3065 Rosecrans Place #203
San Diego, CA 92110
THE DEADLIEST VIRUS
03-13-2020
None of the below is investment Advice.
The top of the food chain is at risk… from air.
This will forever go down as the month of yo-yo. I’m sure I’m not the only one rattled by the uncomfortable market volatility. I believe the worst may be yet to come. The $1.5 Trillion injection by the fed last week (or 35% of its total liquidity) is nothing short of a bail out for institutions with illiquid investments. It makes me sick to see the government throwing so much good money after bad. But then again, what choice do they have?
You might remember my January memo in 2 parts – “151%” in which I described the waning economics supporting businesses. We are highly unlikely to get back to those levels given the current situation.
My specific thoughts on the market aside, I’d like to address the virus. During the one month since we were at record highs, people have mostly gone baseless, which in itself is disheartening to me. When I say baseless, I mean without composure, sophistication, or humanity. However, much of it is warranted, and everyone is under duress, though that doesn’t exclude the baselessness from fascination.
The virus is extremely deadly and dangerous not as a biochemical threat, but as a destroyer of lifestyles, trust, capitalism, and hope. But don’t forget to add biochemical threat too. Let’s start with the thesis (spoiler alert – will reference economics).
The virus will get many people sick and it will spread quickly. Most people really aren’t affected but can still transmit like Typhoid Mary did in the 1800’s. All types of people will then get sick, many in the lower classes. These lower classes have begun rapid inclusion in the economy in an era of low interest rates for corporate debt and tax cuts. These lower classes often can’t afford to miss work. They work at restaurants, grocery stores, retailers; all places where higher earners (more significant people) shop. So there are now two routes – quarantine to mandate that they stay out of work and hit the economy hard short term, or let things proceed, and have the more significant pieces of the economy get sick and take themselves out, because they can afford it and are unwilling to take health risks.
For years, many economists have believed we have been near a recession. I suppose that’s probably always the case, but I took an interest last year after the fallout of the China/US trade war. The ratios and balance sheets didn’t look great then, and they look worse now.
Banks have it particularly bad, because they have been lending to smaller and less credit-worthy customers to grow revenues. That’s been ok as the economy has grown, because the banks pay a much lower deposit than they take in on loans. But now that spread is narrowing significantly, as borrowers won’t be able to afford the spread the way it was last year. Both revenues and earnings will probably be hit. Let’s not forget the extreme asymmetric peril that refinancings cause many banks, causing another potential hit. It’s hard to think how ill prepared banks seem to be to weather a lower interest rate environment at the same time as a pandemic occurs, at the same time as an oil war is started, at the same time as an election is happening, at the same time as BREXIT happened, at the same time as China/US/European tariffs have increased dramatically, at the same time as Boeing has a national emergency. YEAAAA I doubt the stress tests cover that….
So there’s the first piece – the global economy was [last month] priced to accomplish several years of future perfection from here. This was our own doing.
The second piece is a tougher pattern to verify, which is reducing corporate travel, vacations, and live schooling. With the technology in place for years, we have access to brilliant mediums of productiveness and work. The problem for many was voluntary – why learn something new rather than stick to a routine? The virus has forced them to adopt many of these technologies, which could create very large economic ripples on many industries banking on folks commuting to an office. Additionally, many people will be marginalized by such moves. So the second piece is a disruption of a routine. Much of this was written on the walls years ago, leaving many industries at risk, but they continued trying to push the envelope by taking on more debt.
Third, people wanted the run to continue. These are the real losers. They either can’t get out so they say the virus isn’t bad, or they are buying on the dip. I have read reports that outflows hit a record yesterday. I’m conflicted by this greatly, because I have been an advocate of financial literacy and encouraged people to invest until it hurts, but also because the last 11 years programmed many people to buy without thinking. This same phenomenon was omnipresent in 1999 and 2000. You could buy any overpriced junk and the value would go up. The 11 year bull market led people to believe that if they push a button, a stock will rise. Much of it trading at irrational valuations.
At the same time, many revered private investors have come out addressing the virus as unimportant. I guess I’d say that too if my identity and net-worth might be tied up in illiquid investments such as LBO’s. As an aside, I believe anyone speaking about how investments will move should reveal conflicts of interest. We remember Chuck Prince, Citigroup CEO, saying in late 2007 – “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing”… Citigroup went on to lose 63% over the next 12 months.
So the third piece of the mayhem is that people are over-invested, which exacerbates the downfall from an investor perspective. Many participants in an economy do not overlever in private investments or blindly invest capital, but they will likely be the ones affected most. This is our own doing.
Of course, put these three together and you get some form of terrorism that causes baseless behavior. That terrorism is evidently self-induced because of the situation we have gotten into over the years. Many folks have said from the beginning that the virus is a hoax and nearly all of them still stick to that belief. That’s fine, but I’m of the camp of life. I believe in life. I believe in being a part of a better future society. I want to protect myself and the best of mankind. Many of them face death before possibly their greatest achievements. The only way we can protect ourselves and loved ones is to take responsibility and encourage others to do the same. The chances of any of that are very small (always), but that should be the goal of humanity I would think. To those naysayers, I implore your response:
How do you benefit from being right? Is it by maintaining obliviousness/laziness? Why not adapt?
Is it fear that causes you to say this? What are we afraid of if not something like this virus?
Or is it just for the sake of saying, “I told you so?” Which must be the least possible scenario
If you think it’s a conspiracy, how can you believe anything expert authorities tell you? If you believe a source sometimes and not others, you are not a rational person who isn’t able to see the irrationality of your decisions. Then, who can ever trust you to be honest if you can’t be honest with yourself? If you don’t believe anything people tell you, how will you improve and be part of enriching society?
What if you’re wrong? Is there more risk of your decision being correct or incorrect? This goes back to the ‘irrational’ scenario.
So because of these humanitarian threats, swaths of people call it fake news, or they address it as insignificant. I take issue with these dramatically, because I have always admired greatly the human side of life. I believed that people would step up to beat enemies. Now, in the face of a [low probability] threat to civilization, these people scoff instead of assuming responsibility. In times of pain and hardship, we must be cognizant of those that are suffering and not write them off as a political scheme disdainfully.
This is the biggest threat to me – the virus is causing chaos between people. We should come together (psychologically) in these times rather than spread apart. Of course, the trust we have in the economic supervisors will probably be decimated for a while as it was in 2008. That’s a given. But I don’t think there is an excuse to take the [low probability] threat to civilization lightly.
One last thing on the rise this afternoon. I have a hunch that was caused by a short squeeze. I would love to be wrong. Until then, waiting on earnings reports next month. High chance of a rate cut this week.
Disclosure, I have bets against several companies in the US market.