An Early Vaccine Probably Keeps Us In an Economic Deep Freeze.

We saw a burst of hope on Monday around Modena’s vaccine being ready in volume by early 2021.  That news will change people’s individual economic calculus.  The collective impact of those individual choices probably keeps the economy limping along in a self-imposed lockdown until the vaccine is widely available.

Absent hope for a vaccine, people would have slowly adjusted to a “new normal” and acquiesced to the risk of the virus.  “We’re all going to get it anyway I might as well get back out there.”

Hope for a vaccine changes that calculus to “I don’t want to be the last person to die before the vaccine comes out.  I’ll just hunker down and wait until I get my jab.”

Individually, that is the right thing to do.  Collectively, that means we likely stay in a self-imposed semi-lockdown for the duration.

A Fast Vaccine Probably Keeps Us In an Economic Deep Freeze:  Hope for Modena’s vaccine being ready in volume by early 2021 changes people’s personal economic calculus.  The collective impact probably keeps the economy in self-imposed lockdown until then.

Absent hope for a vaccine, people would have slowly adjusted to a “new normal” and acquiesced to the risk of the virus.  “We’re all going to get it anyway I might as well get back out there.”

Hope for a vaccine changes that calculus to “I don’t want to be the last person to die before the vaccine comes out.  I’ll just hunker down and wait until I get my jab.”

Individually, that is the right thing to do.  Collectively, that means we likely stay in a self-imposed semi-lockdown for the duration.  Anything that can be put of until “after the vaccine” will be put off.  No CEO wants to be the guy who pushed his people back to work in the face of a temporary and ultimately avoidable danger.

  • Companies will feel compelled to extend WFH “until the vaccine is available.”
  • NBA, Baseball and other athletes might push to start seasons “after we have the vaccine.”
  • Conventions, events, etc…  will do the same.

Economically, that shifts the calculus to “who can hold out until 2021.”  The market seems to be pretty rationally pricing in those odds for a lot of companies.  .  Atlassian, Cloudflare, Amazon, etc will do just fine.

I am less convinced the market is pricing in the full impact of a 8-12 month economic deep freeze.  Absent a debt holiday, a lot of “Main Street” sources of wealth that depend on steady flow income (McDonalds franchisees, car dealers, strip mall owners who rent to restaurants, etc…) might not be able to hunker down for that long.  A debt holiday makes a lot of practical sense, but can it get done in an election year?  Absent that, we’ll see a cascade of Main Street bankruptcies.  A scenario we haven’t seen before and that no-one seems to have been able to model (as far as I’ve seen).  I have no idea how levered those Main Street folks are.  Or how their likely liquidation of personal assets/portfolios might impact their lenders and the markets (they presumably have decent-sized stock portfolios).  With roughly 40% of some regional banks loan books anchored on Commercial Real Estate, I am also concerned about the impact of a wave of defaults in a previously stable sector.  I haven’t seen any useful analysis on those questions so far.  Partly I think because that sector’s stability has been taken for granted (so no-one has gathered the data or perspective to do that analysis).  We’ve got lots of regulators watching things like derivatives, but I’d guess the Fed never asked banks to model in a total collapse of retail rent payments (until a few months ago, which may be why Powell is sounding so glum).  So it remains to be seen if that is a localized crisis or if it spins up into something uglier.

That said, 2021 probably sees a bacchanal of spending on travel and etc.  Those who have kept their jobs will have a year of enforced savings and a lot of cooped-up frustration to blow off.  So people who can hold on will do well.  I’m a tech analyst so figuring out who wins and loses is above my pay grade and/or expertise.

The operative term for me (and concern) remains that phrase.  “Those who have kept their jobs.”  My gut tells me there are a lot HR departments waiting to NOT be the first company to announce mass white collar restructuring – never let a good crisis go to waste.  Which means there are a lot of dead men walking out there in the WFH class.

Anything that can be put of until “after the vaccine” will be put off.  No CEO wants to be the guy who pushed his people back to work in the face of a temporary and ultimately avoidable danger.

  • Companies will feel compelled to extend WFH “until the vaccine is available.”
  • NBA, Baseball and other athletes might push to start seasons “after we have the vaccine.”
  • Conventions, events, etc…  will do the same.

Economically, that shifts the calculus to “who can hold out until 2021.”  The market seems to be pretty rationally pricing in those odds for a lot of companies.  .  Atlassian, Cloudflare, Amazon, etc will do just fine.

