People have had it and they’re dropping their jobs like a bad habit. 18 months of downsizing, ill treatment and growing workloads have finally tipped the scale. 18 months of working from home and people have learned there’s a better life to be had. 18 months of watching your coworkers get sick and die because Scrooge McDuck didn’t provide paid sick days.
The chart below shows the huge increase in the level of quits in the worst hit sectors in the United States: manufacturing, leisure & hospitality and accommodation & food services. I’d expect to see a similar trend in Canada. These were the front-line workers. The war heroes who were cheered as they put their families’ health on the line, only to get shit on in the end.
People have realized it’s not worth staying loyal to an employer that pays garbage, doesn’t care and treats staff as disposable.
Moreover, people built cash piles over the past year as they sat home twiddling their thumbs. Now that the economy is roaring, people are confident enough to make moves.
Of course, now that people are quitting suddenly companies are scrambling. Positions are unfillable.
Just over the past week alone I’ve witnessed 2 top employees quit and 2 offers fall apart. Companies are getting more short-staffed by the day.
Still, I think the brunt of the departures are in the sectors shown in the chart above. While the business services sector is turning over quicker than normal, many of these workers were well supported (and still are) during the pandemic. Many white-collar employers are baking work-life flexibility into their DNA. For example, Sun Life Financial just announced a permanent flex work arrangement (i.e. WFH if you want to). Manulife has been flexible for years. Other big Canadian employers are doing the same.
Nevertheless, white collar employers are feeling the pressure. They’re just doing a better job at proactively mitigating their risk. Despite how hard they’re trying, these companies are still facing new competition. This is particularly true for companies with head offices in Toronto, as big tech firms open offices in the city adding new competition for talent.
Bottom line: it’s an employees market. Regardless of where you work, now might be a good time to ask for a raise.
It’s easy to forget the economic carnage caused by the virus. So I thought I’d create a list of big retail brands that have announced mass store closures, filed for bankruptcy or sought creditor protection over the past several months. Frankly, it’s depressing so I stopped at 35.
Today, the price per barrel of West Texas Intermediate reached a low of -$40.32. That’s right: the price was negative.
West Texas intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
Everyone has the same question: How is this possible?
The reality is that there is simply too much oil being produced right now and not enough demand. Production is being curtailed globally, but that takes time. It’s not like a light switch that can simply be turned on and off.
The chart below shows supply and demand for the world oil market going back to 2000. As you can see, most of the time there tends to be minor variance between supply and demand.
In contrast, today the gap between supply and demand is extremely wide. This means there is a massive surplus of oil being produced right now.
That oil needs to be stored somewhere, and as storage capacity is maxed out fewer people are willing to take delivery.
With May 2020 WTI futures contracts expiring on April 21, oil producers are desperate to offload about 100 million barrels. With limited storage and plummeting demand, producers are now forced to pay others to take the oil off their hands. Nobody wants to take delivery and the oil has to go somewhere.
You read that right. Oil producers right now must pay others to take delivery of their oil. Of course, anyone taking delivery must have somewhere to put it and means to transport it. That all costs money.
Vanguard Energy ETF (VGE), Exxon (XOM), ConocoPhillips (COP), Chevron (CVX) and Canadian Natural Resources (CNQ) are getting hurt badly today. However, the United States Oil Fund (USO) is down even more, more closely reflecting the maturing May contract.
Is this epic collapse an epic opportunity?
Beware if you’re considering buying an ETF that buys oil futures like the United States Oil Fund (USO). These types of ETFs shouldn’t be used to get long-term exposure to oil.
Oil ETFs tend to invest by purchasing futures contracts (i.e. they don’t actually buy barrels of oil). When a futures market is in “contango” (see chart below) futures contracts expiring near-term have a lower price than those expiring farther out into the future. The oil futures market is currently in record contango. Indeed, there is currently (mid-day April 20th) roughly a $50-60 spread between the May and June contract.
Even if prices along the futures curve for Oil remains constant, when the market is in contango an oil ETF that buys futures contracts will experience a negative roll yield as future contracts approach expiry and converge with lower spot prices. This is a great way to lose money over the long term. Oil ETFs that invest in futures contracts are best used for very short term trades.
