more vulnerable to higher interest rates. This does not seem to present a risk any time soon. But regarding the coronavirus, he said, “This will pass and there will be a strong rebound based on pent-up demand. Keep your powder dry.” Interest rates: domestic and global “The economic environment is not conducive to inflation,” Dr. Johnson said. “Thirty-year U.S. Treasuries are incredibly low at 1.7% and some bond yields are at zero or minus. At 1.7 % on the Fed funds rate, the Fed still has more interest rate capacity than the rest of the world. That’s not much, but the Fed still has a toolbox. If they find the rate nears 0, they may move into quantitative easing, as before. “The industrial world outside the U.S. is not strong. Other countries have negative or near zero long-term rates,” Johnson said. He cited Germany’s rate at -.7%; Japan, -.14%; and the U.K. at .3%. “Some of the most prominent European banks such as Deutsche Bank are struggling to survive. The U.S. has been the bright star over the last two to three years, principally because of regulatory rollbacks and tax cuts.” During his talk on Friday, Johnson mentioned that the 10-year Treasury yield was approaching 1%. “Interest rates look low on the horizon,” he said, “but the Fed may start cutting rates.” Hours later, almost if he’d heard Johnson, Federal Reserve Chairman Jerome Powell signaled a potential rate cut, stating that the Fed “will use our tools and act as appropriate to support the economy.” At the same time, Powell recognized that “a rate cut cannot reduce the rate of coronavirus infection, it won’t fix a broken supply chain.” By Tuesday, and after public pressure from President Donald Trump, the Fed had cut its rate by 50 basis points. Response from the markets since then has been volatile, with wide swings in both directions. Dr. Johnson summarized the outlook on Friday: “Because there’s no environment for sharply increased interest rates, people will seek better returns. “Equity markets will look relatively good once market volatility settles down.” A BRIEF SUMMARY OF THE Q&A SESSION Following his talk, Dr. Johnson answered questions about a number of different subjects: Q. Are we still worried about the deficit and national debt? A. It’s an issue and it keeps growing. We can’t dismiss the impact of debt but it’s relative. For example, consider it in the context of the GDP. Spending at the federal level is still at about 20% of GDP. However unfunded entitlement liabilities are a serious problem. If we go to higher interest rates, interest costs will crowd discretionary spending budgets. Q. Do you see any similarities between today’s coronavirus and the Spanish flu of 1917-1918? A. That would be pure speculation. There was little medical knowledge then. Today there’s no reason for patients to die from a coronavirus infection unless they’re already in a very weakened condition. Q. Will you discuss the economic impact of China’s infrastructure and economic expansion? A. China’s infrastructure and economic expansion have slowed because the country has a massive build-up of debt and a serious aging problem. For that reason, they need to generate economic growth and keep trade markets open. Therefore, they will need to come to trade negotiations. At the same time, they are highly competitive with the U.S., both strategically and economically. I’m skeptical of China’s motives. Because they need Western trade, they’ll make concessions, but probably in fits and starts. It’s hard to know who the real leadership in China is, and it can change behind the scene. The situation is problematic. Q. What are the potential impacts of demographics in other nations? A. Fertility rates are declining in many nations, leading to declining populations. China and Japan both have serious aging issues, especially China because of its previous one-child policy. Both nations have a huge number of aging people, a smaller population of worker age, and not enough births to replace aging workers or care for the elderly—and, in China there’s no economic security for the aged. The population decreases can lead to slow economic growth unless productivity increases strongly. India didn’t have a one-child policy, so they don’t face the same demographic problems as China. India was part of the British Commonwealth, so they are more familiar with the rule of law. But they also have to overcome political and corruption issues, which hold back their growth. They’re technically advanced with an educated population and America has already tapped into their workforce. “Just pick up the phone,” Johnson said. Q: How does immigration affect overseas economies? A: From an economic perspective, legal immigration is a positive for growth, but it isn’t without problems. Japan has never had open borders, and their workforce opportunities marginalize women. To improve their pool of available workers, they should first empower women. Europe has opened its borders, but some militant Muslim immigrants brought terrorism, resulting in a backlash against immigration from the Middle East. Because of immigration problems and a declining domestic population, prospects are not good for Europe. Caldwell Trust Company is an independent trust company chartered in the state of Florida, with offices in Venice and Sarasota. Established in 1993, the firm currently manages over $1 billion dollars in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers. The company, known for its family-oriented culture and strong ethic corporate citizenship, has donated over $1 million to local nonprofit organizations that focus primarily on youth and social causes.