I am less convinced the market is pricing in the full impact of a 8-12 month economic deep freeze.  Absent a debt holiday, a lot of “Main Street” sources of wealth that depend on steady flow income (McDonalds franchisees, car dealers, strip mall owners who rent to restaurants, etc…) might not be able to hunker down for that long.  A debt holiday makes a lot of practical sense, but can it get done in an election year?  Absent that, we’ll see a cascade of Main Street bankruptcies.  A scenario we haven’t seen before and that no-one seems to have been able to model (as far as I’ve seen).  I have no idea how levered those Main Street folks are.  Or how their likely liquidation of personal assets/portfolios might impact their lenders and the markets (they presumably have decent-sized stock portfolios).  With roughly 40% of some regional banks loan books anchored on Commercial Real Estate, I am also concerned about the impact of a wave of defaults in a previously stable sector.  I haven’t seen any useful analysis on those questions so far.  Partly I think because that sector’s stability has been taken for granted (so no-one has gathered the data or perspective to do that analysis).  We’ve got lots of regulators watching things like derivatives, but I’d guess the Fed never asked banks to model in a total collapse of retail rent payments (until a few months ago, which may be why Powell is sounding so glum).  So it remains to be seen if that is a localized crisis or if it spins up into something uglier.

That said, 2021 probably sees a bacchanal of spending on travel and etc.  Those who have kept their jobs will have a year of enforced savings and a lot of cooped-up frustration to blow off.  So people who can hold on will do well.  I’m a tech analyst so figuring out who wins and loses is above my pay grade and/or expertise.

The operative term for me (and concern) remains that phrase.  “Those who have kept their jobs.”  My gut tells me there are a lot HR departments waiting to NOT be the first company to announce mass white collar restructuring – never let a good crisis go to waste.  Which means there are a lot of dead men walking out there in the WFH class.

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Why Aren’t People Connecting “No 2nd Wave of Cases” With “No Economic Re-Start?”

I keep seeing line graphs trumpeting “no coronavirus case re-acceleration yet!!!”  This is often connected to some sort of positive economic outlook or commentary.

That makes no sense.

The absence of a case rise tells us one thing.  People are still social distancing even with the legal lockdowns lifted.  If more people aren’t getting sick, then more people aren’t going out (much).  If they were going out, we’d be seeing them getting sick (much).   Less contagion must be driven by less social  mixing.  Unless the virus has somehow gotten less contagious?  (it hasn’t).

The above logic also squares with activity and economic data from Georgia, Sweden etc…  The lockdown isn’t driving the economic slowdown, the virus is.  People aren’t stupid.  They aren’t taking unnecessary risks.  Anecdotal newspaper stories about people bars and restaurants notwithstanding.

It was hard to not see the whole “lift the lockdown!” push as a pretty naked effort to risk the lives of a lot of folks to save the financial prospects of a much smaller number of folks with mortgage payments on retail and commercial property coming due.

The key, cynical, false assumption of “lift the lockdown!”  was the masses were dumb enough to go back out once restrictions were lifted.  Especially if loudly encouraged by media outlets owned by wealthier folks (working from home).

The absence of a case uptick is yet another sign that the masses aren’t that dumb.  They are staying home too.  This is great news from a health perspective.  It is much less good news from an economic perspective.

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Heading Out Across America

I am setting out on a drive across the USA to Virginia to visit the in-laws.  Maintaining our quarantine bubble in a 19 foot Sprinter RV that a friend was generous (and crazy) enough to lend us.  With a 5 month old and 2 1/2 year old strapped into car seats for the ride.  It will be “interesting” for sure.  And hopefully even fun.  So I’ll be off the grid for a while here.

I’ve got two posts teed up.  I’ll just push them out today.

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COVID and US Decline Vs China and Etc….

We’ve all seen the “USA is in Global Decline Versus China” pieces.  Now mostly with a COVID spin on them.  I wrote this up as a strawman counter-argument.  I’m not entirely sure I believe this argument, but figured I’d share it.

COVID could end up actually IMPROVING the world order.  Leave the US Less Powerful, But Still Hegemon of a More Robust World Order. 

Here’s the logic (vs the “decline” argument).

  • Point of agreement.  Trump and the virus response has unquestionably destroyed global complacency about the US’s ability to act as a global backstop.  The 737 Max destroyed confidence in the FAA.  CoVID destroyed confidence in the CDC.  Etc Etc.  Lets hope the economic crisis doesn’t destroys confidence in the Fed (weak grin).  BTW, I blame Trump less than 40 years of “starve the beast” assaults on government apparatus, but that is water under the bridge.
  • However.  COVID has ALSO destroyed any faith we could have in China.  Their credibility has been even MORE shattered – especially from a “auditioning for a role as the new hegemon” perspective.  COVID (and other actions) show China’s institutions are totally unqualified to replace the FAA, CDC, Fed, etc…
  • So that leaves the US as the only game in town.  But a substantially less comforting one.  To quote Reagan, other countries will have to “trust but verify” instead of just blindly accepting whatever the US says (That new 737 is just fine to fly!  Take our word for it!).
  • A new era of mutually self-reinforcing realism?  That leaves the rest of the world working a little harder towards the collective global self interest.  The US remains “first among equals” but everyone else raises their game instead of free-riding on the US’s policy direction.  Countries invest in their own aviation authorities, CDC’s, defence capabilities, and the like.
  • That makes life more complicated for the US, but it also spreads the burden and introduces much-needed heterogeneity and resilience into the system
  • Oddly, in that scenario China probably ends up even more frozen out.  If everyone else raises their game to be less dependent on the US, they also need depend less of China.

