March 14, 2020
There is so much to unpack from all of the happenings over the past 48 hours, that it is impossible to evaluate the high points. Here is my attempt just the same.
- Equity prices have been hammered over the past week, this was expected. They also bounced on Friday, not exactly expected, but welcome.
- Some signs of panic in corporate activity with businesses suspending various operations, work from home, attempts to access capital.
- COVID-19 now has the attention of authorities in North America, causing panic buying of food, recommendations to restrict travel and so on.
- So, so many other moving parts
While the markets have been my focus for a long time, and perhaps are on the minds of a lot of people, at least those with savings, let’s start with the COVID-19. Almost two weeks ago I proposed that it wasn’t a foregone conclusion that it would run rampant through North American society, and here we are two weeks later and it appears to be grabbing hold in North America.
Viruses don’t care about money or politics. They only want to survive and propagate and the little virus entities don’t care who they take down along the way. This virus is doing a great job propagating. We as humans were designed to survive and propagate, but over the last three or four millenia we have also focused on things, money and a few other distractions. COVID-19 has returned us to our native state and forced us to focus on foraging for food (albeit at Loblaws, Kroger, Costco and Walmart) and protecting our offspring. It’s amazing how even the smallest risk can bring out our base selves.
The virus risk remains quite small for the bulk of the population, but authorities are working overtime to slow it down and hopefully contain it. It is my personal opinion that containment is no longer an option. Slowing it down is an important tool in helping those who are most affected by the virus however, as it reduces the stress on the healthcare system and increases the chances of survival for those who may be most affected (remember indications are that these are marginal cases – mostly the elderly and ill – but there will be a LOT of them if the virus runs rampant).
To provide some perspective, the virus is thought to have started in Wuhan, China. That city has about 11 million people. The greater province of Hubei has about 60 Million people. In that region about 81,000 are known to have contracted COVID-19 and about 3,200 people have died.
There is a lot of discussion around the death rates from COVID-19 (currently around 5.6%), but against the total population, it remains closer to 0% (3,200 people out of 11 million). This is not an attempt to minimize the outbreak or the need for a response, but it is an attempt to bring rational analysis to the hoarding instinct that is overwhelming people now.
Looking at this from another perspective, it is possible that the reason only 81,000 people were affected by the virus is that China effectively shut down the province of Hubei, almost totally. This cutoff almost all transmission paths for the virus. Remember that China is a communist country and this was done by decree. As of this writing (March 14th, 2020) and 50 days from the beginning of the lockdown of Hubei transportation routes, the Chinese new case count has dropped to single digits for multiple days.
As of 4 pm yesterday, the US had 1,629 total cases and 41 deaths. These numbers include presumptive cases, cases that are still under investigation, and importantly, there is a lag in reporting. The CDC website has had a sharp drop in new cases by ‘date of illness onset’. It will take days to find out if this holds, or if there is just a lag in identification, reporting or perhaps even symptoms.
Note that media coverage can vary in quality, depth and can inspire emotional responses. For factual information about the virus, there are a number of excellent, authoritative websites that detail the situation, background information and recommendations for citizens.
One of the best ways to combat an outbreak like this is to have EVERYONE playing from the same playbook. Check out the US Centers for Disease Control and the World Health Organization for the latest information and recommendations for preparation, evaluation and the latest news.
At the same time, the virus is gaining traction in Europe. With thousands of new cases in the past week and touching every economy, there is certainly more to come.
When we think about investments, we frequently think about the stock market. The prices for stocks are quoted everywhere and index levels are on every evening news report and entire channels are dedicated to the spreading of ‘investment news’. The stock market isn’t the entire world of investment, however. There are stocks, bonds, commodities and currencies along with a few dozen derivative products (Index funds, mutual funds, options, futures, etc.). Most of those asset classes suffered significant declines this week. It would make for a super long post to discuss all of the key items, but the effort here is to supply some meaningful insight about the links between events.
Last weekend a very important event outside of the COVID-19 virus took place, and that was a serious blow to OPEC (the Organization of Petroleum Exporting Countries). Russia (not part of OPEC) and Saudia Arabia (the ‘leader’ of OPEC), couldn’t agree to reduce the production of oil and thereby keep oil prices ‘high’. When they failed to agree, Saudi Arabia dropped their oil prices by about $10/bbl so that they wouldn’t lose market share.
This deserves another post of its own, but that act meant that a LOT of companies in America, indeed the world become unprofitable. Stock markets fell hard because these companies have a LOT of debt, and therefore there is a significant risk that thee companies can’t repay their debt holders. In some parts of the world where the government owns all of the oil, those countries face significant shortfalls to run their countries and repay their debts, possibly causing a sovereign debt crisis. This is a big story.
Underneath all of that, the COVID-19 issues began to ramp up. The best way to stop the virus is to stop the movement of everything. China did an amazing job, stopping trains, shutting highways, cancelling flights. Factories were closed, people were told to stay home, 40 days later things began to get back to normal.
In Europe the virus began it’s spread and Italy began its shutdown, France began its shut down, Germany began as well. It’s still spreading and late in the week it appears that the US is getting serious about ‘recommending’ against travel, even within the US. Not exactly an overwhelming response, but they seem to be catching on.
What did get an overwhelming response were markets. Their falls were significant, and the US government provided some insight into modest assistance for those affected by the virus. After this lukewarm response, the markets went into free-fall. At that time, the Federal Reserve offered up to 1.5 TRILLION dollars of support for the markets. THIS IS HUGE! In the first day, only a few hundred billion was spent supporting the markets, but they Fed has made it clear they want to support stock prices. (It’s worth noting that TARP, used to stave off the last financial crises allotted less than half this amount at $700 million. Only about $471 million was used). As of Friday it appears that the markets consumed at least $130MM but probably much more by end of day Friday, but the economic impacts have only just begun.
On Friday, markets had a massive bounce at the end of the day, up 10%.
The question on many people’s minds is “Is it safe to invest again?” Unfortunately the answer is no.
Modern history is replete with examples of the market bouncing sharply from significant declines. This time may be like those other times, or perhaps this time will be different. That is said in jest, because one of the key messages you get when prices are skyrocketing is ‘This time is different’.
Ever since 1981, the world has used debt to unleash the power of markets to make asset prices rise. This process used to provide a huge positive response in the ‘real’ economy, allowing people to buy goods, increasing factories and production. After 40 years, and certainly since the last market correction in 2008, the response in the ‘real’ economy has been very poor, while asset prices have risen rapidly. In essence, it all looks good on paper.
The impact of COVID-19, the slowing of economies like China and Europe and the impact of indebted consumers, corporations and governments, means that the economy is now likely to slow. When that happens it will be difficult to know which business models will be able to sustain their business with slowing growth, higher costs, fewer workers or whatever combination is deemed appropriate when the inevitable slowing occurs.
Until it is clear that travel and work have returned to some sense of normality, it is wise to be cautious with investing money. Stock prices may rise and fall with significant volatility in the coming months, but the economy is almost certain to go into recession and the impacts from that can be long lasting. There is a good chance that what started last week will not be fully understood until the leaves change colours in the fall.