“Men, it has been well said, think in herds; it will be seen that they go mad in herds,

while they only recover their senses slowly, one by one.”

Charles Mackay

 

What a year March was! I have been saying that I feel like have been aging in dog years but I think it is more like 12:1. Markets broke many records on their recent plunge including the worst first quarter for the DOW index in its 100 year history! Some of the bounces higher have also set records so in both directions we have witnessed huge herd mentality. The increased speed of computer trading programs along with leveraged investment strategies have also contributed to the thundering herd. Volatility has remained nauseatingly high for longer than ever before and while unpleasant, it is somewhat justified. Modern markets have no experience pricing in a global pandemic that offers a huge range of extreme possible outcomes. As with almost anything, there are things we know and things we don’t know, but Covid19 presents more “unknown unknowns” than almost anything before it. Without universal rapid testing, we have no idea who has already had the virus with only mild symptoms or what percentage of the population has natural immunity (speculated to be as high as 20-30%). Without having additional data, scientists are just guessing at the mortality rate and it is entirely probable that this number will be much lower than originally feared. In any event, this is the ultimate “new normal”.

This is truly the first global black swan event since that phrase was created. While worries about a global pandemic are not new, by its very nature it is impossible to predict or really prepare for one in advance. Without an imminent threat motivating our political leaders (a bit like climate change!) it is hard to muster the resources to prepare for what may happen at some point. That said, it does seem clear that global authorities were almost completely unprepared and have been playing catchup from the very start. The only organized initial response was simply social distancing recommendations which eventually caused the first government mandated recession in history.

This recession by proclamation is surreal to be living through as we all very well appreciate. I was lined up outside a grocery store recently and commented that we were all living in a Hollywood movie. Almost all global economies have been put into sleep mode to flatten the infection curve and hopefully they can all be rebooted smoothly sometime over the next couple of months. Without universal rapid testing, this may bring about another wave of infections but hopefully the health care response will be better prepared to deal with that wave. While it seems premature to restart economies without adequate treatments beyond ventilators, there is a an obvious cost to running economies in first gear for very long as no company was built for sustained hibernation. Some balance between risks and benefits is in front of us. The November Presidential election will no doubt have an influence on the timing of what happens to the largest global economy that lies to our south. It will be hard for Trump to retain the White House if a second wave is cresting in the fall. But it will also be hard for him to stay in power if the unemployment rate remains in double digits.

Clearly we cannot wait for the development and rollout of vaccinations as that is a 2021 story. What we are really hoping for in the short term are viral treatments to emerge that alleviate the need for hospitalizations. If we can treat the disease and remove the rather prevalent need for ventilators for those that get really sick, we can begin to normalize. Covid19 is a health care problem that needs a health care fix and so far the government response has focused on handing out money to get us through the economic valley in front of us!

To that end, governments and their central banks have met this crisis with an unbelievable amount of support in practically the shortest conceivable amount of time. As I have said many times, when we get into the next crisis, the playbook from the 2008-2009 Financial Crisis will get dusted off and that is exactly what has happened. Leveraging what was learned from those dark days, global central banks once again moved very quickly to slash overnight interest rates effectively to 0% and have embarked once again on an unbelievable amount of Quantitative Easing initiatives. And for the first time ever, Canada is now also engaging in these unconventional tactics.

As a quick reminder, Quantitative Easing (QE) is when a central bank somewhat magically creates money using the power of its own balance sheet and in turn, directs these funds to buy bonds which accomplishes 3 goals. The first is to inject new cash into the system, the second is to drive those targeted bond yields lower to stimulate longer term borrowing and the third goal is asset inflation to create a wealth effect that leads to spending. Prior to Covid19, the US Federal Reserve only ever directed QE buying towards US government bonds. This time around, the US Fed is also buying up corporate and municipal bonds. So the scale of the response from the Fed and in fact all global central banks has been completely unprecedented. Concurrently, federal governments have also rose to the economic and societal challenges with remarkable speed by issuing checks to a great percentage of the workforce that has been idled as well as small and large companies alike. And they have shown a complete willingness to do more if or when it is needed in the coming months.

We came into this pandemic in reasonably good shape economically speaking which was reflected in markets trading at all-time highs in the middle of February. Shuttering economies to slow the spread of Covid19 is a short term solution. Throwing trillions of dollars at the problem is also a short term solution that will have longer term consequences but that is not a concern for the moment. Treatments and vaccines are needed. These will come. Stay focused on the horizon and not the current news flow because we all know bad news sells commercials and there is seemingly no end to that at the moment. Everyone is now a virologist when just a few months ago everyone was a constitutional legal expert when the Trump impeachment occupied the airways. There are no shortage of opinions (they are like noses in that everyone has one!) and no shortage of forecasters. But as Warren Buffet famously said, “forecasts may tell you a great deal about the forecaster; they tell you nothing about the future” and there is nobody with a crystal ball when it comes to Covid19.

While many are quick to trot out statistics on the “average bear market drop and bear market duration” this is clearly something different. I know I said that the 4 most dangerous words in investing are “this time it’s different” because the basic human emotions of greed and fear really haven’t evolved and ultimately that is what drives the day to day market swings. But fundamentally, the reasons behind bears markets are always different. Whether it is a financial crisis or a European debt crisis or a terrorist attack or a pandemic, they all are different and they all are similar. Fear of the unknown present great buying opportunities for those prepared to look to the horizon. We are always looking to take advantage of these dislocations to upgrade the quality of our portfolios when possible and also trade a bit to navigate the short term in order to get through to the other side. I continue to expect that we have another dip lower (the second half of the “W”) and am waiting for this to play out before really leaning into the opportunity. We need to steel ourselves for more bad news to come while remaining optimistic that we will see better days ahead. In just 6 months, things will look a lot better in my estimation although in full disclosure, I am not a virologist!

As always feel free to call anytime!