I’m reminded a bit of how Microsoft reigned supreme as “the” trusted hegemon in compute for so long.  Then we all collectively figured out a lot of their stuff was absolute crap.  Up came Apple OS and Linux and all sorts of other heterogeneity.  Computing is a LOT better off for that diversity.  Making us ALL better off.  Arguably even MSFT is better off shouldering less of that burden.

Although the slogan “Make America Less Great, Making the Rest of the World Greater, Making For a More Robust System.” doesn’t quite roll off the tongue.  Nor does it fit on a hat.

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The Worst of Both Worlds? America Likely Choosing ~2 Million Dead AND Huge Economic Losses.

Stripped of euphemism, America has pretty clearly made a choice.  To “save the wealth (ahem) “the economy!” at the expense of “a few million dead.”  Chasing the possible chimera of herd immunity.

The problem is that is a false choice.  We will definitely get the millions of dead.  But we probably don’t save the wealth.  The worst of both worlds.

A month or so ago, I really did not think “we” (or our elites) would make this choice.  A failure of imagination on my part.  Regardless, I’ll stay hunkered down and hopefully we’ll  avoid the worst of the consequences.  And I’ll continue to hope that I am wrong (about the death stuff especially, less so the wealth stuff).

We Have Chosen the “Herd Immunity” Strategy.  Lots of Dead People Fast.

Forced to make a choice, America has chosen to preserve the wealth “the economy.”  Sacrificing a lot few million ordinary lives on the altar of mammon.  Lets not pretend otherwise.  Governor Kemp of Georgia and others knew what they were choosing with  “early re-opening.”

  1. 2-3 Million Dead:  The USA (or large parts of it) have pretty clearly chosen to let the pandemic run its course.  Meaning we are choosing 2 to 3 million extra deaths (assume a ~1% fatality rate and 80% infection rate before we get some sort of herd immunity).
  2. Why sacrifice those lives?  We (OK our leaders and the elites they listen too) are making wealth preservation a priority.  What sort of wealth?  Small-fish-nationally, big-fish-locally, “country club Republican” wealth.  The strip-mall owners looking into the abyss of personal bankruptcy if those store rents aren’t get paid.  The car dealers paying the carrying costs of unsold cars.  The McDonalds franchise owners who face a HUGE balloon payment of rent in midsummer.  The sort of person who can call the Governor and be put through.
  3. Assuming it won’t be “our” sacrifice.  Underlying that is the personal calculus that the bulk of those deaths will happen to poorer people living in more crowded spaces.  These decisions are sending “them” out to do that dying, not “us.”  No shared sacrifice here.
  4. We will likely soon see re-accelerating infection and death rates.
  5. I’m no epidemiologist, but a lot of those deaths will probably happen in the next 6-12 months.  Before a vaccine is readily available in 2021.
  6. The whole idea of herd immunity might prove to be a mirage.  It isn’t clear prior infection provides protection.  It might.  It might not.  We simply don’t know.

Having made that choice, we are now indulging in a (probably brief) period of magical thinking.  Somehow we’ll save our asset values and the virus will fade away in the summer heat!  This optimism seems to be what is powering the current market boom.  The consequences of that choice will likely hit hard in the weeks and months to come.

Will it Work?  NO?  The Economy Will Still Tank.  Those Strip Mall Landlords and McDonalds Franchisees Are Still Going Bust.

Forget the morality.  Just ask whether this gamble will pay off.  If we “re-open” the economy, will it actually re-start?  No.  It  probably won’t.  We’ll wheeze and struggle and stop-start along.  The worst of both worlds.

The magical thinking here is “they” will gladly, boldly, bravely march out to face death (heading back to Disneyland), while “we” cower behind closed doors (aided by Instacart, Amazon, and remote working).

All evidence suggests “they” aren’t going to go out (and get infected and die) with enough enthusiasm to really re-start the economy.  “They” will stay home.  We will limp along.  The rents won’t get paid.  The wealth will still evaporate.  Same outcome as a lockdown, but with more dead people.  And more angry, bereaved survivors (and voters) left behind.