If you are brave enough to invest in energy right now as a long term play, I would instead choose an ETF that invests in actual producers.
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Get Your Free Copy of CoronaCrisis: A 47 Page Guide to Surviving the Coronavirus Economic Collapse
A recent Bloomberg article provided a view of the deteriorating condition of the Canadian housing market. It’s dire and in my opinion will get worse because the economy is being pushed to the edge by the Covid-19 coronavirus crisis.
Housing crises are slow-motion train wrecks, so don’t expect the pain to be immediately obvious, like in the stock market. While this might seem to make it more manageable, it actually extends the economic pain. If you are unfamiliar with what a housing-led economic implosion looks like, you should brush up on what happened to the US after 2006 and Canada after 1989.
The US housing collapse took years to eventually bottom, resulting in massive economic dislocation, human suffering and a near-collapse of the global financial system. Coming out the other side of the collapse was a long, slow uphill battle for most.
Canada saw the same after its real estate bust in the early 1990s. Years of stagnation and relatively high unemployment.
Of course, in both the US and Canada the real estate bust eventually created massive opportunities for many.
The following key stats from the Bloomberg article illustrate the immediate vulnerability of the Canadian housing market and the overall Canadian economy:
1) Nearly one in three workers have applied for income support.
2) Canadian households are among the world’s most indebted.
3) Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.
4) The City of Vancouver fears it’s heading for insolvency after it surveyed residents and found that 45% of households say they can’t pay their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.
5) Canadian households owe C$1.76 for every dollar in disposable income. In Vancouver, that spikes to about C$2.40
6) Canadians owe C$2.3 trillion in mortgages, credit card, and other consumer debt, about equal to the country’s GDP, which is an even higher ratio than the U.S. had before its housing bust.
7) If only 2% of the housing stock were to be listed for sale, it would trigger the kind of supply shock behind a 1990 crash, according to Veritas. That’s most likely to come from investors, half of whom weren’t generating enough cash to cover the cost of owning their rental properties, Veritas found in a survey last September.
9) 30% of apartment rent due April 1 went uncollected, according to estimates by CIBC Economics.
10) Nearly a third of Canada’s Airbnb hosts — who jointly had 170,000 active listings in late 2019 — need the income to avoid foreclosure or eviction, Airbnb said in a letter to the Canadian government last month.
11) Nearly 6 million Canadians have applied for income support. Lenders had deferred nearly 600,000 mortgages, about 12% of the mortgages they hold, as of April 9.
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I am posting this information to show you the devastation facing millions of small business owners right now.
The headlines make it seem like the government is providing tons of support. However, for most small business owners the support is failing them. These people are the lifeblood of the economy, yet are on their own fighting for their lives.
Authorities predict about 50% of small businesses will disappear before the Covid-19 coronavirus economic crisis is over. This is not something the economy can quickly recover from. It will take significant time, effort and risk appetite for entrepreneurs to once again start new businesses and hire staff.
I’m afraid the neighborhood landscape will look very different once this quarantine is over. Local drycleaners, restaurants, yoga studios, pet stores. Half gone.
Here are their stories:
The future is truly uncertain for small business owners.
I own a bar in Downtown Atlanta. It’s not really a residential area and 80% of our business comes from traffic going to nearby stadiums, arenas, hotels, and concert venues.
We are closed right now, and I don’t see how we could survive as a business without international travel opening back up, restrictions being completely lifted, AND people are eager to get close to each other once again without fear. I would say we have *at least* a year before that would happen.
Not to mention, this happened right at the end of the slow season. So we had completely depleted our resources and had acquired a little (~15,000) additional debt to cover us until we got to the busy season again that starts right around the middle of March.
Now bills are stacking up, I have no money, and the PPP loan really won’t help my business until we know when we can open again (so we can use the forgiven portions of the loan to help float payroll cost as we get back on our feet).
This is just a bad, bad situation. I don’t know what to do either. I don’t know if it’s smarter to begin the process of putting the business out of its misery now or “wait and see” while more bills pile up and more debtors coming after me.
