I get emails left and right from people ostensibly in the financial ‘industry’ telling me that the markets are in turmoil due to the coronavirus though they use the term COVID-19 because, I presume, that makes them sound more sophisticated.
Really? Like anyone who owns a stock or a bond somewhere doesn’t know this already.
With no due respect to Donald Trump, such commentary provides me with more reason to be fearful of things because it reeks of professionals offering, “I’ve really got nothing to say.” Nothing to say is the truth; trying to say something to seem relevant is the outcome. It gives me less confidence.
Take, for example, the notion that things are cheap. Well, yes, relatively speaking they are cheap. Certainly, preferred stocks, muni bonds, utilities have been tossed out with the proverbial bathwater. Problem is, we were about to take that bath and, instead, are taking the bath now. That’s my very point. Perhaps we all were aware that, at least, the stock market was rich, meaning high, but greed and complacency kept us too heavily invested given what’s transpired. COVID-19 was the pin that pricked a balloon that was bound to leak at some point anyway.
Which again brings me back to my point. Yeah, things have gotten very cheap it seems but how do you take advantage of that if you didn’t get liquid, i.e. raised cash, before it all blew up? I certainly had something of a defensive portfolio though not nearly defensive enough and I’m pissed about that, kicking myself and I’d advise my advisors to cross the street if they see me anytime soon.
My reality is that my ‘wealth’ is down just over 16% from its peak so better than the market but painful nonetheless. Give me an uptick to sell into, to raise cash, and perhaps to deploy in some of those cheap things that looked cheap a week ago, two weeks ago and I bet will stay that way for a while.
Why? Here’s where I pull rank and experience if just rank experience. I’ve been through several recessions and market declines, after all.
First, we’re not over it. The corona virus is still spreading and we don’t know how bad it gets. The country will be at least partially shut down for weeks. The developed world, include China, will be shuttered for as long if not longer. And the recovery will get started once we get through the layoffs and business closures yet to happen. Yeah, most firms in the S&P 500 will survive of course; the Fed will see to that, especially for the banks which they can impact most directly.
But the little guys won’t survive. I’m talking the vendors at airports, sports events, the restaurants, the coffee shops, the mom & pops…the very spots that employ most people. (As an aside, now tell them to raise minimum wages, which is another matter entirely, and see how they fare.)
In the last several decades, the ‘gig’ nature of the economy means that many, many, unstable jobs will be lost; from Uber drivers to consultants, to the part-timers, to self-employed tutors, baristas, etc etc. There are two reasons the unemployment rate is so low and yet wage gains are meek. One is that these ‘gig’ workers don’t have unemployment insurance and so when they lose a job they don’t appear as unemployed.
Confusing? Well it means that Initial Unemployment Claims, and other formal measures of unemployment, are low as a percentage of the overall unemployed because, again, ‘gig’ workers just don’t count even though they make up over 30% of the working folk. Make sense?
The other reason is that labor participation, the number of people saying they are in the workforce, as a percentage of the overall population is low. That’s because we got a lot of retirees coming on board who are not in the labor force and others, perhaps taking care of aging parents or kids, aren’t in the workforce either. It’s possible that unemployment will rise very sharply as 1) many ‘gig’ about to lose their job register in surveys, 2) others, retirees, find they actually now need to work again, and 3) those eligible for unemployment benefits claim them.
But I digress once again, a result of writing this while simultaneously looking at the stock market. Yes, stocks are cheap as are many other things other than, for instance, powdered milk on Amazon. But this thing isn’t yet over and, per forecasts, 50% of Americans could get it (70% of Germans). That lingers in terms of economic impact and it’s not a leap to say this quarter might show negative GDP and certainly next quarter will. I don’t see this being a V-shaped recovery, sharp plunge than sharp gain, but rather a U-shaped one, which is to say I think they’ll be plenty of time to buy cheap things. Personally, I’d rather buy stocks 15% higher if I’m confident they can stay at least 15% higher and, in my case, secure a stable dividend.
If I had cash that I didn’t fear I need for the balance of year I’d pick away at some ideas (utilities, muni funds, some stocks with high dividends), but I wouldn’t go in whole hog. But I don’t have the cash and would have to sell something and I don’t feel so inclined because I already own the shitte I’d be looking to buy.
Oh, back to experience. The Fed has eased dramatically as has every other central bank. Excuse me but the level of interest rates — over $40 trillion globally are negative in nominal terms and we are negative in real terms — wasn’t the problem. The stupid stupid stupid thing is that the Fed has eased heretofore simply to keep the stock market going up, a stupid move if I didn’t say that already. Now, with rates near zero, what do they have left? Zero.
Trump will never own up to it, but his economic policies have been feckless. Lower taxes is his one-trick pony. Below is a chart I used to use when I was relevant, which shows US government debt as a % of GDP. The prior spike (1933-45) actually accomplished some things like building schools, dams, post offices, national parks, roads and fight a war. The debt we incur now started with some hope under Obama to deal with the financial crisis, but the last few years under Trump did nothing other than to give companies money to buy back their own shares, not create GDP. (The chart came from the Liscio Report and if I still had my systems I could have dressed it up a little.)
This next chart should give you investing pause, too; it was one of my favorites in the old days. This shows corporate debt as a % of GDP. In other words, how much US corporations owe relative to the size of the economy. Peaks coincide with recessions. Well, hmm, higher interest rates heretofore didn’t stop them from borrowing and given their prospects economically lower rates now won’t help; their credit quality has diminished and so corporate spreads will widen.
We blew our wad. We eased in a growth cycle as the Fed had its arm twisted by Trump and saw the stock market as their mandate. Corporations borrowed to buy their own shares and other companies but not to invest for the future in GDP-boosting ways.
Which is to reiterate that not buying cheap assets today isn’t the worst strategy if, like me, you don’t see them running away.
Prediction; health policy will dominate the election cycle and make the GOP look incompetent allowing Biden to come in as a one-termer with a mandate to fix the system as much as he can. Trump will find blaming China, Italy and Obama for the coronavirus won’t work, but he can’t help himself. Some of the GOP will get religion and distance themselves as their constituents fret over public health policy and are told that, no, the coronavirus won’t be a preexisting condition.
And after November, the stock market will close up 5-10% from current lows after suffering 5-15% downside volatility in the coming weeks.