  1. The title of this economic paper tells you all you need to know.  Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu.  But it is readable and worth a look.
  2. Look at the Google Mobility data from Sweden, which keeps being cited as a model by the “no shutdown” crowd.  Ignore the anecdotes and look at the facts.  Swedish people are social distancing anyway because they aren’t f**ing stupid!   Retail traffic is “only” down 13%, traffic in parks is UP 82%, transit stations down 31%.   Workplaces down 11%.  That all translates into a pretty sluggish economy IMHO.
  3. (Breaking News Today) Look At the Google Mobility Data for the state of Georgia.  They lifted their lockdown a week ago.  Folks in Georgia are not flocking out into the streets.  Retail shopping traffic improved, but its still seriously depressed at down 23% statewide.  Ominously workplace traffic actually FELL from -36% to -45% statewide.  Atlanta data is much worse in general and workplace is now -60% vs -45%?!?  The data are particularly ominous given assumed “pent up demand” for things like haircuts.
    • Fulton county (Atlanta) has Retail and Recreation down 43% (was -52%), Transit down 55% (no change), parks down 45% (was -41%), workplace down 60% (was -44%?!?).
    • State-wide has Retail and Recreation down 23% (was 34%), Transit down 44% (was 53%), parks down 15% (was +4%), workplace down 45% (was 36%).
  4. The US pattern will probably be worse than Sweden.  At least they take it seriously.  Fox news has convinced a whole lot of people this is a hoax.  “Most of those polled said they doubt the U.S. death count: Nearly two-thirds of Democrats think it’s higher, and 40% of Republicans think it’s lower… People whose primary news source is the Fox News channel are most likely to say that U.S. deaths attributed to coronavirus are inflated.
  5. Those folks will go out and mingle.  And infect each other.  Meaning  disproportionate pain for places where disbelief is highest.  Driving a summer of highly local, “mini New York” crises shutting down cities and towns and counties.  Particularly in Red States.
  6. All of the above (especially the Georgia data)  doesn’t solve for a re-started economy.  Or a V-Shaped recovery.  It solves for the economic equivalent of the “limp home mode” of your car (a real thing – computer limited to ~30 MPH for a limited period of operating time).  It sucks.

Everybody has a plan until they get punched in the face.”  (Mike Tyson)

We’ve made our choice.  Sure a lot of people will die.  But it will mostly be “them” not “us.”  And maybe some miracle will save my wealth “the economy.” 

So we’ve got our plan.  The only question is how long it takes for us to get punched in the face…

Sigh…

The Market – We’re Having Our Bear Stearns Moment Now.   The Lehman Moment Comes Later (If it Comes).

The stocks I sold a few weeks ago are now HIGHER than they were in January.  That is… (ahem)… frustrating.

But I keep reminding myself that the market chugged merrily along after Bear Stearns and Countrywide went bust in March 2008.  We thought we’d avoided a systemic crisis.  Doing the Wile Coyote (link below).  Lehman’s bankruptcy, in September 2008, is when Wile stopped levitating.  He hit bottom in March 2009.  See my post here.

Maybe I’m wrong.  Maybe we don’t have a systemic crisis.  The Lehman moment may never come.  But I’m going to stay on solid ground for a while now just in case.  Meep Meep.

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Is Capitalism Is Coming for the Capitalists? 81% of Americans Seem To Think So.

There are three basic inputs to any economy.  Land, Labor, and Capital.  This crisis is a massive economic shock.  So who takes the hit?  Land?  Labor?  Capital?  That is the un-stated question driving the whole “re-start the economy” debate.

81% of Americans (the Labor) think Capital (and Land) should take the hit.

Per this Politico poll.

“eight in 10 voters, 81 percent, say Americans “should continue to social distance for as long as is needed to curb the spread of coronavirus, even if it means continued damage to the economy.” Only 10 percent say Americans “should stop social distancing to stimulate the economy, even if it means increasing the spread of coronavirus.” Nine percent of voters have no opinion.”  https://www.politico.com/news/2020/04/15/poll-dont-stop-social-distancing-coronavirus-spread-187290

Lets say a quick “wow” about the 9% who have “no opinion.”  Then move on to guess at what 10% who put the economy first.  They probably map pretty tightly to the top 10% in…

  1. …Income, especially passive income (real estate rental and dividend checks)
  2. …Asset ownership – especially commercial and rental real estate.
  3. …Personal freedom to work from home and thus self-isolate until 2021.

Reading on, lets all remember the top 10% (the elites) isn’t particularly beloved by the bottom 80% (the deplorables).

Why is the the other 80% putting health and safety over “the economy?”  These folks all work paycheck to paycheck anyway.  Their non-existent stocks of wealth/capital aren’t going to take a hit.  They are also probably starting to figure out that…

  1. …the unemployment checks will keep coming
  2. …they can hang on OK on that for 6-12 months – especially if they don’t pay their rent/mortgage/credit-card bills.   

A Collectively Declared Debt Holiday is the Real Motivating Fear.

The non-payment bit is what really gives the top 10% the heebie jeebies.  31% of America’s renters didn’t pay their rent in April.  It’ll be 40%-50% in May.  By June, even people who can afford to pay will be asking themselves “why am I being a chump? No-one else here at Slumlord Towers is doing it!