I definitely feel abandoned. Like I fell off the ship that is the USA along with many others. Now we’re all stranded in the water flailing, screaming for help while the ship slowly but steadily sails away, leaving us.
The biggest problem for many businesses is the Lease. It no longer makes sense.
Revenues fall? Well, you can always cut some staff to lessen the payroll burden, and figure out other ways to survive until customers return.
But what are you going to do about your crazy lease? You can’t downsize and ask the Landlord, “I’m only getting half the customers vs what I used to… can I change the Lease so that I’m renting only half the store now and pay you half the rent?” The LL will of course say no, especially if you Personally Guaranteed (which is most of the times for small businesses because if they don’t the LL won’t lease the space to you).
Also, if the LLs have a mortgage on their property, even less likely they will adjust your lease since LLs have to pay their bills too. Which is why the commercial real estate market will tank.
If I were you, i’d seriously consider bankruptcy (or closing shop if you have a Good Guy Clause in your lease). Survive the downturn. Meantime, scrounge up whatever you can and launch a new business when the time is right (once the LLs take a beating, new leases/rents will drop significantly and people will be able to find great opportunities).
I qualify for all the loans approved by the government and have applied for the EIDL, PPP past Saturday and Monday respectively, and for the $10K (three day express funding) since March 30th. It has been now nine business days since I applied for $10k express, however, I haven’t heard from anyone. I believe at this point they are not worried about businesses with 10 employees or less. Each day trying to stay afloat makes the debt bigger. SBA classification for small business stand for 100-500 employees which makes me think there is no way they will come to the rescue of a tiny micro business of 10 or less employees. I am losing hope every hour, I am within days of running out of oxygen.
The truth is anywhere from 30 to 50% of the small businesses will not survive this pandemic. A lot of the financial assistance is focused on getting thru the lockdown and the economy shutting down. But little has been focused on what happens afterwards. Do not believe what this administration is selling. The economy is not coming back instantly, nor in a few months or even this year. I have seen articles by economist saying that the US economic will snap back in the 2nd half of the year.
It is the consensus from the medical community that continued social distance is going to be with us for the foreseeable future until a reliable vaccine is available. Which directly contradicts what the government wants.
At this point it is like screaming into the void – somewhat cathartic but ultimately useless.
People in my state are basically 100% against anything opening up before June. There is no help, and no help is coming. No one in the general public gives a fuck about what small business owners are facing right now, or more importantly, the looming economic doom that is on the horizon because of that. Even with agriculture being “essential” we can’t get the required inputs for production because everything is shut down and we can’t get the employees to come in because everyone is paralyzed with fear. No one wants to compromise on measures to ease up on things a bit before May 20th in my state, which in this growing region the window will be missed and the damage will largely be done (although the effects of which won’t be felt until August or September). A friend of mine killed himself the other day because he couldn’t take the burden and the abandonment by everyone, not just the government but mostly the abandonment of support of the public to allow some businesses to reopen with precautions.
At this point I have already given up. I’m doing what I can to provide for myself and my family, and when the bankruptcy comes I’m going to use this as a chance to start over in a state or country that is more hospitable to liberty and more supportive of small business owners.
I’m feeling miserable myself. I’m running a hotel in middle ga and we’re hemorrhaging money. Last year was slower than usual but we got by. This year started slower than normal and turned into the catastrophe we’re in now.
I’ve applied for the EIDL advance (was told it will take a week to get back to us if we’re lucky) and the PPP (I’ve been waiting for BB&T to send us an application for 5 days now). The rules for PPP are such a clusterfuck that I have no doubt that it will take a lot of back and forth before we get approved (i.e. they are using payroll # of employees from January and in my industry we have high turnover so I have to find 3 more employees to hire if I get approved since I’m down 3 housekeepers from Jan and I want to the loan to be forgiven given that we’re barely making any money on hotel rooms right now).
Don’t get me started on getting the mortgage on a hotel paid every month. Thankfully there is enough money in reserves to get by but if this continues then we are totally screwed.
