Now that the market has weathered an initial deleveraging stage in the past week, we’re moving into a crisis based on the fundamentals of the real economy over the next 2-3 months, said Ed Harrison and Roger Hirst on today’s Real Vision Daily Briefing.

They said the size of the recently passed stimulus, though massive, is not likely to restore the market to its pre-pandemic form. Hirst said timing will play a critical role in the success of the Fed’s efforts going forward.

“The key is targeting and timing. Will they aim the bazooka in the right place at the right time?”

While in the short term the stimulus may create inflationary bottlenecks, Hirst and Harrison think the effects over the long term will be profoundly deflationary – particularly as companies and individuals not covered by the stimulus eschew expensive capital.

“Now we’re moving to a crisis based on the fundamentals of the real economy,” Harrison said. With the fundamentals as bad as they are, he said it sets the market up for another swing down when people start to understand where the real economy is.

“The downdraft and the snapback have been so large that realized volatility is still high,” said Harrison. “When equities fall again there’s still going to be a sell signal on [passively managed] funds and that is going to accelerate the next down draft that we see.”

Hirst believes this will eventually play out as a shift away from passive investing. He envisions a future model where active managers are back in the driving seat and emotions and valuations will become relevant again.