As the volatility continues unabated, I wanted to provide you with some context and understanding of our current topography and what may happen next.
I will state three points off the top which are critical to understanding my comments below:
- There is virtually zero systemic economic risk (such as 2008)
- This virus will eventually be defeated
- This market will recover
Very Steep Decline, Very Quickly
At the time of writing the Dow Jones has lost 36% and the TSX has dropped 37%, peak to trough. Virtually all equity markets around the world have experienced a similar collapse.
The speed of the decline is as important as it is shocking. Since 1928 there have been 11 major value collapses of the same magnitude as this one. However the average decline of this magnitude has taken 9 months to occur. In this case, the collapse has taken less than 3 weeks.
The only decline similar in speed to what we are currently experiencing was the 1987 market crash. Accordingly, we are using this as our model. We have included a chart of the 1987 crash overlaid with the current correction: Click here for chart
Please do understand that the angle of decline in a market is often exactly reflected in its recovery. Slow collapses result in slow recoveries. Fast declines tend to result in fast reversals. This is an important fact to keep in mind, as we all look forward.
Financial markets are now, by any reasonable economic measure, vastly over-sold at this point. This is not to say they cannot remain irrational, or become more so, for some period of time.
As I have stated over the past few weeks, the current market conditions are not governed by fundamentals, nor economic mechanics or rationality. Rather, they are governed by the unknown depth of mortal human fear. This truth makes it very difficult to determine the bottom of this value compression (correction).
Prior to this virus, the U.S. economy was reaccelerating and dragging most of the G7 up with it. There was record low unemployment, growing personal incomes (in the U.S.) and a combination of falling taxes and regulations suggested economic opportunities for individuals were growing rapidly. 2020 looked to be a blowout year, for not only the U.S., but for most developed economies around the globe. Additionally, the U.S. was experiencing a real manufacturing renaissance and expectations were rising.
When this virus outbreak first appeared in Wuhan China, the concern was muted as the risk seemed remote. All of that has changed extremely rapidly. The fear of this virus has completely changed the global economic topography, in a way not experienced by virtually anyone living today.
The problem with fear, is that it is highly contagious. Far more contagious than this virus itself.
Inherent in the brain of every human being is a doomsday sleeper code. That sleeper code is designed to react to potential cataclysmic scenarios and assume they are real. It’s why we all love the “Walking Dead” and other Armageddon shows and movies. Perhaps the purpose of this early Hominid response is so that we act to protect our family, or our tribe. But whatever the original purpose of this behavioural code was, it is certainly not helpful today. Sheer panic has now infected the majority of the population and that panic far more damaging than the virus itself.
Perhaps, one day, there will be a study of this hysterical time in history. In particular, the role the mainstream media and big tech (whom drop these media stories into your news feed) have played in it. We hope so.
The crushing pressure of media mandated political correctness has effectively driven every major politician to conduct daily press briefings on the subject. We are not sure this is helpful. Those news briefings (delivered virtually every hour from different levels of government in different countries) have led the population to react in a panicked manner. Which also is, in itself news. This is particularly true if the media can score a video of someone hoarding at the supermarket. Those images, and stories of hoarding, then have the effect of triggering further panic amongst the population. This further panic results in politicians announcing even more drastic measures to ‘protect the community’ and to put it lockdown, or perhaps declare a state of emergency.
Well we can all guess where that leads. To further panic.
We can call this cycle the “COVID-19 Negative Feedback Loop”. But it gets worse.
This negative feedback loop has resulted in nearly everyone in the western world being forced into their home because they are either quarantined, state-quarantined, self-quarantined, self- isolated, socially-distanced or simply just freaked out. People are sitting at home, on their phones, computers, watching televisions or listening to the radio.
All of them, all of us really, are consuming only one thing because the media is only selling one thing – Panic.
Indeed, there is nothing else happening. There are no sporting events, no political event or coverage, no celebrity gossip, no birthday parties, no one is going to the pub and few if any are going out for dinner and all weddings have been cancelled.
And this is true not only in your neighbourhood, but in every neighbourhood all around the western world and in most places beyond.
Everything is black now, for everyone. There is no bright place on the other side of the planet experiencing something good right now. That pessimism is being reflected in the markets.
All of us are under the influence of the media and all are captured in the same negative spiral you are experiencing.
We at McIver Capital Management firmly believe that the fear the market is currently displaying is not at all consistent, or in proportion, to the real risk this virus represents.
That said, fear itself, and as unwarranted as it may be, will certainly result in serious economic implications.
This Economy Will STOP – Not Slow – Due To Fear
This economy, in the main, will stop. The majority of the population in the G7 will be ‘sheltering in place’ due to fear, and our economy and that of the G7 will stop for an undetermined length of time.
This is the real primary problem. Not the virus itself.
The impact of this economic stoppage is completely unknown as it has never happened before.
In the past, economies have been shocked by acts of terror, or declarations of war. But these have not resulted in economies stopping all together. In previous interruptions, economies have transitioned from making pots, to making weapons. Those economies have not stopped.
It is evident to us that virtually all economies will fall into a technical recession (3 months of negative GDP). The question is, really, how quickly will our economies recover.