My business is in live events… we have no clarity on when our business will come back. We might have to wait possibly a year or more? Many in the 2.5 trillion dollar live global events business will go under. MSM is promoting this rosy picture of trillions of dollars in assistance, we’ll all get back to work in a month or two… stock market zooming back up. Not true for many of us… I don’t think anyone knows how bad it’s really going to get and the current optimism and stock market is not reflecting what’s really happening on main street.
I own a bakery/cafe in a small town that is almost 100% reliant on tourist money. The main tourist draw is closed until September, at least. The PPP money will be minimal for us- barely covers 2 months rent if that. EIDL seems to be a bust. My partner is optimistic that once things get back to “normal” our local regulars will show up, but I doubt many folks will have disposable income to keep us going until the festival opens. It’s not looking good for us. If it was just me I’d walk away and deal with the consequences of breaking my lease, but it’s not just me.
Woke up with some anxiety this morning. Still no emails from the SBA regarding my EIDL loan. Since it was just my partner and I in our LLC with no employees, we couldn’t apply for the PPL either.
Made myself some coffee and sat outside for a and listened to the birds for a few.
I have a small but beloved massage therapy business here in downtown Jersey City. My business partner voluntarily withdrew from the LLC last week, has taken the couch (good thing I bought everything else) and will not be renewing the lease with me in May.
Technically, I won’t be able to renew the lease either if the EIDL loan doesn’t come through and I’m saddened by all the effort and money I put into our business the past year only for me to have close doors. I wasn’t done yet. We were building the foundation of things still.
I’m still kinda positive about things in my heart but I’ve mostly given up on that EIDL loan. It was kinda nice to come on here and see others share my disheartened feelings as well. Got to be realistic at the end of the day and be able to adapt or cut losses.
Tragic to have read someone took their life last week in the chaos.
Still grateful my family and I have our health and if you’re reading this, I hope you still have that too and will continue to have it until this is over.
I’m in Mexico, which in official terms, has reacted way worse than how the USA has, according to many criticisms.
The President (AMLO, as we call him) textually said “don’t stay inside… I’ll let you know when you really have to stay inside.” I could write several paragraphs describing his reasons and the background, but all you need to know for context is that he divides opinion just like Trump does. And he’s trying to wash his hands from the economic recession. Just days before they acknowledged the pandemic, the US dollar jumped from around 18 Mexican pesos to 24.
The government stance on business is this: There are no governmental aids. You’re expected to pay all taxes as normal, all bills such as electric or water. Businesses are told to close (even though the citizenship is told not to stop going out), but it’s not enforced. However, a worker that contracts coronavirus in whatever circumstances and isn’t being paid in full to stay home, can sue their employers for getting the virus. So they pretend every single business is a massive corporation that can pay full wages indefinitely. To add to this take into account that 90% of Mexicans live day-by-day and can’t afford to go a single day without pay, or else they and their family don’t eat that day.
I have a couple small businesses where I sell flooring and window covers, plus a few other related products like awnings. Traditionally we sell in person, but I had worked a long time on trying to build an eCommerce sales channel, to some success (boomer mentality runs rampant in Mexico, where even Zoomers doubt the legitimacy of eCommerce). However, we install our products and most people aren’t interested in DIY and would rather have the technician perform the installation.
It’s a family business, my dad owns and runs the factory that supplies about 75% of the products I sell. The factory is still operating at a limited capacity, as it has a relatively small team with large space. But mainly, the workers asked my dad to continue working because they can’t survive without steady salary. About 90% of what we call small sales vanished overnight when Mexico announced the first case, which was about three weeks before the government even talked about the pandemic. These small sales provide most of the cash flow and account for about 60% of revenue on an average month.
My own sales dried up by about 85%. Only wealthy clients are buying, since they can survive their entire lifetime without working again (or thereabouts) and are now getting bored of looking at the same decor in their homes.
I’m trying to complement my earnings with Appen (have waited two weeks for project validation, still waiting) and I recently opened another business thanks to my cousin. We are selling construction materials remotely (again, normally done in person) as construction hasn’t halted yet.
