Congratulations, you survived the worst day in stock market history since the 1987 crash. To find a worse day, we have to go back the Great Depression and the great crash of ’29! In Monday evening’s note to you, I boldly claimed this is not a 2008-style financial crisis, so what happened? To be frank, it turned into a financial crisis overnight. To explain, I’m going to summarize events in opinionated terms. Take what you will of political connotations, but my aim to rationally analyze the situation.
In last night’s Oval Office address, the President said- and didn’t say- a few things that set markets off. A key phrase that no politician should ever utter is “this is not a crisis” when we all know it is. It’s the same with “the fundamentals are strong”. If a leader has to say such things, we know things aren’t good. Good conditions do not need reinforcement. Wall Streeters know to run for the exits whenever authority tells you not to worry. This is similar to when former Fed Chair Ben Bernanke said “the subprime crisis is contained” right before it all went to pieces.
Secondly, proposed solutions were both inadequate and off the mark. Payroll tax cuts don’t help those no longer on the payroll, for example. Stopping flights with Europe is irrelevant- the virus is already here in volume. It’s clear there is little thought going into this messaging while the country needs meaningful action.
Following the speech, I went to King Soopers to observe (and get chocolate). It was a madhouse at 8:30pm. One roll of toilet paper left and desperation on faces. Interesting how people were obviously frustrated with other people’s panic even though they were doing the same. The NBA, NHL, major events cancelled en masse. Panic finally went mainstream. (More on the over-reaction in a moment.)
This morning, Boeing drew down it’s $13 billion credit line as did a number of other companies such as airlines and energy companies. Note that banks are very well capitalized- they probably have too much capital by normal standards. Again, not like 2008. However, when companies draw on their credit facilities, at the same time, when the economy is rolling into recession and those companies are at the forefront of the economic difficulties, the banks suffer. They don’t go bust as in 2008, but they go from healthy and strong to having the flu, if I may use that analogy. That’s how we go from no financial crisis to teetering on one in 24hrs.
As a result, markets panic. All sorts of weird things happen such as very safe bonds plummeting 3-5% today (we’re talking certain treasury bonds and AA rated municipals). That makes no sense until you realize it means that whoever owned them had so sell their safe investments to pay off margin balances or liabilities. If you run a pension fund, say, and need to sell when there’s a panic, you don’t sell everything down 30%, you sell some of the safer investments hoping for a rebound on the risky ones. So weird things happen on days like this. It’s not wise to shift things very much in a panic. Things that should be up, are down (e.g. bonds and gold); and things that are down, are down way more than they should be. Watch the madness, but partake as little as possible.
When will it end? That’s the $64 trillion question. Here’s my best guess: there willbe action by the Federal government. It may come in days or weeks (remember that the 2008 bailouts failed in Congress several times as the world burned. I’d be surprised if it were better this time around). That action- or at least the knowledge that comprehensive action is coming- will soothe the situation. If people aren’t travelling and are working from home, that means hotels, restaurants, Ubers sit empty. Those workers lose hours and jobs. The ripple effect shuts down commerce. Will that restaurant worker pay their rent? Will the person who owns the rental borrow from someone else to pay the mortgage on the rental unit? And so on. Unemployment was probably only at the low 3.5% because so many people “worked” driving Uber. That all unwinds.
The Federal government can provide a backstop so that a) people don’t have to go to work sick and further spread the virus b) small companies can survive and c) those on leave can survive. Most giant corporations like Disney will be lose some money for a while, but be fine in the end. With Federal support, the economy will survive the necessarily lower level of overall economic activity. We haven’t heard even a snicker of proposing the right things yet.
On the back of Federal support, the economy will be set up to hang in there while the virus itself is dealt with. A common refrain is that “there’s only a few thousand cases”. There are only a few thousand confirmed cases. We all know there are tens of thousands of cases. It was reported today that only about 2,500 people have been tested (with 1,400 confirmed). No one knows how bad it will be unless we test widely. Is it 25,000 or 250,000? There are only about 300,000 hospital beds in the whole country. Remember, the virus is twice as contagious as seasonal flu and the hospitalization rate is 30x higher.Markets will fair much better when know the extent of the problem, mostly because people will be able to go back to some sense of normalcy when we know just what the risk is.
I do sense some over reaction from all corners. Public gatherings of all sorts are being closed. Shutting down all public activity does seem like an overreaction to me, but it might just help faster than anything else. Slowing the spread before hospitals are at capacity should be the aim and while accomplishing that hurts economically, the Federal government can help soften the blow. The faster we get to a plateauing growth rate in case counts, the sooner life will return to normal.
So is it time to buy? The answer is a resounding maybe. 30% off highs is usuallyclose to a bottom. However, on occasion, 30% is only a little more than halfway to bottom. As we’ve discussed, stocks were so over-valued, they couldfall 60% just to get to normal valuations levels. Have you ever walked past a store with advertising 40% off everything on account of going out of business? Walk in and find out everything is 40% off after being first marked up 25%? That’s roughly how the market feels to me.
For a number of technical reasons which I won’t bore you with, today looked very much like what we call “capitulation”. Capitulation is a snarky way of saying people threw in the towel and finally got a case of serious pessimism. It usuallymarks a bottom- at least for a while. It marks a point where I’m comfortable starting to pick at certain investments. Just dipping the toe in the water. Very often a crab bites that toe and you have to be brave enough to try again when the tide is a little lower. We’ll see how it goes. Our portfolios are holding up well, giving us ballast to buy. Remember Buffett’s advice: “be greedy when others are fearful”. The trick is to know when they are fearful enough.
As a reminder, I am available to talk - please reach out anytime. With limited outside engagements, there’s not much personal worry here- as long as I don’t stress-eat our stockpile of emergency chocolate.
Keep calm and carry on,
-Brett
Ps.
Here’s a picture of my screens today. It’s been a long time since they were this red:
