On Markets, Predictions, and Geopolitics

It’s amusing to watch professional economists and “market experts” try to protect the future level of economic retraction, how many millions of Americans will lose their jobs (it may be in the tens of millions), how long they will lose their jobs for, how long the recession will last, whether it will turn into a depression, how fast the recovery will be off the bottom, what industries will look like post-virus, on and on and on.

Nobody knows.  It’s complete guesswork.

What we go know for certain is we are going to have at least a recession (defined as two quarters of negative economic growth), a lot of people are going to lose their jobs, and a lot of people are going to get sick and die from this virus.

It’s a stressful and sad time for our country.

But how stressful, how sad, and for how long?

We’re going to find that out in the next three years.

I think the market is rallying into the close of the quarter (so portfolio managers can keep the momentum going and look a little better at the end of Q1) and is trying to extend the bear market rally that began last Tuesday.  We’ve made up a lot of ground in the past week, in a really short period of time.

The time elements involved here are breathtaking – we hit all time highs on the markets about a month and a half ago, we went into a bear market about twenty days ago, and we technically exited the bear market less than a week ago.

I say technically, as opposed to just saying “exited”, because the average bear market in prior market declines has lasted almost two years.  (600+ days)  We’ve been in this one less than a month.

A lot of pundits and “experts” are sounding the all clear now, saying it really is over and now we’re going to see a huge rally and the economy will roar immediately back.  Maybe that ends up being the case.

But I think it’s super arrogant to get out there with decisive calls at such an uncertain and unique period of time.

What we have been doing at our firm, as opposed to making wild predictions on assumptions rooted in bad or inadequate data, is putting about 20-40% of our clients “dry powder” cash back into the market. 

We have 60-80% left to put to work, of uninvested capital, should this get back down to the lows, or even materially worse than that. 

A fall in the S&P 500 similar to 2000-2002 would take the market to 1850 or so.  A fall similar to 2007-2009 would take the market back to around 1500 on the S&P 500.  What is the “E” in “PE” going to look like a year from now?  What will the market bottom at? 

I have no idea, but if you could tell me what the “E” looks like, I would have a lot better guess.  But that’s all it would be is a guess.  2600 or so on the S&P 500 is a meaningful drop from the all-time high of 3393, but it’s nowhere near what past bear markets have resulted in, in terms of a fall.

The best advice I can give a serious investor, as opposed to a speculator, gambler, or hope-filled guesser, is to keep plenty of cash around for emergencies, and only invest money you won’t need for several years, and to invest that money slowly into the stock market, on days and weeks and months of weak prices, at prices relatively AND absolutely attractive. 

And to keep your head, as Rudyard Kipling’s poem “If” advises.  Stay calm when all those around you are losing their heads, or retreating into isolation, or depression, or despair. 

And feel confident from these levels or lower levels, the odds the stock market will be higher in five, ten or fifteen years isn’t 100%, but it’s very close to that.  Anything more than that statement is complete guesswork.

Our country will navigate this mess with excellence, but not overnight.  Whether it’s Main Street, Wall Street, human health, or a combination of some or all three, this is going to take some time.  So settle in, work hard, keep your head down, and make sound, wise decisions.  One day at a time.

A note about the geopolitics of all of this…

One final point – with friends like the Chinese, the Russians and the Saudis, who needs enemies?  You have the Chinese government releasing this virus into the world, then covering it up and lying about it for a month or more prior to sounding the global alarm, costing the nations of the world countless additional deaths and economic injury. 

Whether it emanated from the wet market or the virus research lab a few hundred yards away really doesn’t matter.  The costs they have doled out to the United States and the rest of the world are incapable of calculation.  Trillions and trillions and trillions of dollars in destruction. 

The Russian government has been a bitter foe and irresponsible global actor since 1917, and took the point of maximum global economic weakness to flood the world with crude oil, exacerbating the crisis and trying to bankrupt U.S. oil and gas companies, and throwing hundreds of thousands of American workers out of their jobs, perhaps permanently. 

The Saudi government is clearly a frenemy. Fifteen of the nineteen 9/11 terrorists were Saudis.  Osama Bin Laden was a Saudi.  The Crown Prince is a wildly inconsistent, immature thirty-four year old despot, who had a journalist working for the Washington Post brutally tortured and murdered in a foreign country.

The Saudis still wage proxy wars against the Yemenis, Qataris, and Iranians (fine with the last one, actually), and now helps the Russians flood the world with oil, leading to economic depression in the U.S. oil patch, and threatening geopolitical and economic chaos all around the world.

We better be reconsidering and reformulating our policy and posture towards all three of these countries on the other side of this crisis.  Our behavior towards each will require extensive changes and ruthless promotion of what’s best for the U.S. vis a vis those three countries.  Not what is best for them.

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