If enough people stop paying, there is no way that top 10% can ever go back and collect.  Nor will it negatively impact credit reports because “everyone” is going to have the same non-payment history at the same time.  Same goes for credit card bills and most other debts.

That growing wave of non-payment helps us work back to answer this question;

What dark fate is so threatening that 10% of Americans polled would see a higher death rate as preferable?

Capitalism Red in Tooth And Claw Working its Magic On “Us,” Not “Them.”

The threat is clear and, to my mind. highly likely.  A major, permanent write-down in the value of wealth-creating assets (especially commercial real estate).  Martin Luther King frames the issue better than I can.

“We all too often have socialism for the rich and rugged free market capitalism for the poor.” ― Martin Luther King Jr.

Except, this time around, capitalism is likely to eat its own.  The poor will have it tough.  But they will eventually go back to living paycheck to paycheck.   The rich, however, will suffer a permanent loss of wealth.

A Long Partial Shut Down (Official Or Informal) => A Massive Un-Rented Real Estate Glut => Massive Rent Reductions on Re-Start => Massive Wealth Destruction.

Think about commercial real estate in particular.  There is about $6 Trillion of it in the United States.  It underpins a LOT of wealth.  But no spin-meister on earth is good enough to make Landlords into a sympathetic class deserving of a bailout.

  1. The immediate crisis is the mortgage note is still due, but the rental income isn’t coming in.  In a few months, that lands most landlords in bankruptcy.
  2. If you survive that, commercial landlords will find themselves with largely empty strip malls, malls, hotels, and other buildings that are incredibly hard to re-purpose.  In other words, a MASSIVE SUPPLY GLUT.  That will take years to work down.  When the economy re-starts, prospective businesses owners will have their pick of locations and all the negotiating leverage on rent.  Even if all the old tenants just come back, they’ll do it having negotiated lower rents by threatening to NOT come back.  That is a permanent write-down of wealth. 
  3. Residential landlords will probably do better out of it.  There will still be a supply glut (all those service industry types who moved back home etc…).  So they won’t be able to collect back rent.  Better to keep the tenants you have and just try to get them back to paying.  But that supply glut also creates downward pressure on rents.  People will shop around, upgrade, etc…

Don’t Kid Yourself, We Will Have A Long Partial Shut Down (And So a Write-Down).

Even if people “go back to work,” they don’t have to go out to dinner.  Or go to Disney.  or go to a movie.  Or fly.  Or go to a hotel.

Until we have a vaccine, they won’t.  Or they won’t do it as much.

That means a lot of service industry businesses (which occupy much of that commercial real estate) will stay shut down.  Which means a lot of service workers (disproportionately renters) won’t get re-hired.  In other words, we’ll stay partially shut down.

Those closed service business won’t be sending in their rent checks.   Those service industry non-workers won’t either.

Medical Advances Make a Partial Shut-Down MORE Likely Until a Vaccine in 2021.

The usual retort here is some hopeful medical claim.  “But I hear trials of XXX are going well!  J&J says a vaccine will be approved by 1Q 2021…”   That is all good news, although you and I probably don’t get anywhere NEAR a vaccine shot until mid-2021.

But stop and think for a second.  If we are really going to be OK in 6-12 months, then why go out and risk your life in the meantime?  If the virus is a long-term fact of life, you might take the risk.  But if it isn’t a risk by 2021, you’re an idiot to NOT hunker down and wait for the vaccine.

So the “positive medical developments” arguments just reinforce the likelihood of a (self-declared) partial shut-down.

Capitalism Probably Comes for the Capitalists This Time Around.

In the last crisis, the bailout got bent in favor of the top 10%.  There are a lot of really smart people working overtime to figure out how to do that again this time.

SO far, all they’ve come up with so far is the thin gruel of “consider the emotional toll of all those people out of work!  The suicides!  The alcoholism!”  That transparently self-serving concern isn’t going to change a lot of minds.

The poll above suggests that messaging battle has already been lost.  That 81% seem to understand that “getting the economy re-started” means “me and mine might end up dying for no good reason. We’re a rich country.  We can just keep writing them trillion dollar checks.  They’ve been doing it for years to line their own pockets.  And I ain’t never seen it coming to me.  So its our turn now…

The problem is that logic is entirely correct.  We can keep writing those unemployment checks.  We will.

That means someone will take a massive loss.  But absent a massive bailout, that loss will mostly hit the landlords, bosses, and the bosses’ bosses.  In a normal year, Congress could be counted on to figure out some sort of bailout.  Congresscritters own a lot of that commercial Real Estate themselves.  The President does too.

But it isn’t a normal year, its an election year. 

All the 81% has to “do” is make sure the politicians keep sending the bailout unemployment money to them (Labor) and not the top 10% (Land and Capital).  With an election coming in November, they have the means to enforce that.  And punish any bailout of Capital big enough to make a difference.  Especially as a bailout of landlords and REITS and Debt Investors will be much harder to hide behind smoke and mirrors vs 2008’s bailout of the banks.