AMLO is trying to pit business-owners (whom he has referred to as the cancer that’s killing Mexico even long before he was elected; he makes no distinction between tiny stores and cafés than multimillionaire CEOs) against the workforce and vice versa.
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If you are wondering how to invest during this bear market, this article is for you.
Investing during a bear market isn’t easy. However, it is when good money can be made. Although it might feel like the world is falling apart and markets are riskier than ever, in reality the risk of investing is actually reduced AFTER stocks have already plummeted. In contrast, the most risky time to invest is when investing feels most comfortable.
Do you wait for the bottom? What if you’re too early or too late? How do you even know when a bottom has occured?
Howard Marks, Director and Co-Chairman of Oaktree Capital shares his valuable insights on how to invest during a bear market. He is a market veteran so he’s seen a few bear markets and financial crises in his day.
Howard Marks, CFA Director & Co-Chairman Oaktree Capital
Since the formation of Oaktree in 1995, Mr. Marks has been responsible for ensuring the firm’s adherence to its core investment philosophy; communicating closely with clients concerning products and strategies; and contributing his experience to big-picture decisions relating to investments and corporate direction. From 1985 until 1995, Mr. Marks led the groups at The TCW Group, Inc. that were responsible for investments in distressed debt, high yield bonds, and convertible securities. He was also Chief Investment Officer for Domestic Fixed Income at TCW. Previously, Mr. Marks was with Citicorp Investment Management for 16 years, where from 1978 to 1985 he was Vice President and senior portfolio manager in charge of convertible and high yield securities. Between 1969 and 1978, he was an equity research analyst and, subsequently, Citicorp’s Director of Research.
Below are several quotes taken from Howard Marks’ recent market insight pieces available on the Oaktree Capital website:
These days everyone has the same data regarding the present and the same ignorance regarding the future.
Future scenarios comprise a large number of variables: today even more than usual. It’s relatively easy to build a spreadsheet listing the many things that will contribute to the future and rate them as likely to turn out well or poorly. But merely toting up the plusses and minuses won’t tell you whether the future will be favorable or unfavorable. The essential element is figuring out which ones will be most influential. That’s often where optimistic or pessimistic biases come in. The optimist takes cheer from the favorable outlook for the positive data points, and the pessimist is depressed by the unpleasant possibilities for the negative ones . . . even if they’re both working from the same underlying spreadsheet in terms of elements and ratings.
I don’t think I’m likely to have superior knowledge regarding the outlook for the virus, its impact on the economy, the success of Fed/government actions or the direction of oil prices. I organized and discussed the possibilities for each of these things in the March memos, but I’m unlikely to be a better predictor than anyone else.
Buy, sell or hold? I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be. What I would do is figure out how much you’ll want to have invested by the time the bottom is reached – whenever that is – and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds. But no one can tell you this is the time to buy. Nobody knows.
The best time to buy generally comes when nobody else will; other people’s unwillingness to buy tends to make securities cheap. But the factors that render others averse to buying will affect you, too. The contrarian may push through those feelings and buy anyway, even though it’s not easy. As I put it, “All great investments begin in discomfort.” One thing we know is that there’s great discomfort today.
“The bottom” is the day before the recovery begins.Thus it’s absolutely impossible to know when the bottom has been reached . . . ever.Oaktree explicitly rejects the notion of waiting for the bottom; we buy when we can access value cheap. Even though there’s no way to say the bottom is at hand, the conditions that make bargains available certainly are materializing. Given the price drops and selling we’ve seen so far, I believe this is a good time to invest, although of course it may prove not to have been the best time. No one can argue that you should spend all your money today . . . but equally, no one can argue that you shouldn’t spend any. The more you want to garner potential gains and don’t mind mark-to-market losses, the more you should invest here.On the other hand, the more you care about protecting against interim markdowns and are able to live with missing opportunities for profit, the less you should invest.
One way to think about the balance between offense and defense is to consider the “twin risks” investors face every day: the risk of losing money and the risk of missing opportunity. At least in theory, you can eliminate either one but not both. Moreover, eliminating one exposes you entirely to the other. Thus we tend to compromise or balance the two risks, and every individual investor or institution should develop a view as to what their normal balance between the two should be.
