Are we nearing the bottom? Is it too late to sell? Is the long bull market finally kaput? These are questions that try men's souls and I've got some ideas on one of the worst days in the history of the market. It's a day where the circuit breakers, devices that shut down trading to cool off the markets, got activated down 7%, a day when oil had its worst decline since the 1991 Gulf War and the 10 year Treasury went to .5%, an unheard-of level for country that just got an incredibly strong unemployment number.
And it's a day where you probably lost a lot of money.
So first, let's figure out what got us here.
First, sellers have overwhelmed the market fearing that we are going to have a recession because of Covid-19. Right now, that seems somewhat fanciful given that there are so few people who have been stricken by it here and it is, in the end, like a flu, not the bubonic plague. As the president tweeted earlier today, "So last year 37,000 Americans died from the common Flu. It averages between 27,000 and 70,000 per year. Nothing is shut down, life and the economy go on. At this moment there are 546 confirmed cases of CoronaVirus with 22 deaths. Think about that."
That's a pretty compelling argument if the virus stops right here or proceeds slowly here, as opposed to South Korea, Italy or, of course, China. It is reassuring for certain. Perhaps we will be like Japan, which has 126 million people, and slightly fewer cases than the U.S. has -- when not including cases from the cruise ship outbreak.
But, is it too reassuring? That's what the 10-year Treasury is saying with its spike in price and collapse in yield to record lows. It's what the stock market is saying with its incredible and breathtaking drop. It's what Federal Reserve Chairman Jay Powell was saying when he did an emergency 50-basis point rate cut, something that accelerated the great bond panic of 2010. It's what oil is saying with its 30% plunge.
So can the president be right and it is much ado about nothing and all of these markets be wrong? Is he correct when he tweets of the oil collapse: "Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!" Isn't he correct when he writes "Good for the consumer, gasoline prices coming down?"
Those are proximate causes and excellent outcomes, except they ignore that the United States is the world's largest oil producer and it's been a huge boon to the economy. So that, plus the gigantic amount of debt some of these oil producers have, will cause some big defaults.
The president's also right about the number of people who we know have contracted the illness, but the American people are dubious and want to see test kits and results that verify how well we are doing and make us feel more confident to go out and travel and convene and congregate, all things that are in question, in large part, I believe, because of the huge number of Covid-19 sufferers on cruise ships like those of Carnival (CCL) . They are also disastrous in their indebtedness and their ubiquitous nature. It does seem like we are unaware of where the ships are, why we aren't testing every person on every ship seems odd. At least Dr. Tony Fauci, our nation's top immunologist, had the commonsense to warn people away from cruises. These cruises demonstrate without any further research that the darned thing is just too easy to catch and too easy to die from if you are elderly, something that the nursing home in Seattle proved indubitably, too.
If I had four wishes, though, if I could make three wishes based on the information at hand that would make want to buy some stocks I would:
- Give us some fiscal stimulus, as monetary policy has gone as far as it can. What would it look like? How about no-interest loans to small business people who will not be able to handle the downturn and the lack of customers. How about a giant fund to be sure that commerce continues unabated through this downturn.
- How about a change of tact by the president; he's got a hope for the best attitude without a concomitant prepare for the worst. I think we would all feel more confident if everyone on a cruise is tested. Maybe everyone coming from overseas. Or everyone in a gathering place. I don't think this shows weakness and it doesn't undermine the idea that things could be better than some think. The markets are craving leadership; that's what the Dow and 10 year are screaming in unison. Playing golf is a way to placate and keeps people going about their business. Unfortunately going about your business as we saw from the Spanish flu epidemic doesn't work. Quarantine, working from home, staying away from crowds, slows the infection down and gives health care workers a chance to breathe.
- We need our president to push for a vaccine or a drug or at least some information that would allow our drug companies or, perhaps, more important, our scientists, to solve this thing. Why not convene a Manhattan Project of the smartest minds and not just from the pharmaceutical industry, but from all industries. You mean to tell me that the Google health unit of Alphabet (GOOGL) doesn't know more than the Food and Drug Administration? Why not offer $100 million to the individual who solves it the way Jonas Salk solved polio, and unfathomably horrible disease that kept people in their houses for fear of getting it.
- Back the community-health based system we have with unlimited resources, everything from Mobile Army Surgical Hospitals to ventilators and respirators and hazmat suits. They don't have the money to do these things. The federal government is always yapping about the states and local communities being the right entities to take care of things. This one's too big for them to do alone.
Now let's go back to the question at the top, can we start buying or is there more bad news ahead that is not priced in?
My thinking is that we are on the eve of a recession, if we don't take the fiscal actions I just mentioned in order to restore confidence. The last time, in recent memory, we were on the eve of a recession was December of 2018, when Jay Powell took rates up too far too fast and then gave a wacko prediction that we may need many more hikes to slow the economy. Not his finest hour.
The stock market took a huge header back then. The S&P went as low as 2339. The Dow plunged to 21,770. We are at 2754 and 23, 862 respectively. That would mean we have more downside as things play out. I find those are good benchmarks to start.
I have been bearish about this market as you know. I do believe there will come a level not unlike what Warren Buffett talked about two weeks ago and what his editorial predicted in the height of the Great Recession. You didn't catch the bottom when you listened to him back in the recession, but ultimately you make a ton of money.
We are not Warren Buffetts. He has almost unlimited capital. We need to time it a little better only because we don't want to be overrun when we buy. If you want to sell until we hit those pre-recession levels, particularly if you want to sell the oils, I sanction it.
However, I want to make it clear this is not Armageddon. We have record low oil prices, good for the consumer. We have the potential for the lowest mortgage rates in history, if the Fed were to buy mortgage bonds, as that market stubbornly refuses to go even lower as it should, prices for goods and services are coming down. These are not bad things and they will allow us to spring back
But I do not think there will be a spring back if Covid-19 breaks out, if there is no fiscal stimulus and we do not have confidence, the confidence that does not come from business-as-usual golfing, but comes preparation for the worst, including tests being administered, public health being bolstered and a recognition of the serious nature of a disease that we all fear getting and we all fear dying from, even if the likelihood is not as great right now than it might be by the time April rolls around.