“If you can keep your head when all about you are losing theirs and blaming it on you “
From Rudyard Kipling’s poem “If “
We are often asked how much money should we keep available for emergencies or rainy days? That question is certainly relevant today, and our recommendation is three months minimum. Six months is better. And a year is best! We should all agree that for the moment, we’re confronting both emergency and rain.
We previously wrote that the big drop through last Friday might get worse before it gets better and as of yesterday (Wednesday, March 18th) this is the case. 1000-point swings in the DJIA are now quite common, occurring daily and rendering those attempting to predict the daily direction surely befuddled. We refer to these wild swings in equity prices as volatility and measure it with an index called the VIX. We also refer to the VIX as a fear index. During normal trading periods the VIX might trade at 14 or so. When markets are fearful, the Index might exceed 40, and in 2009 it approached 80. Today the index stands around 85. Yuk! Based on previous breakout highs in the index, buying stocks has proved sagacious.
So, with the VIX at 85 we should be loading the truck. Don’t panic, we’re not suggesting you buy. We’re simply suggesting having done so in the past seems to have worked. An Oracle of sound investment counsel, Warren Buffet, argues we should buy when blood is in the streets. Like Buffett, we have cash equivalents to snag some bargains. And we’ve snagged a few.
The question on your mind (and ours) is how much lower can the market go? The Trump gain has been eradicated. The potential answer is embedded in the period of time the country remains paralyzed. Can anyone answer that? An influential hedge fund manager is promoting a total shut down of the US for 30 days. Include a moratorium on taxes and interest payments for the period of an extended US spring break. We’re getting cozy with the notion. For several weeks we have incrementally shut down, and daily we get more intensive doses of monetary and fiscal accommodation. The path for the virus appears to replicate the slope for countries several weeks or months with earlier exposure. The accent of new cases has peaked and reversed for some of these countries. Let’s do more of what they did with social distancing and get the crisis behind us!
Can we expect a recession and if so, how long will recovery take? Yes, and who knows? Quite obviously the market seems to be discounting a nasty retraction. We can hasten the recovery and limit the carnage by not getting sick and by not spreading the virus. We can appreciate people not taking their own health seriously. But we can also castigate them for not taking our health seriously. Maybe you reacted as we have to videos of crowded beaches and packed bars. Some of the more calloused are referring to the virus as a “Boomer Remover.” Somewhat disturbing but painfully true. The stats tell the story.
Much like stressed periods of the past, the prices of stocks, bonds, and gold are becoming correlated. That’s a euphemism for they are all dropping in price simultaneously. Stocks worse than corporate bonds, corporate bonds worse than government bonds. Yes, the yields on US government bonds have ratcheted up this week (prices down). Why? Because the US government is going to need to borrow trillions of dollars to cure the economic malady resulting from the medical malady. Let’s forget for a moment the many trillions we already owe. That will be a problem for the college kids on spring break.
In 2008-2009 the US government bailed out the very financial institutions which caused the financial crisis. As conditions improved these same institutions rewarded themselves with $20 billion in bonuses. We will need to do the same for many institutions who will fail without public assistance. The difference is no single industry or institution is liable for the current crisis. The primary need for assistance is due to an inability for companies to fund the rainy day without revenues. Much of the need relates to payment on debt which they issued and used to fund repurchase of their own shares at substantially higher prices than those quoted today. After several years of sizable profits, how could they have not put away enough to fund three to six months of emergency needs?
In spite of their lack of prudence, we the taxpayers can help them out with the caveat that the corporate leaders who didn’t manage the company properly to make it through a rainy day have appropriate reductions in their compensation. It only seems fair!
Stay safe, stay sane, quit looking at your losses and please don’t panic. Be prepared to nibble when others are fearful. We are doing so now.
As always, regardless of current conditions, we’re available if you need us. Just email or call.
The Berkeley Capital Partners Team