Now, however, as opposed to the conditions of 2, 6, 12 or 24 months ago the risks in the environment are recognized and largely understood, prospective returns have turned from paltry to attractive (for example, the average yield on high yield bonds ex. energy has gone from 3½% to almost 9%), security prices have declined, and investors have been chastened, causing risk-taking to dry up.
Given these new conditions, I no longer feel defense should be favored. Yes, the fundamentals have deteriorated and may deteriorate further, and the disease makes for risk (remember, I’m the one who leans toward the negative case). But there’s a big difference between a market where no one can find a flaw and one where people have given up on risk-taking. And there’s a big difference between one that’s priced for perfection and one that allows for bad outcomes.
…we never know when we’re at the bottom. A bottom can only be recognized in retrospect: it was the day before the market started to go up. By definition, we can’t know today whether it’s been reached, since that’s a function of what will happen tomorrow. Thus, “I’m going to wait for the bottom” is an irrational statement. If you want, you might choose to say, “I’m going to wait until the bottom has been passed and the market has started upward.” That’s more rational. However, number one, you’re saying you’re willing to miss the bottom. And number two, one of the reasons for a market to start to rise is that the sellers’ sense of urgency has abated, and along with it the selling pressure. That, in turn, means (a) the supply for sale shrinks and (b) the buyers’ very buying forces the market upward, as it’s now they who are highly motivated. These are the things that make markets rise. So if investors want to buy, they should buy on the way down.
The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones. Think about your normal behavior. Before every purchase, do you insist on being sure the thing in question will never be available lower? That is, that you’re buying at the bottom? I doubt it. You probably buy because you think you’re getting a good asset at an attractive price. Isn’t that enough? And I trust you sell because you think the selling price is adequate or more, not because you’re convinced the price can never go higher. To insist on buying only at bottoms and selling only at tops would be paralyzing.
So it’s my view that waiting for the bottom is folly. What, then, should be the investor’s criteria? The answer’s simple: if something’s cheap – based on the relationship between price and intrinsic value – you should buy, and if it cheapens further, you should buy more.
I don’t want to give the impression that it’s easy to buy while prices are tumbling. It isn’t, and in 2008, Bruce and I spent a lot of time supporting each other and debating whether we were buying too fast (or too slow). The news was terrible, and for a good while it seemed as if the vicious circle of financial institution meltdowns would continue unchecked. Terrible news makes it hard to buy and causes many people to say, “I’m not going to try to catch a falling knife.” But it’s also what pushes prices to absurdly low levels. That’s why I so like the headline from Doug Kass that I referred to above: “When the Time Comes to Buy, You Won’t Want To.” It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies. But doing so should be the investor’s greatest aspiration.
The bottom line for me is that I’m not at all troubled saying (a) markets may well be considerably lower sometime in the coming months and (b) we’re buying today when we find good value. I don’t find these statements inconsistent.
Get Your Copy: 47 Page Guide to Help You Survive the Coronavirus Economic Crash
“When the facts change, I change my mind. What do you do?…”
— John Maynard Keynes
As time plods on, my thoughts on the economy grow increasingly dire. The reason is not the drip of horrible data releases – that was to be expected – but the mere fact that time itself makes our predicament more inextricable. It is becoming increasingly clear that the Covid-19 coronavirus exogenous shock is not a one-quarter phenomenon.
Governments are increasingly ‘socializing’ the idea that quarantines could last not weeks, but months. We’ve heard rumblings of this from officials in the UK, Canada and the US. Even as China appears past the peak on paper, it too continues to suffer from moderate forms of quarantine (e.g. movie theaters are still shut) and prolonged weakness as both domestic and export markets collapse. China’s experience shows that a v-shaped recovery is highly unlikely.
Except for the occasional grocery-store mission, I have not left the house in weeks. Other than food and utilities, I have not spent a penny. My ‘win’ however, is someone else’s loss and is a microcosm of the type of world we are approaching.
The epic collapse
March payrolls declined by over 700,000. This is just getting started:
Source: BLS, CNBC
Weekly initial claims are up 6.6 million. An unprecedented number. (I’ve highlighted the increase because it just looks like part of the chart’s vertical frame otherwise.)
