Assessing the Covid-19 Crisis: The Good, the Bad and the Questionable

Let's take a look at the most important factors that are driving the market and global economy right now -- while also interspersing some lessons from 2008 throughout. Here's the bad, good and the questionable of what's happening: The Bad Sadly, it is easier to start with the bad. So, let's get it over with. First, we all see the news and know that the death tolls are mounting across the globe. Hospitalizations are increasing rapidly in hot spots in the U.S., putting even more strain on the medical system. That's scary. At the same time, businesses, at least in parts of the U.S., are shutting down at a rapid pace. These closures of restaurants, shops, and other businesses are unlikely to be offset by efforts by governments to help the bosses and workers through the crisis. The Coronavirus Aid, Relief and Economic Security Act -- or Cares Act -- is unlikely to do enough for small businesses or individuals to prevent a wave of missed payments on rent, mortgages, cars, credit cards, and other expenses. To pile it on, oil continues to hit new lows, and, basically, the demand shock is truly shocking. We can all now brace for the coming ratings downgrades, too. One lesson from 2008 is that very few investment grade companies defaulted even during that crisis. I don't want to be complacent, but alarm levels are too high. The Good We should, however, remember there are positives out there, too. The administration of Donald Trump, by extending the social distancing policy to the end of the month, is setting a good tone. While everyone would like things to resume as soon as possible, returning too soon is deadly. Also, there is truly a war with the virus vibe now. Academy Securities has been describing it as a war on the virus for several weeks and that description seems to have become consensus recently. That will lead to better decisions and responses. This should lead to even more state and local support throughout the U.S. Central banks, meanwhile, are doing the most they can and will continue to do more. A famous quant fund, in 2008, basically failed and then admitted that the failure was largely due to their model not being able to incorporate massive fiscal and monetary policy shifts. It is easy to sell the news, but I would be careful dismissing what has already been done on the fiscal and monetary policy side and dismissing what more can, and likely will, be done. Positioning and sentiment seem very bearish, too. For every message pointing out we are already down 25%, I receive about 100 messages pointing out that last week's rally was biggest since the Depression-era crash, implying that more damage is yet to come. Another lesson from 2008: It is far easier to say Bear Market Rally than to time the start or end of one. Perhaps best of all, we're seeing glimmers of hope on the fight against the virus. South Korea and Germany seem to be shining examples. Every day, despite the scary conditions, the medical community is becoming more adept at dealing with the virus. Information is shared among experts, and so is work. The shortages of equipment -- such as protective gear and ventilators -- are scary, but there is progress. Testing is also improving, which is key. The Questionable But there are many factors that seem uncertain, too. You cannot flatten the curve, if you don't know the curve. That seems like common sense. But it's what's happening right now. As has been pointed out, total confirmed cases is not meaningful if we don't know the total number of cases -- we only know who has been tested. I have been ranting and raving about Garbage In/Garbage Out for weeks. Confirmed cases are a function of testing more than any reality -- at least until we test every single suspected case of infection. Relying on confirmed cases likely leaves the policy response behind the curve in the early stages. Also, what we don't know, by relying on confirmed cases, is whether the responses we've taken are already flattening the actual number of cases. How will we know to step up restrictions or ease restrictions if we aren't measuring the thing that matters most? My alter ego on Twitter, @TFMKTS, spent an inordinate amount of time on this subject this past weekend. It seems that many people understand the need to estimate actual cases rather than fixating on confirmed cases. In an informal and small poll, 75% of respondents estimated that there were already more than 500,000 actual cases in the U.S. While that number is alarming, it does start to put some things in perspective, like the mortality and hospitalization rates might be overstated. I don't know the answers, but across the globe, it is an effort to turn sampling techniques into valid estimates. Getting to a count of actual cases will let better policy be made. As testing improves and is readily available, we will get to the point where confirmed cases equals actual cases, but we aren't there yet. The Bottom Line Testing, testing, testing. Without testing, we are not only operating on incomplete information, we may be reacting to information that is wildly divergent from reality. And, I'm not bearish here. In fact, I like risk. But in one last lesson from 2008, we are all right sometimes and wrong sometimes. We've all accepted that fact if you are in this business and not a billionaire. What we aren't used to, is being wrong by 3% in a matter of hours. It is extreme, and you need to position accordingly, but big price moves don't mean what they did a month ago, in either direction. Good luck and stay safe.

Assessing the Covid-19 Crisis: The Good, the Bad and the Questionable

Let's look at what's driving the market and global economy -- and look back at some lessons learned from our last crisis in 2008.

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