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When Do You Think Disney World Re-Opens? An Economic Reality Check.

I keep running into variations on the “quick in and out” economic scenario.  Most disturbingly among professional investors and other people who should know better.  Per prior posts, I think this reflects a consensus that hasn’t moved past the “Denial” phase of the stages of grief  (followed by Anger, Bargaining, Depression, and Acceptance).

I see a long, sluggish recession as the most likely scenario after so much economic disruption.

Consensus seems to expect a quick in-and-out.  I think that is insane.  The economic equivalent of WW1’s “The war will be over by Christmas… 1914 1915 1916 1917 1918.”  Here’s a reality check you can try at home.

When Do You Think Disneyworld Will Re-Open?

Keep in mind the park only works with a certain (very large, continuous) volume of people flowing through it.  My answer is either:

  1. After we have a widely available vaccine – so 2021 at earliest given production ramp-up times etc…
  2. Shortly before we go through another massive resurgence of the virus (sparking and another economic tailspin).   Maybe after a “Economic Grand Re-Opening” in late summer keyed to a desperate effort to re-elect Trump.

Neither scenario above solves for getting back to normalcy in the next 6-12 months.  Which also doesn’t solve for a return to prior valuation levels – the Fed’s dollars be damned.

Of course, the investment professionals might be (cynically) forecasting the false dawn of that Trump re-election gambit in mid-summer.  I’m less convinced.  Why?  I don’t think the little people are quite that stupid or desperate.

The “Stupid People” and Little People” Hypotheses

Implicit in the v-shaped recovery are also two morally suspect but, more importantly, factually suspect hypotheses.

The “stupid people hypothesis.”

I’m smart enough to stay home until we have a vaccine, but “those people” are so dumb they will go out the first chance they get.  And stay out when reinfections start up again…

The “sacrifice the little people” hypothesis.

I can work from home.  The little people in services jobs can’t, but they don’t have savings.   Poverty will force them to go out and start working again.  Sure we’ll lose a few million of “them” to the disease, but [emerging elite dogma phrase here] we can’t make the cure worse than the disease.  Especially as I’m making the comfortable assumption me and mine won’t be doing the dying in service of preserving my wealth (ahem) the economy…

Both rest on assumptions that don’t stand up to common sense.

  • They aren’t that stupid.  They love their elders/children too.  Yes, people will go out “more” after a total lock-down.  But they are going to stay pulled-back until we get a vaccine.  Which translates into sluggish economic activity.  And no Disney World.
  • If “you” don’t go out, “they” won’t have jobs to go back to.  Top 10%’s spending is what creates many of those little people jobs.   Waiters without customers don’t stay employed for long.  The guy who plays Mickie Mouse won’t get re-hired until Disney re-opens.  Our (massive) service economy is heavily weighted towards many less-affluent people (the presumed stupid and desperate) providing services to a much smaller slice of affluent people (the presumed smart, work-at-home, still employed, socially distancing people).  If “they” go back out and “you” stay home, the equation doesn’t balance.

So far, however, comfortable v-shaped assumptions seem to be winning out over logic.  Because Denial.

I’m guessing the rosy scenario will die a death of a thousand cuts sometime by late April.  We start quarterly corporate earnings season next week.  That will replace assumptions with facts.  Massive economic damage already done in March and a total lack of visibility into the months ahead.

What Will the “Anger” Stage of Grief Look Like For the Affluent Class?  Not Sure.

It is pretty easy to envision the “Anger” stage of grief for the masses.  They will get (even more) angry at the elites.  See this piece here for a model and a well-argued case for how the Left should harness it.  https://theintercept.com/2020/04/05/coronavirus-american-politics-democratic-party-biden-sanders/

But I struggle to see what “Anger” will look like for the comfortable classes.  Because they are (or were) pretty comfortable.  Not much given to anger.  And they can’t well get angry at the elites because they ARE the elites.  I’m guessing there will be some sort of scapegoating (probably of Trump).  But I’m not sure that is going to really suffice.

We live in interesting times.

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“Starve the Beast!” Comes Home to Roost. But Who Will They Blame?

I did a “starve the beast” post from a few weeks ago. “We starved the beast.  And suddenly we find we need it.  But no amount of whipping is going to get it moving any faster than the starved, weak, abused thing we let it become.

Starving the beast” is a political strategy employed by American conservatives to limit government spending by cutting taxes, in order to deprive the federal government of revenue in a deliberate effort to force it to reduce spending.

This Washington Post piece nicely sums up that starved, weak, abused response to date.

