To panic or not to panic, that CANNOT be the question. When I look at the landscape, I cannot help but think panic is, for many, a very real strategy today. The indebted, the fearful, they want to take action to relieve the pain -- and that action could be an opportunity, if it weren't for the lack of a plan by the federal government to deal with the potential for a full-blown epidemic.
At the risk of making things a little more simple and less threatening, let's go over systemic risk versus earnings and revenue risk and put out some pros and cons.
First, oil. We are watching the oil market crumble -- and with that a belief that there can be no bottom until at least when we hit the extreme levels of 2016, which is about $26 a share.
A price war led by the Saudis and matched by the Russians is meant to destroy the U.S. production of $13 billion.
It can't, though. There is too much that is in the spigot right now to turn off. There is too much that is being built out. It can't just be shut down. Plus, many oil companies have hedges that will allow them to get through the next few months without any sort of liquidity risk. Sure, some will go bankrupt, especially the heavily indebted ones that have high breakevens, but the group itself is surprisingly ready for what's happening, as many have cut back already.
But do not be optimistic. We have a potential for a lower-for-longer situation because of the price war and the determination to break us versus 2016, when there was no such pressure and the goal of all producers was to get oil to go higher. Overall, this is no place to buy, but that's been my thesis for ages. It is very difficult to buy stocks when numbers have to come down across the Street.
Second risk? The banks. Are the banks ready if the oil companies run out of cash flow? I don't want to be a Pollyanna about this, but they are a heck of a lot more diversified and cash rich than they were. Oil, as big as it seems, is not able to crush our economy or our banks. Does that make them a buy? Again, numbers have to come down. It is tempting to buy banks with a 4% yield. I will actually be eyeing them. But only to see which ones don't go down on the downgrades and the number cuts that are needed because of the new, daunting yield curve.
Third risk: Private Equity. Right now there are no real visible cracks in the system. We know who is indebted and who isn't. I, myself, am not as worried as others about all the money that has gone into private equity in the last few years because I do think it is much smaller than, say, the mortgage craze of 2007. That said, the media will not be able to resist wondering about the "shadow banking" system. So be ready for that narrative to be squawked about. It will spread fear. My job is not to spread fear. My job it to be factual and right now the facts as I see them do not warrant what you are about to hear from others.
Finally, the big one: Covid-19. Here I can offer no reassurance. I have been calling for a massive all-out assault by the federal government against this, with plenty of backstop lines of credit to all of the small and medium size businesses that are thinly capitalized and will quickly run out of money.
I have no understanding about why the federal government settled on $8 billion. I was going to write that even if you add two zeroes that may not be enough. That's unhelpful. We do need to have a Manhattan Project with all of the great minds in our country -- and here I mean the great minds of Google (GOOGL) and Amazon (AMZN) and Apple (AAPL) -- trying to solve this Covid-19 situation, not just the drug companies.
At the same time, I do not understand why the federal government can't learn from Wuhan. This great democracy can afford to build what they did when it comes to medical facilities and public health.
The most important thing to worry about now whether it comes to protecting you from Covid-19 or ameliorating it so it doesn't harm you to where you cannot come back, particularly if you are older, is the nation's public health care system. We are a community based system right now -- no different, oddly, from the Spanish flu, which we can learn a great deal from. While there is no instance whatsoever that equates the two when it comes to fatality rate, there is genuine concern about the sheer numbers that will come down with it, perhaps more than half according to the most informed work I have read coming from the Harvard T.H. Chan School of Public Health.
I regard this number as being, distinctly, a "hope for the best, prepare for the worst" number. Our federal government is simply in the hope for the best mode. That's not prudent.
Because we are community based, the federal government must be willing to give whatever it takes to help the public health care system get through this. Anything and everything. If things get unruly, it must be willing to summon the National Guard and it must be willing to take in as many sick people as necessary in its facilities.
While our country would, most likely, not accept a lockdown of Chinese or even Italian proportions, we must no longer go about business as usual. At this point, we have to hope that someone in the federal government explains social distancing and not just asking people not to travel on cruises, as helpful as that actually is. I think it would have been better to simply say that no ships can be launched from our shores. If we say they can't land here that just unleashes more sickness to come back here.
But let's not get caught up in minutiae. If you are worried about your health, you are going to be a seller not a buyer. If you are worried about the health care system, you are going to be a seller not a buyer.
We need to change the psychology of the situation, make it clear that the federal government embraces a "whatever it takes" mentality, even if it means raising hundreds of billions of dollars in federal funds at the low rates that the bond market is gifting them. We don't want to be like Germany, which has done nothing with low rates. Our government is in a unique position where there is unprecedented demand for Treasuries, even if it is driven by algorithms.
It is time for the Feds to step up. By any means necessary:
1. Manhattan Project to beat Covid-19,
2. Stopgap funding for small and medium size businesses to get through this, and
3. Unlimited support for community public health including all equipment and infrastructure that is needed.
We will get through this. We want to get through it stronger not weaker. Right now we are headed to the latter because the leadership does not seem to understand the enormity of the task.
Until it does, it's very hard to countenance anything but sitting tight and raising cash where possible for better, lower prices that should come as it dawns on the firms on Wall Street that lower longer when it comes not just to oil but all economic activity might just occur.
Join Jim Cramer's special Action Alerts PLUS members-only call to prepare your investment strategy during the economic fallout from the coronavirus and as oil prices fall amid a price war.