Source: St Louis Fed
The world economy has come to a standstill.
On April 4, 2020 the IMF Managing Director, Kristalina Georgieva, said this is worse than the global financial crisis:
“Never in the history of the IMF have we witnessed the world economy come to a standstill. This is in my lifetime humanity’s darkest hour, a big threat to the whole world and it requires for us to stand us, be united. It is way worse than the global financial crisis. This is a crisis like no other.”
This is clearly not priced into the market. Currently, the S&P 500 is 27% off it’s all time high. During the 2008-2009 financial crisis, the market fell 57% from it’s highs. It would seem to me that there is considerable room for downside, if this is worse than the global financial crisis.
Notably, during the global financial crisis S&P 500 earnings per share bottomed roughly the same time as the market. Given the current Covid-19 lockdowns could continue for at least several more weeks, it is entirely plausible that S&P 500 earnings – and the S&P 500 Index – won’t bottom at least until early summer 2020.
There is clearly more room for downside. Perhaps 30% more downside, if the global financial crisis is our yardstick.
Great Depression 2.0
Even more troubling, however, is that this isn’t a normal cyclical downturn that can simply reverse after inventories are liquidated, companies create new efficiencies and new investment opportunities arise. Like during the Great Depression, the entire world economy is unraveling due to a sudden and widespread shock. This will only worsen with time.
Think of it like a cat playing with a ball of string. If some of the string comes unraveled from the ball one can easily re-wrap it around the remaining ball. However, the more the string comes unraveled, the harder it is to re-wrap. Eventually, the ball ceases to exist and you’re just left with a pile of string.
The longer the Covid-19 shutdowns continue, the more difficult it will be to put the economy back together. The economy will experience a permanent destruction of aggregate demand.
If I could snap my fingers today and return everything to normal, enough animal spirit still exists to spring the economy back to life. Restaurants could quickly re-hire staff with confidence customers would return. There are plenty of fully employed people to fire up aggregate demand once again.
However, as time goes on more restaurateurs will throw in the towel. More businesses will disappear. More people will become unemployed – many permanently so. The knock-on effects on commercial mortgages, loan losses, homelessness and wealth erosion will increasingly get out of control.
After a prolonged drought, people become very conservative about water usage. The same will happen with money. Those who do have discretionary income will stuff it in their mattress in fear that their time will come. Businesses won’t invest or hire. Even if banks are willing to lend, who’s going to borrow and invest?
This is our WWII moment. Even after the virus is defeated, if the battle is long and difficult the fear will remain. Everyone will be waiting for the other to make the first move to spend, invest or hire. In doing so, nobody will make the first move.
The world will enter a liquidity trap not seen since the 1930s.
Luckily, today’s world might by-pass some of the policy mistakes made during the 1930s. We have faster access to information and broader understanding of monetary and fiscal policy. There might not be bread lines, but the scale of economic devastation could certainly surpass that seen after the 2008/2009 crisis, looking more like a Great Depression 2.0.
Even after we won WWII, many feared a return to the depression economy. At that moment, however, the United States became the most powerful nation on the planet. It retained massive production capacity and became the cornerstone of a new global monetary system. Moreover, huge global fiscal spending to rebuild Europe and Japan began, which helped prevent the world economy from slipping back into depression.
Today, if the world economy remains shut for much longer our only salvation will be massive government fiscal stimulus not seen since the WWII era.
How to Survive the Coronavirus Economic Catastrophe:
Summary: stock markets are forward-looking. They act on what might happen 4-6 months into the future. So early signs that the future will start to get better can have a big positive impact on stocks, especially after they’ve been beaten down. I’m not saying this is the definitive “all clear” for stocks, but it is a very early sign that things could start improving. Something to keep watching.
It looks like the Covid-19 coronavirus pandemic is starting to weaken. Obviously this is very preliminary data, but the rate of growth of total new cases might be slowing.