“Small-business owners have reported delays in getting approved for loans without which they will close their doors, while others say they have been denied altogether by their lenders and do not understand why. The law’s provision to boost unemployment benefits has become tangled in dated and overwhelmed state bureaucracies, as an unprecedented avalanche of jobless Americans seeks aid,” Jeff Stein reports. “Officials at the Internal Revenue Service have warned that $1,200 relief checks may not reach many Americans until August or September if they haven’t already given their direct-deposit information to the government. Taxpayers in need of answers from the IRS amid a rapidly changing job market are encountering dysfunctional government websites and unresponsive call centers that have become understaffed as federal workers stay home. … More than a dozen senior positions in Treasury were unfilled heading into the crisis, creating a wide vacuum between the career staff and the highest levels of management. …

Were do we go from here?  The Facts Won’t Win Anything.  The More Effective Messaging Will Win.

There is only a rational, constructive, “right” path.  And there is a self-serving, ultimately self-destructive, “wrong” path.

  1. Effective, competent government matters.  We need to invest!
  2. I told you the government can’t do anything!  We need to keep tearing it down! 

We’ve been on the wrong path for about 30 years.  Because it serves the interests of a narrow but powerful slice of people.  Folks who tend to own the loudest megaphones.  That negative message is still unquestioned dogma among too many otherwise sensible people.  That scares me a lot.

Joe Biden also doesn’t strike me as the kind of guy who’s going to lead the charge for “real” change (vs tinkering around the edges).  That scares me a lot too.

We all need to put our shoulders in to push back.  Thousands of people have died because we starved the beast.  If that isn’t enough to motivate folks, I’m not sure what will.

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Stages of Grief. We’ve Hit “Bargaining” On the Virus. Only at “Denial” On the Economic Impact.

To date, I’ve seen far too much amateur epidemiology and surprisingly little economic analysis around Coronavirus.  Even the econ blogs I follow have fallen victim to this disease (armchair virology, not Coronavirus).  In doing so, they have also fallen strangely silent on the economic outlook.

I’ve experienced the same dynamic in conversation – even with professional investors.  If you bring up the economic and financial outlook, conversation limps along for a few sentences of vague foreboding.  Then it slides back to discussing the latest hopes for a miracle cure!!!!  After repeated tries (I’m not the most clueful guy), I’ve figured out that people just don’t want to go there (yet).

Why?  Stages of Grief.  Denial, Anger, Bargaining, Depression, and Acceptance.

We are going through two distinct grief cycles.   One track on the virus.  One track on the economy.    We are at different stages of grief on each…

  • Virus => Denial, anger, Bargaining (new drugs!, vaccine coming! LL Bean is making masks!), depression, acceptance.

  • Economic recession to come => Denial (NO NO NO Lets get back to talking about the virus!!!), anger, bargaining, depression, acceptance.

We are also doing what humans do – hyper focusing on an (admittedly serious) immediate threat to the exclusion of an (arguably natier) secondary threat.

At some point, however, the economic news is going to get hard to ignore.  Because something like 20-30 million newly unemployed folks (out of ~156m total employed) are going to be walking among us  by the end of April.  Having mostly lost health insurance (stupidly and inexcusably tied to employment ONLY in the US).  During a nationwide pandemic.

As a society, we’ll move on to the next stage – Anger.  That is not gonna be fun.

A possible silver lining is that anger will probably be directed at the fools who led us into this so ill-prepared.  But we’d be foolish to expect that anger to be wholly reasonable in choosing its focus and target(s).  Especially with the fool(s) at the top desperately working to channel that anger away towards someone, anyone else.  We can only hope they fail in that effort too.

We live in interesting times.

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I Have No Idea If I’ll Call The Bottom This Time. I Do Know We Aren’t At a Capitulation Bottom Now.

Someone with more emotional intelligence than I noted that my last blog post could have read as saying;

“I’m selling out now because I know I’ll be able to call the bottom again (because I am oh-so-smart).”

That was absolutely NOT my intended message. The intended message was.

I’m not so foolish as to bet I’ll call “the bottom” again. We might not even get to a true capitulation bottom. But I do know what a capitulation bottom feels like.  We aren’t anywhere close now. There is far too much hope out there. People buying the dip. Talk of a quick return to work. Wonder cures just on the horizon…

I have no idea if I’m doing the right thing (by going to cash). But I do think I’m making the right decision based on; 1). no visibility. 2). a binary future scenario with a pretty awful downside case (see below).

If the economy rides through OK, I’ll be wrong. I’ll miss a rally.

If the economy (more likely) take an ugly hit, we have one or more legs down from here.

When/if things really feel hopeless, I’ll force myself to buy back in. No idea if I catch “the bottom.” It could just keep getting worse from there. But we’ll definitely be closer to a bottom than we are now…

Capitulation bottoms are marked by numb despair, resignation and indifference. The result of a long siege of fear. All assets are being liquidated, with correlations at 1. We all lived that in early 2009. We may not get there, but we definitely aren’t there now.

