I recently heard a Jimmy Buffet tune recorded during the great financial crash of 2008-2009. The lyrics reminded me of now, especially the refrain:
There's the price of oil
The war of the spoils
Here's your bucket for the big bailout
Iraq, Iran, Afghanistan
We've got a lot to drink about.
Add in the Coronavirus health shock and an ugly bear stock market and we definitely have many good reasons to drink – if the liquor stores were still open!
I’ve been seeking perspective since the onset of the fastest occurring bear market in history that started just a few weeks ago. Warren Buffet offered the right perspective last week when he said (paraphrasing) that in his 89 years he’s not seen a one-two economic sucker punch like the recent crude oil plunge and the Coronavirus pandemic.
The breakneck speed of the current bear market has shaken investors to their core, with the US stock market value dropping 30% from its record highs just last month and US interest rates shifting to the zero bound.
Coronavirus was still a cocktail topic a few weeks ago. It is now terrorizing the general public, rattled by unprecedented social distancing public policies in a concerted effort to contain the budding pandemic. It all feels ominous, despite only several thousand confirmed Coronavirus cases in the US – at least so far.
Sitting in a local restaurant Monday evening for the last time before it closes indefinitely, I pondered how best to frame such a perplexing time without any precedent upon which to draw.
My mind kept circling to the fact that economic, financial and business conditions in 2020 are nowhere as bad as they were during the great recession of 2008. In fact, before last month, they were pretty darn good. Furthermore, conditions will have to materially turn much worse for a prolonged period for it to rival 2008.
I’ve been joking with clients that I experienced 2008, I know 2008 and 2020, you’re definitely not 2008 – at least not yet.
Back in 2008, another Black Swan – the collapse of Lehman Brothers - pushed the US financial system to near collapse and the US economy to the brink of a depression. It was scary bad in 2008.
Roll forward to March Madness 2020, the economy, banking sector, the US consumer and business profits were in solid shape and the housing market was prospering. In short, heading into 2020, the US was in good condition to absorb a short-term Coronavirus body blow.
Finally, federal, state and local governments, the Fed Reserve and the business community are now working cohesively to contain the pandemic and its economic consequences. Coronavirus testing kits are inexcusably in low supply, but their availability is expected to ramp up quickly over the next several weeks.
Last weekend, the Fed Reserve declared their own war on the Coronavirus, cutting short term interest rates by a stunning 1.0% and re-introducing quantitative easing (money printing) to help fix the growing illiquidity concerns within the US Treasury market. The (real) cost of money is now essentially free at the short end of the yield curve out through thirty years (!), the lowest in recorded history of money.
Note that stocks normally like cheap money, the cheaper the better.
The last piece of the puzzle is fiscal, namely the federal government enacting new stimulus, tax breaks, industry assistance (bail outs?) and cash stipends for workers laid off due to forced business closures.
Like it or not, a massive new federal spending bill is in the offing, which should be helpful in stemming the current economic chaos. We’re on a war footing now, deficit spending be damned.
All of these fiscal moves should have a positive effect and hopefully contain the economic impact of the Coronavirus to the first half of 2020.
Someone should tell the US stock market. The market selloff over the past few weeks was driven in part by technical factors, but also by investors expecting a really unpleasant recession due to the pandemic.
I’m nosy, so I took a peek at how the Chinese stock market behaved during the darkest days of their Coronavirus outbreak. From January to February, Chinese stocks fell 13% peak-to-trough, less than half of the US market swoon and China seems to have contained their Coronavrius outbreak. Revealing.
The extra negative dimension to the stock bear market has been the collapse of crude oil prices.
Sensing US weakness from the flu, Russia and OPEC are once again trying to assassinate the US shale oil industry by ramping up oil production and cutting prices. They’re now applying maximum financial pressure on overleveraged US shale oil drillers to curb as much new future well drilling capital as possible and slow their domination of the world oil market.
March has been an ugly month for global stocks, much more so for any stock associated with the energy sector. Energy stocks as a group have fallen 50% - 90%; that really smarts.
The good news is that global crude oil markets are unstable with oil prices in the $20 / barrel range. Both Russia and Saudi Arabia need $70+ / barrel oil prices to balance their fiscal budgets. Experts expect oil prices to stay low for several months before rising to its natural equilibrium price of $50-60 / barrel, but not before causing some bankruptcies for US shale drillers.
It’s maddening to see the natural gas sector get pummeled along with crude oil as an innocent bystander. The sector foundered despite natural gas commodity prices rising 25% last week.
The future of natural gas has never looked brighter, especially after the oil industry storm. We see material upside opportunity in the sector, specifically midstream (pipelines).
The real current investment opportunity is to methodically rotate out of overpriced US bonds into undervalued US stocks over the next few months. Dollar cost averaging to accomplish a portfolio rebalance was made for times like these.
Until next time, be well - and Cheers….Tim