The two charts below show on a log scale the number of Covid-19 cases in the United States. A diagonal line on a log chart indicates exponential growth. A flattening line indicates a slowing of the exponential growth rate of new cases. The lines are starting to flatten.
The next chart shows the number of new cases of Covid-19 in the United States reported daily. As you can see, the final data point showed a fairly significant decline in new daily cases.
New York State has also experienced a decline in new deaths, as reported by Governor Cuomo. Another sign the virus spread is starting to slow.
This slowing phenomenon is also occurring on a global scale. (With half of humanity on lock-down you’d certainly hope so.) The final two data points in the chart below shows a significant slowing of new case growth worldwide.
While this is early data, stock markets are already taking this information to potentially form a new rally (markets were up 7%+ today). I suspect the trend – both medically and financially – may continue for a while but keep watch to see how this develops. By no means am I giving the ‘all clear’.
Of course, the real economy won’t mend as quickly as financial markets. This might take years to recover from – especially if there’s a second wave of Covid-19 in the fall.
Still, we all could use a light at the end of the tunnel. We may see one very soon.
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Performance of various types of stocks during WWI and the Spanish Flu. “Smaller stocks with high yields (value) tend to not offer protection during these sharp market corrections but perform well during the recovery phase.”
What do the returns look like in the 3 months before stocks bottom in a bear market?
2020 unemployment line is just getting started, but it will probably rival that of the Great Recession:
The worst market crashes tend to see a huge drop in earnings but the relationship isn’t perfect:
This recession will force GDP onto a lower growth path:
Slow productivity growth followed the last recession:
Fiscal stimulus needed to offset coming drop:
Students graduating in 2020 will be permanently impacted:
The data tables below show what happened across a variety of asset classes after the last four market crises. There is some variance depending on asset class and the nature of the crisis, but again, the story is uniform in the only important respect: the markets recovered what they lost and grew nicely from there.
As of March 26, the FTSE Canada Long Corporate Bond Index yielded 3.96%, compared to the FTSE Canada Universe Bond Index yield of 2.10%, resulting in a yield advantage of 1.86%:
Big drop in manufacturing activity coming to Canada:
List of the companies and institutions developing new tests for COVID-19:
Performance of gold vs. gold miners:
The insane daily volatility of March 2020 indicated the market was broken:
In March 2020, investor sentiment sunk to levels not seen since the Global Financial Crisis. While some use this as a contrarian indicator, note how long negative sentiment in 2008/2009 persisted. In fact, the sentiment was deeply negative in EARLY 2008, prior to the near-collapse that started in September. So I question the idea that extreme sentiment is actually a contrarian indicator:
When the traditional 60/40 portfolio failed:
“Pandemics have effects that last for decades. Following a pandemic, the natural rate of interest declines for decades thereafter, reaching its nadir about 20 years later, with the natural rate about 2% lower had the pandemic not taken place. At about four decades later, the natural rate returns to the level it would be expected to have had the pandemic not taken place. These results are staggering and speak of the disproportionate effects on the labor force relative to land (and later capital) that pandemics had throughout centuries.”
Pandemics also have the effect of raising real wages for some time:
Bear market rallies during the dot-com collapse and global financial crisis:
Canadian housing prices expected to take a minor hit, but quickly recover. Is this realistic? Possibly, provided flexibility is afforded to mortgage holders so they aren’t forced to sell:
If you have still been spending money, stop. After all, with unemployment skyrocketing we don’t know how long we will keep earning an income. At this point, each paycheck we receive should be able to cover about 3 pay-periods worth of expenses. We need to do this so if we lose our jobs we have money to continue living.
Actual experiences may vary, depending on the size of your fixed costs (rent, mortgage payments, utilities, etc.). If you’re still spending a considerable portion of your paycheck on these fixed expenses, take some time to go through each one. Can you cut back? Can you renegotiate with your provider? It is worth the effort and right now banks, telecoms and utility providers might be more receptive to your negotiation requests.
You’re at home working, eating and watching TV. So take the time and effort to AGGRESSIVELY minimize your spending. Essentially, what I’m saying is – if you’re still getting a regular paycheck – you now have an unprecedented opportunity to build your emergency savings. Use it wisely.
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