We May Not See the Capitulation Part

The market is swinging wildly because it is pricing in binary scenarios.

  1. Optimistic: The economy bounces back quickly. Limited damage done. That scenario is driving market rallies. “Buy the dip!”

  2. Bad-to-Catastrophic: The shut-down drags on until we have a viable vaccine in wide distribution (in other words, 2021). That likely leads to a downturn that dwarfs 2008. The “catastrophic” flavor of the downside scenario hasn’t been priced in yet at all (IMHO).

We aren’t sure which scenario plays out. The market will almost certainly figure it out (and price it in) before I figure it out. What we DO know is the potential cost of the negative scenario vastly outweighs the potential benefit of the positive scenario.

Given that cost/benefit, the “smart” decision is to plan for that negative meltdown scenario. It might not turn out to be the “right” decision after the fact. But I’d prefer to miss a rally than suffer a melt-down.

OK, I Do Think We Will See Capitulation – This Likely Gets Bad.

My metaphor for the coronavirus crisis is the 1906 San Francisco earthquake. The earthquake was bad, but most of the damage was done by the fires that followed it. The virus is the earthquake. The resulting economic dislocation are the fires. Absent a miracle cure, I don’t think the likely scope of the upcoming economic crisis is understood much less priced in.

My worry is its economic shock and the resulting stresses on the financial system. If a plane hits too much turbulence for too long, something big – wings, an engine – eventually falls off. We know a lot more about that than most folks want to admit (yet).

  • The longer the virus crisis drags on, the worse the economic crisis gets. The fires after the earthquake.

  • The worse the real-world economic crisis gets, the more likely we spark a financial crisis. Gasoline on the fire. That is why I am using 2008 as a template.

  • The usual counter-argument here centers on some sort of medical miracle breakthrough. But we also know it’ll take until 2021 for a vaccine to be developed, pass trials, and get widespread distribution to the population at large.

  • I also think we all know (but aren’t yet willing to admit) that economic activity will remain depressed until there is a vaccine. A “therapeutic” treatment is great news, but “you still might end up on a ventilator and die, but it is less likely” doesn’t read like a banner under which people march back out unafraid.

Worse than 2008? Hard to See Why It Wouldn’t Be…

The other thing we know is the global Coronavirus crisis is clearly a broader-based and sharper economic shock than the US’s 2008 mortgage crisis. This doesn’t guarantee a “worse” economic result. But it does mean the real possibility of an equally or more catastrophic scenario. That is the downside case I have decided to protect myself from.

I worry we are in the March 2008 “Bear Stearns goes bankrupt – what a pity” phase where everything still seemed under control (economically). If the economic stress overwhelms the system, we could have a October 2008 “Lehman Moment” out there somewhere. Followed by the long ugly siege of selling that took us to that March 2009 bottom.

https://yhoo.it/3bOVluf

I Don’t Know Any Better Than You, But We Need to Decide Now – Not Knowing.

In short, I’ve decided to “risk missing a rally” to avoid risking a disaster scenario.

That isn’t to say that companies (like NET) aren’t going to have a great quarter and a pretty good year. They probably will. But they report 6 weeks from now. That’s an eternity in Coronavirus time.

Looking out over a year, those good numbers will matter even less if we get a repeat of 2009 – correlations go to 1 in liquidation selling. Everything gets sold and everything goes down.  A capitulation bottom starts with capitulation. That is an ugly, multi-month process.

We are facing a binary outcome here. One of those binary scenarios is a possible systemic financial crisis so dire that, in response to the threat, the Fed has opened up every tap it has, the Republican Senate just passed a $2 trillion stimulus bill without a blink, and even Trump is taking it seriously. That scenario has clearly gotten folks very very scared.

I’m not saying that super-bad scenario WILL happen. I have no idea. But better to plan for what happens if it does. If it doesn’t, you miss a rally. If it DOES, the bottom is a long way down and no asset will hold up well.  We’ll see.  At least I’ll sleep better.

(Recap) How I Called the Bottom in 2009.  It Just Couldn’t Get Any Worse.

Lets be clear about the ONLY thing I knew writing that “calling the bottom” note back in March 2009.  I had NO IDEA when it would get better.  I just knew it couldn’t get (much) worse.  The title says it all.

My Centre is Yielding. My Right is Retreating. Situation Excellent. I Attack!” 

Sometimes attacking is the only defense you have left.

We’d already been though months of liquidation in markets.  All sellers, no buyers.  That week in March, two of the networking equipment companies I covered told me customers were making capital plans on a rolling two week basis (vs a typical 1-3 years).  In other words, the demand and planning horizon had shortened about as far as practically possible. It couldn’t get shorter.  It couldn’t get worse.  Abject fear.

That is what a bottom looked like back then.  It might end up being what one looks like now.  And we aren’t close to that yet.  I hope I’m wrong.

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