As of March 20, 2020
Things are changing on a daily basis in terms of the Coronavirus and how it’s affecting us all. I have spoken with many different investment managers, both for equities and fixed income, and wanted to give you another update on what’s going on in the economies and the markets.
This is a recession brought on by a pandemic and a bear market. When you put it in perspective, this one is much milder in terms of the numbers of deaths than any that we’ve seen in recent years. We’ve had about 8,000 deaths. In sharp contrast, during the Bubonic Plague in the 1500s, there were 200 million deaths. There were 56 million deaths due to small pox in just the 1900s. The Spanish Flu in the 1920s killed roughly 50 million. So, this recession has been brought on not due to the number of deaths or the virus itself but due to the actions we’re taking to stem the virus and to save people. It’s a short-term cost we’re baring in order to save tens of thousands of lives. Maybe millions of lives.
The good news is, there has never been another time in history when everyone on the planet has been focused to resolve one problem, from Elon Musk to Bill Gates. Anybody with skin in the game, and that’s everyone who cares about humanity, are doing what they can to resolve this.
This virus has pushed global markets into bear market. We will have a recession. Last week, we advised you to maintain social distance. The good news is everyone has responded. This disease may be resolved much more quickly. This is not just me who is saying this; it’s the best minds in the world.
This recession could be very short-lived and we could have a very quick recovery. There are a lot of positive developments. A trial medication has been found and is being used in France and now in Belgium. Ventilators are now widely available.
We expect the economy will drop sharply, 5 to 10 percent next quarter. But it may rebound in quarter three and four. We believe it will. So, this is an event-driven bear market. It’s not a time to sell.
I talked about this recently: This virus is so scary because it is so contagious. For every person who gets it, if they give it to three people, we can have tens of thousands of people with the virus within just weeks – and that’s just from one person having it!
Korea and China are already in the recovery period, where their daily new cases are dropping. Unfortunately, in the U.S., we’re going to see a lot more daily new cases and daily deaths. It’s getting terrible here. But the especially good news is, there weren’t any new cases in China last week. None!
Again, we are looking at flattening the curve.
Now, What Do We Do?
I feel like everything is falling into place. Maybe late, but I do think this is happening. I hope so, because so much depends on it. Our government’s response was late, and could have been better.
Bear markets like this are temporary loses because there’s little impairment from most companies in most industries.
The result is that event-driven bear markets last for shorter durations. They’re lesser in decline, although this one is already at the average point, and they recover much more quickly.
If we look at the last case that was similar to the Coronavirus, it was the Spanish Flu, which came to the U.S. as soldiers came back from World War I. They came to Philadelphia. Philadelphia had a parade. And 2,600 people died. This is because they didn’t have enough hospital capacity. And the infected were all there at once. St. Louis, on the other hand, closed their schools. They closed the theaters. They closed the pool halls. They banned public gatherings. The result: Less than 300 people died. They did not flood the hospitals. The people who were infected, who were fewer, were able to be treated faster. The hospitals were more capable to treat them.
We want to have a St. Louis experience.
The Spanish Flu started in March 1918. The market dropped 33 percent. It was back within a year. We hope that’s true this time.
Why We Believe the Recession Will Be Short-Lived
There are good reasons to believe the recession will be short-lived, even if the COVID-19 pandemic is not fully resolved quickly. Don’t listen to me. Listen to someone who’s smart. Bill Gates is an expert on infectious diseases at the Gates Foundation. He said that countries can re-open six to 10 weeks later if they do a good job locking it down. Again, St. Louis did it. Philadelphia did not.
Update: Bill Gates held a TED talk on March 24. With the right coordinated actions, things can return to normal in six to 12 weeks.
Moreover, governments are going to use every tool in their box. They’re going to bicker about how to do it. They’re going to blame one another and so on as they always do. But this will get done because it’s in the national interest and they will come together.
How Bad is This Bear Market?
What are managers saying about this bear market? We’ve talked to a lot of experts recently, and they are all singing from the same song book: This is not a Depression!
Although the market dropped faster and further than any time since 1929, there are no systemic risks. Banks are strong. There won’t be a depression because depressions are triggered by bank failures.
Other countries have dealt with this. China took 17 days to peak; South Korea, 16. We hope Italy is peaking now because it’s terrible over there.
More good news is that policymakers woke up. They are responding. This is encouraging for global policy coordination. They’re saying one thing: “We’re buying. These anomalies will not last.” They are investing more of their own money.
The lower-risk guys are saying the same thing:
- Banks are healthy.
- We have a healthy economic system.
- The Fed can buy all kinds of securities.
It’s critical to support lower and middle-class America. All experts we have consulted with believe this will fade over the summer. It may come back in the fall, but it’s going to come back a lot weaker, because we’ll be ready for it.
We don’t think there is a systematic risk!
Every time this has happened in the past, buying the right security, knowing what you own, has worked, even if purchased before the crash. Now we have the opportunity to buy even more underpriced securities.
The thing you need to know is we are in this together. I own the same securities that you own. So does everyone on the Global View team. We are trying to do everything we can for you. We have no vested interest in owning investments for any other reason.
If you have questions, contact us.
