Apocalypse Now?

(Before I really begin this, I thought I’d mention something about the title. That, of course, comes from the 1979 movie. Well I saw that movie in Cambridge, Mass, the summer just before my senior year, with Jay Pollard, who later made a name for himself and Richard Feen , who went on to get a couple of Phds before Jay-bird ended up as a jail bird. That’s one of those ‘out of me ‘ed’ thoughts.)

Earlier this week a Tyler Cowen, a columnist for Bloomberg, wrote this story; “A Vision of Post-Pandemic New York– Once this is over, the city will be younger, cheaper, poorer and segregated in a new way.”

I sent that about to some people with my own views of the matter. To wit,
I’m not sure I agree with the grand doomsday scenario. What if they come up with a vaccine, for example? Surely, the lesson we are learning is about 1) early detection, 2) being able to work remotely in the event, 3) the need to stock up on all sorts of things. The remote work, too, has limitations; there’s still a need to meet and talk, right?

I don’t see a return to the NYC of the 70s, god forbid. THAT was a lot about demographics and drugs to say nothing of white flight and the baby boom sending people to the suburbs. I don’t see white flight. I don’t see family sizes increasing. Maybe the burbs get a boost, but even then do you want a house with all the expense in Westchester and pay, oh, $25k in taxes just for a good school? Or worse, New Jersey? I think the costs balance out for the 0.7 children people are having.

An old bond trading friend, now teaching Tai Chi or some such thing, wrote to ask me my views about the market and shared my views that we just can’t bailing things out (businesses, people) with more and more debt. Who’s going to pay for it all? And the sort of debt we are incurring here and globally is not the sort we had during WW II. That debt got us jobs, factories, roads, airports, you name it, but it created things. This debt that we’ve been getting for the last 30 years is really just providing liquidity to financial markets so they don’t freeze.

But jobs? Production? Nothing. Remember, debt does have to be repaid.

I speak to a lot of people who think that the market will be fine in a year or two if not sooner. They cite the virus calming down after the next wave, a vaccine will be done, and while the pain might be there it will pass and all this government money will get things going.

I think they are dead wrong and the folks saying it are brokers, or people with money who won’t starve, don’t work, and have only the experience of ‘you’re supposed to buy into market declines.’ Like the chorus of stocks being down 20-30% look cheap compared to…..compared to a few months ago all things being equal. They are not equal.

They base their ‘logic’ on the past; markets have dropped like this before and recovered so this is normal, part of the process, the business cycle, if concentrated in a short period of time. While I’m depressed (seriously) over my smoldering myeloma and a sense of uselessness in retirement, I will allow that I’m a big picture thinker and pessimist. I think people are clinging to ideas of the past on this one and this one is different.

1) Demographics — How will we pay for all those state and local pensions, healthcare, Federal debt? Taxes or spending cuts at the government level, means lower lifestyles or poorer quality of care or both. There is no way around it. Those ‘rich’ people like me — ha ha — just lost 30% of our wealth and must face the reality of higher costs of medical care, even Medicare, going forward and some form of Social Security adjustment like means testing or cutting the cost-of-living increases. And I imagine that pension promises will be compromised versus the alternatives.

The cloud to that silver lining is that the younger generations are large enough to provide a strongly growing labor force and resulting tax revenue to pay for it all.

2) Every market crisis I’ve lived through, from the oil embargo and 1970s inflation, to 1987 to 2000 to 2008 has had financial or economic motivations. That is, things got too expensive and a bubble was burst. The 1970s are a rough analogy. The chart below shows the Dow from 1966-82, with an arrow illustrating the time in question. This was inspired by a break in global confidence from economics to leadership (60s, Vietnam, the shock of the oil embargo, feckless leadership here and abroad and, oh, the list goes on). This current COVID-19 thing seems to me to expose that globally and I see no ready solution.

3) I’ll never get how smart folks see this percentage drop in the market as something normal in the course of market events. For the last 20 years we’ve boosted the stock market through low interest rates — negative rates, really? — and through deficits to provide money to the system to, in reality, simply boost stock prices. In these last 12 years, those low rates and deficits (tax breaks in 2017) have been used by corporations to do buybacks and perhaps M&A but NOT create jobs, factories or productivity-enhancing investment. In other words, the biggest buyers of stocks have been corporations themselves. Take that away whether because now they simply need to use cash for their debt payments or stay alive.

4) I believe people use the stock market as an economic indicator incorrectly. I get why they do it, but it’s not longer valid. It’s not about economics per se but about the liquidity provided by governments via deficits and low taxes. You can boost P/E ratios by simply diminishing the amount of stock outstanding, which is what they’ve done. The stock market once did reflect, perhaps as a leading indicator, corporate earnings based on growth of the business but not the number of shares out there. Again, people are looking at a drop of X% and saying, well, “I’m always supposed to buy weakness.” Go ahead and look over your shoulder to see if the biggest buyers are there with you.

This chart shows the float, or number of S&P 500 shares outstanding. See the decline? In basic economics you learn about supply and demand. Below you see far less supply which boosts demand. Who has been the demanding actor in this drama? That’s right, corporations themselves.

5) Like a broken record, which is right twice a day –mixed metaphor if there ever was one — the fact is that people are older, have suffered with increasing frequency market meltdowns and can’t or won’t tolerate more risk. Or shouldn’t.

Which leads me to conclude the stock market will stumble and stumble along for years to come. Alas, other markets — like bonds, muni bonds, corporate bonds — are similarly over their skis.

Is there any positive in all this? Well, my ‘fear’ is that when the virus thing ends I’m still stuck with goddamn myeloma (and even now waiting for blood and urine tests taken Tuesday) and while everyone relaxes I’ll be crossing the then-opened border to Massachusetts to visit a marijuana dispensary.

That aside, I think we are gaining an appreciation for life itself: friends, family, cooking at home. A sense, I imagine, that you don’t have to have things to enjoy life and maybe we go to a less frenetic consumer competition phase. That’s not good for economic growth, but maybe good for our souls. That is, AFTER I can get a haircut!