Three Core Concepts That Will Determine Our Immediate Future
1) Healthcare Response
This is the response of our Canadian government to this threat. This includes screening at airports and borders, the availability of drugs to combat the virus, and the availability of ventilators and hospital beds.
We have very significant opinions and concerns here, but we will reserve all of those concerns for now. We support each level of our government, and understand that the horse has now left the stable. We trust our talented medical professionals to get this difficult job done.
The data suggests that the risk of a mortal infection remains very small.
2) Monetary Response
This is the response to the need of capital in the larger economy in general, but most importantly among financial institutions that extend credit to each other and to individuals or corporations.
The Bank of Canada and the U.S. Federal Reserve have unleashed a torrent of liquidity. This includes dramatically lowering interest rates and various actions to support commercial debt.
For you and I this means little in the immediate term. But it is very important from a larger perspective.
Lowering interest rates was not designed to encourage you to borrow for a car or home renovation (but sure it helps if you want to), rather to ensure institutional bank liquidity and corporate liquidity. They were acting to ensure that we do not experience a credit freeze such as we experienced during the financial crisis of 2008.
To this end, and although we believe they have over-reacted, central banks have done a solid job protecting against any systemic economic liquidity risk. There is now virtually zero risk of a liquidity crisis.
This monetary response will remain in place FOLLOWING the recovery and likely be hugely impactful in the recovery.
This is action is very positive.
3) Fiscal Response
These are the measures taken by government to mitigate the impact of the economic situation on individuals such as you and I.
Both in Canada and the U.S. there have been several announced government measures to ease to the economic pressure on all of us. More specifically, measures taken to help those most at economic risk. As the economy effectively stops for a number of weeks, those at risk include business owners and hourly wage earners. In Canada these measures include extending the tax return deadline to June and direct cash for those unable to work due to the virus covenants.
We at McIver Capital Management support all of these steps, but advocate additional measures to recover and grow the economy once the virus fear dissipates – such as moving the GST to zero for 6 months and, at least a temporary, rolling-back of the federal Liberal income tax increases and the provincial NDP tax income tax increases. We hope they will take heed. We all need tax relief – and now.
Regardless, the announced government steps to ease fiscal pressure upon us, and those more vulnerable economically, is very constructive and positive.
The Market Bottom
At McIver Capital Management we have been working hard to identify the criteria necessary to determine where this market will bottom.
Because this sell-off is not based upon economics or any economic systemic risk that can be measured, it is extremely difficult to determine where the bottom is. Human fear is a nebulous thing.
That said, it is very likely close to market levels which are already suggesting, and have baked in, a massive recession.
I will not bore you with the charts that we at McIver Capital Management or our Investment Committee pour over each day. But I will say, we have reached levels at which we should have significant buying support.
By every metric, markets are cheap right now.
The Case For Optimism
If I was a perpetual pessimist, I would never have been successful (in fact, I know no successful pessimists). However, if I was a perpetual optimist, I likely would likely be a very unsuccessful investor. Which is clearly not the case.
All things must be in balance.
The truth today is that, within that balance, the case for optimism far out weighs the case for pessimism.
The first point to consider is that there is no sign of any systemic risk in the economy. Banks and financial institutions are in good shape.
The second point to consider is that the root of this problem is a human event which will pass. It is not a pre-existing fundamental systemic problem with the economy. Accordingly, the recovery should be rapid.
Additionally, the weather is improving each day and this virus seems to exist in between 30 and 50 degrees north latitude. That suggests that this virus is seasonal, and a vaccine is on its way.
But the most important thing is to consider the bulging store of good news stories which will eventually flood the airwaves.
We will hear human interest stories of resilience and strength. We will hear stories of public parks opening again, of schools opening again, of borders being re-opened and flights resuming. We will hear of sports leagues re-starting and cancelled events being re-booked. We will hear of restaurants and pubs re-opening. We will once again get together with friends and family.
That is powerful fuel for the collective.
The summer is coming.
Here is a small start to those stories:
-China has closed down its last coronavirus hospital. Not enough new cases to support them.
– Doctors in India have been successful in treating Coronavirus. Combination of drugs used: Lopinavir, Retonovir, Oseltamivir along with Chlorphenamine. They are going to suggest same medicine, globally.
– Researchers of the Erasmus Medical Center claim to have found an antibody against coronavirus.
– A 103 year-old Chinese grandmother has made a full recovery from COVID-19 after being treated for 6 days in Wuhan, China.
– Apple reopens all 42 China stores.
– Cleveland Clinic developed a COVID-19 test that gives results in hours, not days.
– Good news from South Korea, where the number of new cases is declining.
– Italy is hit hard, experts say, only because they have the oldest population in Europe.
– Scientists in Israel are likely to announce the development of a coronavirus vaccine.
– 3 Maryland coronavirus patients fully recovered; able to return to everyday life.
– A network of Canadian scientists are making excellent progress in Covid-19 research.
– A San Diego biotech company is developing a Covid-19 vaccine in collaboration with Duke University and National University of Singapore.
– Tulsa County’s first positive COVID-19 case has recovered. This individual has had two negative tests, which is the indicator of recovery.
– All 7 patients who were getting treated for at Safdarjung hospital in New Delhi have recovered.
– Plasma from newly recovered patients from Covid -19 can treat others infected by Covid-19.